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					SET FOR A STRONG FUTURE   HSH Nordbank AG 2003 Annual Report
Multiple-Year Overview, HSH Nordbank Group*
                                                 2003            2002           2001           2000              1999
Operating profit before risk (€ millions)      1,162.1         1,110.7          936.0         683.1              572.9
Operating profit after risk (€ millions)         582.7          621.7           480.3         446.5              336.0
Net income (€ millions)                          261.9          239.1           204.4         110.2              111.5
Cost-income ratio (%)                             38.7           37.7            37.6          41.9               43.1


                                            31.12.2003     1.1.2003      31.12.2001     31.12.2000       31.12.1999
Total assets (€ millions)                     171,660       181,173         178,554        162,430           146,093
Business volume (€ millions)                  204,926       211,105         200,677        184,797           162,701
Lending volume (€ millions)                   205,016       211,254         201,771        185,535           163,685


Employees                                        4,511          4,724           4,355         3,855              3,647

* Pro forma data for previous years.




Ratings
                                                         long-term       short-term     stand-alone
Moody’s                                                  Aa1             P-1            C (financial strength)
Standard & Poor’s                                        AA-             A-1+           not assigned by S&P
                                                                                        at this time
Fitch Ratings                                            AAA             F1+            C (individual)

    Stable
    Outlook negative
    Under review for a possible downgrade
Set for a strong future

HSH Nordbank AG
Annual Report 2003
Set for a strong future
Our claim holds true in a double sense. The merger has created a
Bank that is, more than ever before, a strong partner standing
beside its customers worldwide – acting rapidly, individually and
with expert competence. And by amalgamating and bundling our
forces we have – as a strong bank of the north – created a power-
ful platform for still further enhancing the success of our market
activities. Our goal is clear: capital market readiness by 2006.


The conditions are favorable:
– as regional bank of the north we are – along with the Savings
  Banks – market leaders in the Hamburg/Schleswig-Holstein
  region;
– as a specialized financing provider we are excellently positioned
  in promising market segments, both nationally and internationally;
– in the international capital markets we are a powerful and inno-
  vative partner.


For these reasons we have designed our Annual Report 2003 to
express the new era for HSH Nordbank. We show its promise in pic-
tures of people setting out for new personal and emotional fron-
tiers. People who, like HSH Nordbank, have prepared themselves
with dedication for the challenges ahead. Like them, we are in peak
condition. That is evident from the straightforward figures, facts
and data of 2003 – the year we are presenting to you in this report.
Contents
Annual Review
                    6    Managing Board
                    6    Foreword by the Chairman of the Board of
                         Managing Directors
                    10   Board of Managing Directors, HSH Nordbank


                    12   Report of the Supervisory Board

                    16   Group Overview
                    16   Corporate Governance
                   20    Merger and Integration
                   26    Strategy
                    32   Employees
                   36    Cultural Projects/Corporate Citizenship


                   40    Group Segments
                   40    Shipping Clients
                   46    Real Estate Clients
                   56    Corporate Clients
                   62    Special Corporate and Institutional Clients
                    72   Private Clients
                    78   Financial Markets
                   88    Strategic Participations/Transaction Services


Financial Report   100


                   102   Management Report
                   102   Management Report and Group Management Report


                   132   Annual Accounts
                   132   Annual Accounts and Group Annual Accounts


                   184   Additional Information
                   184   Glossary
                   188   Addresses
Managing Board   6
                                                                                              7




Ladies and Gentlemen,

2003 marks the beginning of a new era for HSH Nordbank. The Bank came into being on
June 2, 2003, born of the merger between Hamburgische Landesbank and Landesbank
Schleswig-Holstein. With approximately 4,500 employees in the Group worldwide, and total
assets of EUR 180 billion, this first cross-state merger in Germany’s Landesbank history has
created a new and powerful player in the German banking market.


The merger was a decisive strategic step toward securing our long-term capital market
readiness and strengthening our competitive position worldwide and, as such, a prompt
and logical response to the upcoming abolition of state guarantees in 2005. The circum-
stances of the merger were particularly favorable. Not only had both banks been collabora-
ting closely and successfully since 1997, but both benefited from complementary strategies
as well as the physical proximity of their locations. Landesbank Schleswig-Holstein had a
strong presence throughout the Baltic Sea region, and Hamburgische Landesbank in Asia.
As a result of the merger we are looking to achieve a medium-term synergy bonus of some
EUR 150 million per annum.


The logic of the merger, and the new bank that it created, aroused a great deal of interest
in the media and rating agencies, as well as among investors and customers. We must
now demonstrate that HSH Nordbank can fulfill those high expectations and be seen as a
positive example among the Landesbanks. To this task all our energies are committed. For
example, the speed with which we have launched our new overall bank strategy aimed at
“Capital market readiness 2006” demonstrates the high level of integration we have already
achieved. The new strategy connects seamlessly with our two predecessor banks, and con-
sistently develops and extends traditional strengths. The operational program putting this
strategy into effect was launched before the end of 2003, and is currently in progress in the
Bank’s individual divisions. This progress is being monitored and steered in a bank-wide
controlling process.
Managing Board   8




                 HSH Nordbank has positioned itself as a powerful regional bank of the north and at the
                 same time as an international provider of specialized financing. We aim to focus our
                 thinking, actions and communication with growing intensity on the requirements of our
                 customers and of the capital markets. As a result, our solutions will increasingly reflect
                 our special expertise in customer relations as well as industry and product know-how.


                 Our overall strategic goal is clear: on the one hand a significant growth in profitability,
                 and on the other a clear and sustained improvement in our capital resources and their
                 structure. We are determined to raise return on equity above the 15 % mark, and the core
                 capital ratio to more than 7%. Sound cost management will enable us to make the invest-
                 ments we need for earnings growth.


                 However great the challenges of the past year, we have at all times maintained our concen-
                 tration on current business operations. We have successfully responded to market demands
                 and achieved gratifying results in a difficult economic environment. With somewhat lower
                 total assets of EUR 171.7 billion in comparison with the previous year’s EUR 181.2 billion,
                 we were able to increase net income by 9.5 % to EUR 261.9 million, and to significantly
                 strengthen our reserves as a result. Risk provisions and evaluations rose once again in
                 2003, but it must be noted that the previous year’s figure had benefited significantly from
                 extraordinary income. Discounting this effect, risk provisions fell discernibly, mainly
                 because they could be considerably reduced on the securities portfolio. We are confident
                 that we can further curtail risk provisions during the current year without relaxing our
                 traditionally strict risk management standards.


                 The gradual improvement in the economic forecast for 2004, as well as the ongoing recovery
                 on the financial markets, give grounds for all-round optimism for the current year. Our
                 agenda for 2004 is therefore clear:


                 • We aim to complete the integration of our two houses and to realize all the costs and
                     earnings benefits connected with this.


                 • We will further optimize return on equity and focus more intensively on qualitative
                     rather than quantitative growth. We aim to increase earnings by sales of non-capital-
                     binding products and by pricing loans to reflect actual risks more accurately.


                 • In addition, we will consistently develop our strengths on the lending side, concentrating
                     increasingly on profitable new business. With this in view, we aim to focus specifically
                     on sectors where we can obtain attractive prices because of our dominant market position
                     or strong regional presence.
                                                                                                 9




• We intend to continue with our active engagement in new lending business. However, we
  will relinquish the policy we have so far followed, of always holding loans on our books
  until maturity. Instead, we will sell certain tranches of loans before maturity, in order to
  free up our equity capital. This can be effected, for example, by securitization of indivi-
  dual loan portfolios.


• We will also systematically develop our cooperation with the local Savings Banks. In the
  first quarter of 2004 HSH Nordbank and the Savings Banks Association for Schleswig-
  Holstein entered into an agreement of association regulating the details of our future
  collaboration. Bilateral operational agreements with each individual Savings Bank in
  Schleswig-Holstein will follow. This opens a new chapter in our longstanding cooperation
  with the Savings Banks and underpins our role as a powerful partner in this sector.


As you see, Ladies and Gentlemen, we are pursuing with consistent pragmatism the course
we have set, defining our goals, developing our strategy and taking the steps required to
realize it. We are optimistic about our way ahead. In the words we have taken as leitmotif
for our first annual report, HSH Nordbank AG looks and feels “Set for a strong future”.


That we have come so far in our first year, and established so strong a position for the future,
is due in large measure to our clients and employees. I would like to thank them, in the
name of the entire Board of Managing Directors, for the confidence they have placed in us,
and for their commitment and support. I invite all our clients and employees to continue
with us on our constructive path into a successful future.


Hamburg/Kiel, May 2004




Alexander Stuhlmann
Chairman of the Board of Managing Directors
HSH Nordbank
    Managing Board             10                                                                                                                                                                         11




                               The Board of Managing Directors
                               HSH Nordbank




Alexander Stuhlmann                      Hans Berger                          Peter Rieck                        Franz S. Waas, Ph.D.              Hartmut Strauß                     Ulrich W. Ellerbeck

Born 1948. Member of the Board           Born 1950. Appointed Deputy          Born 1952. Appointed Deputy        Born 1960. Appointed to the       Born 1949. Appointed to the        Born 1952. Appointed to the Board
of Managing Directors since 1996.        Chairman of the Board of Man-        Chairman of the Board of Man-      Board of Managing Directors of    Board of Managing Directors of     of Managing Directors of Landes-
Appointed Chairman of the Board          aging Directors of Landesbank        aging Directors of Hamburgische    Landesbank Schleswig-Holstein     Hamburgische Landesbank 2000.      bank Schleswig-Holstein 2003.
of Managing Directors of Hambur-         Schleswig-Holstein 1996 and          Landesbank 1998. Member of         2001. Member of the Board         Member of the Board of Man-        Member of the Board of Man-
gische Landesbank 1998. Chairman         Chairman 2003. Deputy Chairman       the Board of Managing Directors,   of Managing Directors, HSH        aging Directors, HSH Nordbank,     aging Directors, HSH Nordbank,
of the Board of Managing Direc-          of the Board of Managing Direc-      HSH Nordbank, since June 2,        Nordbank, since June 2, 2003.     since June 2, 2003. Responsible    since June 2, 2003. Responsible
tors, HSH Nordbank, since June 2,        tors, HSH Nordbank, since June 2,    2003. Responsible for Participa-   Responsible for Asset Liability   for Controlling/Finance, Credit    for Financial Institutions/Global
2003. Responsible for Communica-         2003. Responsible for IT/Organiza-   tions/Research, Real Estate        Management, Capital Markets,      Risk Management, Services,         Trade Finance, as well as Corpo-
tions/Investor Relations, Human          tion, Internal Audit, Shipping,      Customers, Lease Finance, and      as well as Portfolio Management   Taxes, and Transaction Services.   rates and Structured Finance.
Resources, Private and Business          and Savings Banks/Public Sector      Transportation.                    and Investments.
Clients, the Legal, as well as Board     Customers.
Advisory Services.
    Report of the
Supervisory Board   12




                    Report of the Supervisory Board

                    Foundation of HSH Nordbank AG.


                    The shareholders of Hamburgische Landesbank – Girozentrale – and Landesbank Schles-
                    wig-Holstein Girozentrale resolved on September 9, 2002 to merge the two banks. In
                    taxation and accounting terms the amalgamation would be effective retroactively as from
                    January 1, 2003. The new bank was to be a stock corporation. The act of merger and the
                    change in legal status were accomplished with entry of HSH Nordbank AG in the Commer-
                    cial Registers of Hamburg and Kiel on June 2, 2003. Therefore the report of the Supervisory
                    Board covers the activities of the predecessor houses from January 1 – June 1, 2003 and
                    those of HSH Nordbank from June 2 – December 31, 2003, as well as the activities connec-
                    ted with the foundation of HSH Nordbank itself. The reports of the Supervisory Board
                    of Hamburgische Landesbank and of the Administrative Board of Landesbank Schleswig-
                    Holstein on their activities from January 1 – June 1, 2003 can be found below.


                    HSH Nordbank AG was founded on April 16, 2003 by the shareholders of its predecessor
                    banking houses. In accordance with article 30, paragraph 1, and article 31, paragraph 1 of
                    the German Stock Corporation Act, the founders named ten members to constitute a Super-
                    visory Board representing their interests. The members of the Founding Supervisory Board
                    were as follows:


                    Heide Simonis                   Dr. Ralf Stegner                Dr. Wolfgang Peiner
                    Gunnar Uldall                   Jürgen Sengera                  Dr. Manfred Puffer
                    Olaf Cord Dielewicz             Dr. Hans Lukas                  Dr. Rainer Klemmt-Nissen
                    Alexander Otto


                    On April 17, 2003 the Founding Supervisory Board elected from among its members
                    Minister-President Heide Simonis as Chairwoman, and Senator Dr. Wolfgang Peiner as
                    Deputy Chairman of the Supervisory Board, and appointed the members of the Board of
                    Managing Directors of HSH Nordbank AG. On 24/25 May 2003 the Supervisory Board
                    examined and signed the Foundation Audit Report.


                    The membership of the Supervisory Board is governed by the German Codetermination
                    Act, with the effect that the Board has to have parity of representation. Status proceedings
                    were opened in accordance with article 31, paragraph 3, and articles 97-99 of the German
                    Stock Corporation Act, and on August 14, 2003 ten employee representatives were formally
                    appointed by ruling of the District Courts of Hamburg and Kiel. The persons appointed
                    were:


                    Astrid Balduin                  Olaf Behm                       Margitta Dauck
                    Dr. Elisabeth Keßeböhmer        Michael Schmalz                 Hans-Joachim Schwandt
                    Bernd Steingraeber              Berthold Bose                   Peter Deutschland
                    Annette Falkenberg
                                                                                              13




At its meeting of August 18, 2003 the Supervisory Board approved the Chairwoman and
elected Astrid Balduin from the group of employee representatives as a new Deputy Chair-
woman of the Supervisory Board.


At the same meeting the Supervisory Board appointed the committees as determined by
the procedural rules. The Executive Committee is mainly concerned with Managing Board
business. The Mediation Committee deals on an ad hoc basis with matters falling under
article 31, paragraph 3 of the German Codetermination Act. The Audit Committee supports
the Supervisory Board in matters of accounting and internal auditing, and examines the
annual financial statements. The Risk Committee supervises the overall risk situation of
the Bank regarding counterparty, market price and operational risks.




Key activities.


The Supervisory Board of HSH Nordbank has fulfilled the tasks incumbent on it by law,
statutes, procedural rules and Corporate Governance Code. The Board of Managing Direc-
tors has provided the Supervisory Board with regular, comprehensive and timely infor-
mation and submitted to it all issues requiring its decision or knowledge. The Supervisory
Board has ensured that it was regularly informed about the Bank’s business development,
fundamental questions of corporate planning, the risk situation and important individual
occurrences.


In order to establish the operational competency of the Bank from the moment of the
merger, the Supervisory Board had already – in a written resolution signed at the end of
May 2003 – approved the key regulations governing the Bank’s activities, the procedural
rules for the Board of Managing Directors and Supervisory Board, as well as the Corporate
Governance Code. In June 2003 the sale of LBS Schleswig-Holstein AG – previously spun off
from Landesbank Schleswig-Holstein – was approved, also in a written resolution. In the
Board’s two ordinary meetings the bylaws were again discussed and their main points
confirmed. In addition, the Supervisory Board was on each occasion informed by the Board
of Managing Directors about the current situation of the Bank’s business development.
Further questions resolved at the meetings were the appointment of a Personnel Director,
the acquisition of a mortgage bank and the opening of another foreign branch. In its final
session the Supervisory Board focused on the Bank’s strategic orientation and planning for
the next three years. Other matters on the agenda included the support collective of the
Savings Banks Finance Group, as well as a report on IT migration related to the merger.


The Supervisory Board was supported by the work of the Risk Committee. In its three
meetings this committee dealt with the matters falling within its purview as determined
by law, statutes, procedural rules and administrative regulations. It also scrutinized the
Bank’s private equity activities. The committee discussed the Bank’s risk report in detail.
The report provides a comprehensive overview of the Bank’s risk situation, with specific
reference to credit, liquidity and market risks.
    Report of the
Supervisory Board   14




                    Examination and adoption of the Annual Accounts and Group Annual Accounts for 2003.


                    The annual accounts and management report for 2003, as well as the Group annual accounts
                    and Group management report, were examined by the auditors, BDO Deutsche Warentreuhand
                    Aktiengesellschaft Wirtschaftsprüfungsgesellschaft, and approved without reservation. At its
                    preparatory meeting on May 3, 2004 the Audit Committee, composed of members of the Super-
                    visory Board, scrutinized the annual accounts and management reports and discussed the audi-
                    tor’s reports in detail. The auditor was present at this meeting and answered the committee’s
                    questions at length. At its annual accounts meeting on May 12, 2004 the Supervisory Board con-
                    sidered the annual accounts as well as the report of the Audit Committee. The Supervisory Board
                    approved the audit results and confirmed that no reservations need be made. At its meeting
                    on May 12, 2004 the Supervisory Board approved and adopted the annual accounts and Group
                    annual accounts and management reports as presented by the Board of Managing Directors.




                    Personal notes.


                    In addition to the appointment of the ten shareholders’ representatives, and the Courts’ appoint-
                    ment of the ten employee representatives, there were other changes in the membership of the
                    Supervisory Board. With effect from the end of the extraordinary general meeting of the Board
                    on August 6, 2003, Jürgen Sengera, Dr. Manfred Puffer and Dr. Rainer Klemmt-Nissen retired from
                    the Supervisory Board. In their place, the meeting elected Dr. Johannes Ringel, Hans-Peter Krämer
                    and Prof. Dr. Hans-Heinrich Driftmann. Dr. Johannes Ringel resigned from the Board with effect
                    from December 31, 2003. Margitta Dauck left the Bank – and therefore also the Supervisory
                    Board – with effect from the same date. As successors, the District Courts of Hamburg and Kiel
                    appointed Dr. Thomas Fischer and Jutta Langmack. The Supervisory Board would like to take
                    this opportunity to thank all former members mentioned above for their successful and highly
                    esteemed commitment.


                    Hans-Peter Becker, a member of the Board of Managing Directors of Hamburgische Landesbank
                    from 1980-1993, died on April 19, 2004. A highly respected lending business specialist, he put
                    his profound knowledge, breadth of experience and excellent customer contacts to the service
                    of the Bank, to whose continuing success he contributed substantially. He also played a key role
                    in establishing and developing our international branches and offices.


                    The Supervisory Board would like to thank the Board of Managing Directors and all Bank employ-
                    ees for their intense commitment, in particular with regard to the preparation and execution of
                    the merger of our two predecessor houses. Not only was the amalgamation successfully comple-
                    ted, but at the same time a good result for the year was posted – an achievement for which man-
                    agement and employees deserve high recognition as well as gratitude.


                    Hamburg/Kiel, May 2004


                    The Supervisory Board




                    Heide Simonis
                    Chairwoman of the Supervisory Board HSH Nordbank
                                                                                             15




Activities of the Supervisory Board of Hamburgische Landesbank and of the
Administrative Board of Landesbank Schleswig-Holstein from January 1 – June 1, 2003.


From January 1 – June 1, 2003 activities were subject to supervision and control by the
Supervisory Board/Administrative Board of the two predecessor organizations. In fiscal
year 2003 only one ordinary meeting of the Supervisory Board of Hamburgische Landesbank
was held, on April 2, 2003. At this meeting the Managing Board informed the Supervisory
Board about the Bank’s business situation and the progress of the merger. The Supervisory
Board gave its consent to various matters of investment holdings. The meeting concentrated
on examining the annual accounts of Hamburgische Landesbank for 2002, including the
Group annual accounts. At its preparatory meeting on March 21, 2003 the Audit Committee
discussed the annual accounts and auditor’s reports in detail, in the presence of the auditor.
The Credit Committee, composed of members of the Supervisory Board, met five times dur-
ing the period under review to discuss specific lending commitments.


The Administrative Board of Landesbank Schleswig-Holstein met twice in the period under
review, on March 7 and May 5, 2003. The Administrative Board was informed at these meet-
ings about the Bank’s business situation and the progress of the merger. The Managing
Board also informed the Administrative Board about internal audit activities in 2002. As
well as various matters of investment holdings, to which the Administrative Board gave its
consent, the second meeting concentrated on discussion of the annual accounts of Landes-
bank Schleswig-Holstein for 2002, including the Group annual accounts. At its preparatory
meeting on May 5, 2003 the Audit Committee discussed the annual accounts and auditor’s
reports. The Credit Committee met three times during the period under review to discuss
lending commitments requiring its approval. The Advisory Committee also met twice in
order to be informed about the Bank’s business situation, especially the progress of the
merger.


In the period under review there were some changes in the composition of the Admin-
istrative Board of Landesbank Schleswig-Holstein. Waltraut Fuhrmann and former Minister
Claus Möller retired from the Board. Their places were taken by Helmut Gründel and Minis-
ter Dr. Ralf Stegner. With the merger of the two predecessor banking houses, Ulf Gänger
and Dieter Pfisterer retired from the Managing Boards of Hamburgische Landesbank and
Landesbank Schleswig-Holstein respectively. The supervisory bodies of both Banks appre-
ciated Mr. Gänger and Mr. Pfisterer as highly competent specialists in the lending business,
whose personal qualities and experience contributed substantially to the success of both
Banks. We would like to take the opportunity here to thank them once again for their com-
mitment.


Kiel, May 2004                                     Hamburg, May 2004


For the Administrative Board of the former         For the Supervisory Board of the former
Landesbank Schleswig-Holstein Girozentrale         Hamburgische Landesbank
Girozentrale                                       – Girozentrale –




Heide Simonis                                      Dr. Wolfgang Peiner
Chairwoman                                         Chairman
Group Overview   16




                 Corporate Governance

                 The concept of corporate governance describes the principles
                 of responsible leadership and management of a company.
                 HSH Nordbank is emphatically committed to these principles in
                 the interests of sustained economic operation. For many years
                 they have been an essential part of the Bank’s philosophy.
                                                                                          17




A tradition of transparency.                  at the time of its foundation. This Code is a
                                              constituent element of the procedural
In February 2002 the Government Commis-       rules for the Board of Managing Directors
sion on Corporate Governance published        and Supervisory Board. It is written into
the German Corporate Governance Code,         the bylaws of the Bank and published in its
containing the most important guidelines      Internet pages (www.hsh-nordbank.com/
for the management and supervision of         InvestorRelations).
German listed companies. Conceived as a
supplement to existing company law, the
Corporate Governance Code lays down           Voluntary commitment – going further.
standards for good, responsible corporate
management. Its principal goal is to en-      HSH Nordbank’s Corporate Governance
hance the attractiveness of Germany as a      Code reflects the core legal framework regu-
business location for national and inter-     lating the management and supervision
national investors.                           of stock corporations, as well as nationally
                                              and internationally accepted standards of
Corporate management directed toward          good, responsible corporate management
sustained and responsible growth of           to which the Supervisory Board and Board
enterprise value is a central concern of      of Managing Directors of HSH Nordbank
HSH Nordbank. For this reason the Bank        subscribe. Both text and content of the
expressly subscribes to the goals of the      Bank’s own Code correspond closely to the
German Corporate Governance Code. Our         German Corporate Governance Code pub-
two predecessor banking houses, Ham-          lished by the Government Commission.
burgische Landesbank and Landesbank
Schleswig-Holstein, followed these same       The German Corporate Governance Code
management principles, even though they       has two parts: the first part depicts the law
did not possess a corporate governance        as applicable to company management;
code of their own.                            the second part consists of suggestions and
                                              recommendations, which are generally
As an internationally operating organiza-     expressed in the words “should” or “ought”.
tion, HSH Nordbank views it as a priority     This latter part contains procedural recom-
that the corporate governance system to       mendations for the management and super-
which it has voluntarily committed itself     vision of German companies listed on the
should be understood and appreciated by       stock exchange. These recommendations –
shareholders, customers, employees and        and all the more so the suggestions – are
the general public alike – both nationally    not regarded by the German Code as man-
and internationally. In order to reinforce    datory, but as allowing deviation from the
long-term confidence, the Bank committed      suggested norms.
itself to its own Corporate Governance Code
Group Overview   18




                 The HSH Nordbank Code exceeds the terms         The principal rules of the HSH Nordbank
                 of the German Corporate Governance Code         Code govern the following areas:
                 as it ignores the distinction between legal
                 prescription and recommendation or sug-         • shareholder rights;
                 gestion. HSH Nordbank views the non-
                 mandatory elements of the German Code           • annual shareholders’ meeting;
                 as equally binding on it as a company. Both
                 the Board of Managing Directors and the         • cooperation between the Board of
                 Supervisory Board of HSH Nordbank see             Managing Directors and the Supervisory
                 the consistency of their own Code as under-       Board;
                 lining the unique value of the Bank’s cor-
                 porate management principles. Moreover,         • rights and duties of the Board of
                 it encourages a higher level of identifica-       Managing Directors, with specific refe-
                 tion between the addressees of the Code           rence to tasks and competencies, struc-
                 and its content. As its prescriptions are not     ture and remuneration, conflicts of
                 formulated as options, one does not even          interest;
                 think of acting otherwise.
                                                                 • rights and duties of the Supervisory Board
                                                                   with specific reference to tasks and com-
                 Key aspects of the Bank’s Corporate               petencies, tasks and competencies of the
                 Governance Code.                                  Chairperson of the Supervisory Board,
                                                                   formation of committees, structure and
                 To facilitate comparison with the German          remuneration, conflicts of interest, effi-
                 Code, and to enhance transparency, the            ciency checks;
                 detailed structure of the German Code was
                 taken over. In compiling the Bank’s own         • transparency;
                 Code, each regulation of the German Code
                 was scrutinized for its specific relevance to   • preparation and publication of financial
                 the Bank. The main points of divergence           statements and audit of annual accounts.
                 from the German Corporate Governance
                 Code are summarized at the end of the           Compliance with the stipulations of HSH
                 HSH Nordbank Code.                              Nordbank’s Corporate Governance Code is
                                                                 continuously monitored. The Bank has
                                                                 complied in full with the prescriptions of
                                                                 its Code since the date of its foundation,
                                                                 and continues to do so. At its meeting on
                                                                 March 29, 2004 the Supervisory Board de-
                                                                 termined that, in the period under review,
                                                                 it had fulfilled the tasks incumbent on it
                                                                                          19




by law, statutes and Corporate Governance     confirm its activities as efficient in accor-
Code. The Supervisory Board determined        dance with article 5.6 of the Bank’s Cor-
further that it had been informed by the      porate Governance Code.
Board of Managing Directors in a regular,
comprehensive and timely manner about         HSH Nordbank AG understands corporate
the Bank’s business development, funda-       governance as an ongoing process invol-
mental questions of corporate planning,       ving every member of the organization. The
the risk situation and important individual   Bank’s own Corporate Governance Code can
occurrences. The Supervisory Board and its    be adapted at any time in response to new
committees were informed of all issues        circumstances, especially if there should be
requiring their decision or knowledge. The    developments in company law or changes
Supervisory Board was therefore able to       in the German Code.


Hamburg/Kiel, May 2004                        Hamburg/Kiel, May 2004




Heide Simonis                                 Alexander Stuhlmann
Chairwoman of the Supervisory Board           Chairman of the Board
HSH Nordbank                                  of Managing Directors
                                              HSH Nordbank
Group Overview   20




                 Merger and integration. HSH Nordbank –
                 first mover in the German Landesbank sector

                 With the agreement of July 17, 2001 between the German Govern-
                 ment and the EU Commission on the abolition of the so-called
                 Anstaltslast (maintenance obligation) and Gewährträgerhaftung
                 (guarantee obligation), a new phase dawned in the history of the
                 German Landesbanks. Responding promptly to the loss of state
                 guarantees due in summer 2005, and to the intensification of
                 competition in the banking industry, the owners of Hamburgische
                 Landesbank and Landesbank Schleswig-Holstein created HSH Nord-
                 bank. This was the first interstate merger in the German Landes-
                 bank sector. The merger is an important step in the realization of
                 HSH Nordbank’s business strategy, including the long-term securing
                 of capital market readiness, and the strengthening of the Bank’s
                 position in international competition.
                                                                                           21




Hamburgische Landesbank and Landes-           Managing Boards, as well as their depart-
bank Schleswig-Holstein – two ideal           ments and projects, in the run-up to the
partners.                                     merger decision. From that point on, the
                                              office assumed responsibility for manage-
The merger of the two Landesbanks was in      ment of the merger process.
several respects an ideal match. Both in
geographical focus and business strategy      Whilst the preparatory phase, from March
they perfectly complemented each other.       through September 2002, was largely occu-
And, since 1997, Landesbank Schleswig-        pied with feasibility studies and questions
Holstein’s 49.5 % stake in Hamburgische       of evaluation, the period immediately follo-
Landesbank had proved a sound basis for       wing the merger decision saw the imple-
successful practical cooperation. With        mentation of a number of important steps.
similar corporate cultures and well-estab-    With 36 integration projects and over 100
lished knowledge of each other’s structures   sub-projects in operation, the merger of
and processes, as well as close physical      the two institutes was driven purposefully
proximity, the two partners spoke the         forward and the structure of the new Bank
same language – a fact that has conside-      set up.
rably simplified the integration process.
                                              In the immediate aftermath of the owners’
                                              decision, taken on September 9, 2002, to
Full speed ahead for the merger.              merge the two banks, several major tasks
                                              were accomplished. Key positions were
In March 2002 the Managing Boards of          filled, and organizational structures as
Hamburgische Landesbank and Landes-           well as business policies were defined. By
bank Schleswig-Holstein were asked by the     the end of 2002 the Board of Managing
banks’ owners to examine the possibility      Directors and the first management level
of merging their two houses. This involved    positions had already been filled, the orga-
questions of evaluation and the subsequent    nizational divisions had been allocated bet-
distribution of shares in the merged bank     ween Hamburg and Kiel, the Bank’s orga-
between the owners. The Bank’s organi-        nizational principles had been determined,
zational divisions also had to be allocated   the decision had been taken to employ
between the two headquarters in Hamburg       RaRoC (Risk-adjusted Return on Capital) as
and Kiel. On the basis of a shareholders’     the Bank’s economic management prin-
resolution of July 5, 2002, the two banks     ciple, the Bank’s strategic image had been
set up a joint office based in Hamburg and    defined, and the future IT system decided.
Kiel. Commencing work on August 1, 2002,      With the signing of the State Treaty on
this office served as a coordination center   February 4, 2003 between the Free and
for both                                      Hanseatic City of Hamburg and the State
                                              of Schleswig-Holstein, the merger gained
                                              decisive political impetus.
Group Overview   22




                 Legal incorporation.                           Entry in the Commercial Register after
                                                                only nine months.
                 An important step toward capital market
                 readiness was the decision to change the       Once these steps were accomplished, there
                 Bank’s legal status into an Aktiengesell-      were no further obstacles – after a prepara-
                 schaft (stock corporation), sending a posi-    tory period lasting less than nine months –
                 tive signal to capital and labor markets       to the birthday bells ringing for HSH Nord-
                 alike. Long term, the step is an indispensa-   bank AG. So with entries completed in the
                 ble prerequisite for stock market flotation.   Handelsregister (Commercial Registers) of
                 Although still a non-listed corporation,       Hamburg and Kiel, the Bank already opened
                 HSH Nordbank has decided to follow the         its doors for business on June 2, 2003. For
                 German Corporate Governance Code, there-       accounting and tax purposes, incorporation
                 by conveying another valuable message to       took effect retroactively as of January 1,
                 the capital markets.                           2003. The shareholders of the new Bank
                                                                are the City of Hamburg (35.38 %) and the
                 In response to the Brussels decision, the      State of Schleswig-Holstein (19.55 %), along
                 strategic orientation of HSH Nordbank          with the Savings Banks Association for
                 required a clear separation between public     Schleswig-Holstein (18.21 %) and WestLB
                 sector development and commercial busi-        (26.86 %). The shares held by Landesbank
                 ness. Therefore, with effect from June 1,      Baden-Württemberg (LBBW) were taken over
                 2003, Investitionsbank Schleswig-Holstein      by the Bank’s public sector owners before
                 (IB) – which ran the public sector develop-    completion of the merger. These owners
                 ment side as a legally dependent but           have contractually committed themselves
                 administratively autonomous division of        to maintaining a majority shareholding
                 Landesbank Schleswig-Holstein – was spun       (50.1 %) in HSH Nordbank AG at least until
                 off from the parent bank. And on May 23,       the end of 2013.
                 2003 Hamburgische Landesbank trans-
                 ferred its 82 % stake in Hamburgische
                 Wohnungsbaukreditanstalt (WK) – which          Letters of comfort also binding on
                 conducts the public sector business for the    HSH Nordbank.
                 City of Hamburg – to the City of Hamburg.
                 HSH Nordbank AG was also obliged by            With the entry of HSH Nordbank AG in the
                 law to shed its savings and loan business.     Commercial Registers, the entire invento-
                 Therefore with effect from June 1, 2003,       ries of Landesbank Schleswig-Holstein and
                 Landes-Bausparkasse (Home Loan and             Hamburgische Landesbank, including all
                 Savings Bank – LBS) was spun off from          assets, liabilities and employment relation-
                 Landesbank Schleswig-Holstein and acqui-       ships, were transferred to the new Bank as
                 red by the Savings Banks Association for       legal successor. This includes letters of
                 Schleswig-Holstein. Hamburgische Landes-       comfort issued by the predecessor banks in
                 bank had already disposed of its holdings      favor of their subsidiary companies before
                 in the home loan and savings business as       the merger.
                 from January 1, 1997.
                                                                                            23




Brussels Agreement covers                      IT migration.
HSH Nordbank.
                                               After intensive analysis and evaluation, it
The transitional arrangements enacted by       was decided in December 2002 to take over
the Brussels Agreement of July 17, 2001        the IT platform used by Landesbank Schles-
on the abolition of the Anstaltslast and Ge-   wig-Holstein as the principal solution for
währträgerhaftung are also applicable to       HSH Nordbank. Whilst specific functions
HSH Nordbank. The states of Hamburg and        of the Hamburgische Landesbank system
Schleswig-Holstein determined in the State     have been maintained, Hamburgische
Treaty that their obligations toward HSH       Landesbank’s business databases have been
Nordbank apply to exactly the same extent      migrated onto the new system, which has
as they did toward the predecessor banks       clear advantages in terms of modularity,
Hamburgische Landesbank and Landes-            client compatibility, multicurrency com-
bank Schleswig-Holstein.                       patibility and multilingualism. Temporary
                                               problems arising in the course of IT migra-
                                               tion have been identified and analyzed –
Annual synergies of EUR 150 million            and to a great extent already solved. Inter-
expected.                                      nal bank operations were at no time mat-
                                               erially impaired.
By the third year following the amalga-
mation, HSH Nordbank expects to benefit
from synergies amounting to approxima-         Integration of business cultures – an
tely EUR 150 million per annum. Some two       essential step to success.
thirds of the savings will be in costs, ari-
sing principally from consolidation of IT      The success of a merger depends to a great
and staff functions, as well as from a         extent on the ability to integrate business
lowering of expenses in connection with        cultures and achieve full and rapid identi-
preparations for IAS and Basle II. We aim      fication with the new company. For this
to achieve earnings synergies by improved      reason, cultural integration is a high prio-
utilization of customer potential (cross-      rity for HSH Nordbank. The Cultural Inte-
selling), and by HSH Nordbank increasingly     gration project was primarily concerned
assuming lead or co-lead functions in          with analyzing the business cultures in
financing projects – reflecting the Bank’s     Hamburg and Kiel, pinpointing similarities
enhanced profile in international markets      and differences and determining where
and state-of-the-art know-how in key mar-      action was required. Specific measures were
ket segments.                                  then taken – for example, in the shape of
                                               information sessions and events focused
                                               on cultural integration. The longstanding
                                               cooperation between the two banking
                                               houses and their familiarity with each
                                               other’s structures and methods, as well as
                                               their relatively close physical proximity,
                                               considerably eased the integration process –
                                               although this has not yet been entirely
Group Overview   24




                 perfected. An important supportive feature   The strategy process – concentration on
                 of the merger operation was the Bank’s       core competencies.
                 effective internal communications. Swift
                 and comprehensive information about          The merger united two powerful partners
                 each step of the process was seen as a key   firmly rooted in the Hamburg and Schles-
                 to enhancing employee motivation and         wig-Holstein areas of northern Germany.
                 commitment.                                  The ability to remain competitive after the
                                                              abolition of Anstaltslast and Gewährträger-
                                                              haftung will be a decisive factor for the
                 HSH Nordbank Hypo AG .                       future growth of HSH Nordbank. With this
                                                              in mind, the Bank undertook an intensive
                 The decision to establish HSH Nordbank as    review of business strategy immediately
                 a stock corporation entailed loss of the     after the merger. HSH Nordbank sees itself
                 right to issue covered mortgage bonds as a   as both a strong regional player in northern
                 refinancing instrument – though a special    Europe and an international expert in spe-
                 federal German regulation enabled existing   cialized financing. Aiming to improve and
                 mortgage bonds to be continued. In order     extend its customer relations and signifi-
                 to regain the authorization to issue mort-   cantly increase sales of non-capital-binding
                 gage bonds, HSH Nordbank acquired a          bank products, the Bank will pursue an
                 mortgage bank in September 2003. HSH         active capital management policy based on
                 Nordbank Hypo AG – equipped with a letter    portfolio transactions.
                 of comfort from HSH Nordbank – can con-
                 tinue to secure favorable conditions for
                 its real estate and medium-sized business
                 customers, as well as mun-cipalities and
                 public authorities, and at the same time
                 offer refinancing products to both public
                 and private sector Savings Banks.
25
Group Overview   26




                 A clear goal, a clear strategy –
                 “Capital Market Readiness 2006”

                 The German banking industry is undergoing profound change,
                 the result of a shift in underlying conditions, changes in the legal
                 framework, and intensive competition. To keep pace with these
                 developments and continue to operate successfully in today’s
                 markets means adapting to these changes. With the completion
                 of the first interstate merger in the Landesbanks sector, we have
                 created an excellent platform not only for keeping up with the
                 leaders, but for taking our place among them. Our new overall
                 bank strategy, and the business model we have built on it, reflect
                 this ambition. They are milestones on our way to a successful
                 future.
                                                                                                    27




Our strategic basis – a strong position in           Our strategic goal has a name –
core markets.                                        “Capital Market Readiness 2006”.


In all its core markets HSH Nordbank enjoys          The new overall bank strategy aims to pro-
an excellent competitive position. In the            vide HSH Nordbank with capital market
Hamburg and Schleswig-Holstein economic              readiness, independent of state guarantees,
region we are market leader in the cor-              by 2006. Against this background we have
porate clients segment, not merely on                consistently developed the strategic orien-
account of our lending strengths but also            tation of our predecessor banks. Above all
because we act in many cases as house                in northern Germany and northern Europe
bank to the medium-sized business sector             we will continue to play the role of core
in northern Germany. Hardly any other                regional bank, enjoying a close relation-
Landesbank is so deeply rooted in its home           ship with our customers. At the same time
region. In specialized financing we also             we will serve the foreign trade require-
take a leading position – as one of the three        ments of our domestic customers. And
top addresses for commercial real estate             HSH Nordbank will also be active as a pro-
finance in Germany, one of the largest               vider of specialized finance in those inter-


Beyond home base – we are represented at major financial centers worldwide

                                                                                         Shanghai



                                    Oslo          Helsinki
                                                             Tallinn
                                      Stockholm
                                                             Riga                   Hong Kong
                                             Copenhagen
                                    Kiel   Lübeck
                           Amsterdam                                      Hanoi
                      London         Hamburg Berlin     Warsaw

                           Guernsey   Luxembourg




    New York



                                                                                  Singapore




German refinancers for manufacturer-                 national segments in which we possess
independent leasing companies, a major               special product, market or client expertise.
international transport financing house,
and world leader in ship financing. In these         To broaden our investor base on both the
segments we also act as house bank for               national and international capital markets,
many clients. Our new overall bank strate-           HSH Nordbank is consistently expanding
gy, launched in 2003, takes its inspiration          its position as an innovative partner, secu-
from this excellent starting position.               ring its funding with a continuous issuing
                                                     program, but also offering and dealing
                                                     in complex products such as structured fi-
                                                     nance and asset backed securities. With
Group Overview   28




                 this enhanced profile we will continue to      in earnings through sales of non-capital-
                 be competitive and successful in future,       binding products, as well as by risk-oriented
                 and generate sustained growth in the           pricing in our traditional lending business,
                 Bank’s enterprise value. Our goal is clear:    and by a more active management policy
                 we aim to boost profitability and signifi-     in our equity and risk positions.
                 cantly improve both our capitalization and
                 its structure.                                 2. Profile to be sharpened by intense
                                                                focus.


                 The road to success – consistent               Despite the limit set on risk-weighted
                 development of overall bank strategy           assets, we aim to develop new lending
                 and business model.                            business very actively, by intense utiliza-
                                                                tion of the advantages we have built up
                 Our strong market position and longstan-       over decades of contact and trust with our
                 ding customer relationships in our role as     existing customers. We will, however, con-
                 principal banker – founded on the tradi-       centrate our activities in segments where
                 tion of HSH Nordbank and its predecessors      our strong market or regional presence can
                 as relationship-bankers – create a platform    give us a leading position, with the possi-
                 on which our overall bank strategy and         bility of attractive profit margins. Commit-
                 business model will be developed in a five-    ments outside these areas will be entered
                 point plan:                                    into very selectively on the basis of assured
                                                                high profitability. This strategy will signifi-
                 1. Qualitative growth.                         cantly sharpen our profile, positioning us
                                                                as a powerful regional bank of the north
                 In its core activities, HSH Nordbank reached   and an international provider of speciali-
                 a critical size with the merger. For this      zed financing. We will systematically use
                 reason we will in future – unlike our pre-     our lending strengths to further extend
                 decessor houses – focus not on quantitative    our leading position via intensive expan-
                 growth but on profitability and capitaliza-    sion of new business.
                 tion, aiming for a position that is also
                 internationally attractive. Without exten-
                 ding our risk position, we intend to further
                 expand our lending business. Our aim is
                 for clearly focused growth, without keep-
                 ing all our loans on the books until matu-
                 rity. We will achieve the necessary increase
                                                                                              29




3. Active asset management to generate          4. Franchise value to be boosted by multi-
growth and diversify risks.                     product approach.


As we intend to actively pursue the deve-       HSH Nordbank’s traditional strength as
lopment of new lending business, we will        an outstanding loan specialist constitutes
relinquish our former policy of keeping all     an excellent platform for systematic devel-
our loans on the books until maturity. In-      opment of our customer relationships.
stead, we will sell tranches of loans before    Currently we too often maintain a single-
maturity, thus freeing equity capital tied      product relationship with our clients.
up in lending. This can be effected by syn-     Our future goal is to develop an all-round
dication of claims at the time when a loan      approach that more frequently makes us
is arranged, or by portfolio management         first address for all our customers’ finan-
transactions on the secondary market (for       cial requirements. Within a multi-product
example, securitization) during the credit      context we will offer a significantly higher
period. The precondition for such transac-      number of non-capital-binding products
tions is a portfolio of outstanding quality –   and services, with the overall goal of doub-
like ours.                                      ling commission income by 2006.


By securitizing tranches of loan from the       In order to achieve the transition from a
ship financing, real estate and corporate       loans-intensive business model to one orien-
segments, which enjoy high ratings, we aim      ted on selling significantly more products
to support the creation of a liquid secon-      and services with high commissions earn-
dary market for these asset classes. Our        ings, we will in future focus more closely
goal is to regularly place complete sub-port-   on the specific business requirements of
folios on the international capital markets     our customers, and thereby also deepen
via securitization transactions, thereby        the already good relationships we enjoy
enabling investors to benefit from HSH          with them. We aim to generate further
Nordbank’s special expertise in its attrac-     commissions earnings by more frequently
tive core activities.                           assuming lead or co-lead functions. This
                                                will involve our product divisions in deve-
In our portfolio management transactions        loping high-performance non-capital-bind-
we will also exercise vigilance, taking         ing products, and providing support for
prompt action to counter the formation of       customer advisory and sales units.
risk concentrations. In addition, to enhance
risk diversification and optimize earnings,     This approach enhances customer-value
we will systematically invest in credit and     and at the same time creates tangible value
market price risks.                             added for the Bank. A deep and far-reaching
                                                customer relationship, based not only on
                                                lending, will prevent bank services from
                                                drifting off to the competition – and do so
                                                without burdening the Bank’s capital.
Group Overview   30




                 5. Cooperation with the Savings Banks to        Our claim – to be a top player in the
                 be intensified.                                 north European banking market.


                 Our position as a strong regional bank of       The onward development of our business
                 the north is further reinforced by our          model, as outlined above, has laid the
                 intensive cooperation with the local Savings    foundation for HSH Nordbank’s positio-
                 Banks network. This constitutes a second        ning as one of northern Europe’s leading
                 pillar of our business activities. We are       commercial banks – and one that, after
                 particularly closely linked to the Schleswig-   mid 2005, will no longer enjoy state gua-
                 Holstein Savings Banks – for which we           rantees. Thanks to the deep relationships
                 serve as central bank – through an agree-       with our customers that we have developed
                 ment of association, as well as by concrete     over the years, and to our strong market
                 bilateral sales agreements. We also tradi-      position, we do not need to expand into
                 tionally serve the Savings Banks on a supra-    new high-risk business segments. Instead,
                 regional basis as second or third under-        we can concentrate on generating new
                 writing partner.                                business in fields where our expertise is
                                                                 proven and our customer know-how out-
                 Our activities are focused on areas in          standing. This is an excellent springboard –
                 which – in line with our business model –       not only in itself, but also in relation to
                 we possess acknowledged expertise. These        the competition.
                 include refinancing, advisory services for
                 risk and portfolio management, and the          In the wake of the Managing Board’s deci-
                 trading of risk on the secondary market.        sions establishing an overall bank strategy,
                 Examples are a mortgage bond secured on         the period since autumn 2003 has seen
                 real-estate, developed for Savings Banks and    the implementation of this strategy in HSH
                 successfully placed for a Schleswig-Holstein    Nordbank’s various organizational divi-
                 Savings Bank – an historic first in Germany     sions. Progress is monitored and ensured
                 – as well as rating advisory services provi-    through a bank-wide controlling pro-cess.
                 ded for various Savings Banks. In addition      The strategy is put into effect decentrally,
                 to this, we put our proven expertise in         and the process is complemented with a
                 developing innovative capital market pro-       program of action addressing key success
                 ducts – for example, our successful struc-      factors for the development of our business
                 tured retail products – at the service of       model.
                 Savings Bank customers as well.
                                                                 We are confident that the systematic im-
                                                                 plementation of this model will, by 2006,
                                                                 achieve a return on equity of more than
                                                                 15 % before taxes, as well as sustained
                                                                 growth in our capital resources, with a core
                                                                 capital ratio of over 7 %. This will ensure
                                                                 adequate and attractive funding on the
                                                                 international capital markets.
31
Group Overview   32




                 Employees – high level of commitment
                 following a successful merger

                 The merger of Hamburgische Landesbank and Landesbank
                 Schleswig-Holstein into HSH Nordbank AG, and the integration
                 process that followed, continue to make high demands on
                 our human resources management and on our employees.
                 For this reason personnel issues had clear priority from the be-
                 ginning of the process. Tackling them swiftly has been crucial
                 to the rapid and frictionless integration of the two banks.
                                                                                            33




Integration process well on the way.           Responsible HR management – measures
                                               swiftly taken to integrate employees.
Experience of company mergers and re-
structuring processes shows that the inte-     The integration process was implemented
gration of different business cultures is a    via various practical measures supporting
decisive factor in creating a new corporate    cooperation, developed by HR initially as
identity, and in laying the foundations of a   projects and later as established policy.
stable and viable business model. In the       Among these were large interactive events
run-up to the merger, HSH Nordbank al-         in which all employees had the opportu-
ready identified this as a key issue and,      nity to participate, as well as optional con-
after a thorough cultural analysis, intro-     flict-solving and coaching sessions. A key
duced the necessary operational measures.      element was the team-building sessions
We consistently based these on the aware-      provided in response to the requirements
ness of a shared north German mentality.       of many of the Bank’s organizational units.
That the integration process has already       These covered topics from the development
achieved so much is due above all to the       and implementation of strategy to setting
willingness of our employees to actively       up information and communication struc-
shape our common future. The Board of          tures. The sessions are being continued in
Managing Directors would like to take the      the current year, with the focus on the
opportunity here to thank all our employ-      Bank’s new strategy to meet the demands
ees for the trust they have put in us, and     of the capital market, as well as measures
the commitment they have continuously          required for developing a unified leader-
demonstrated.                                  ship concept.
Group Overview   34




                 Development of employee profile.                          tation of the Bank’s new strategy, we
                                                                           supported and implemented these changes
                 As at December 31, 2003 the HSH Nord-                     with various complementary and compen-
                 bank Group employed 4,511 people – some                   satory measures, and as a result were largely
                 4 % less than were employed in the prede-                 able – from the inception of HSH Nord-
                 cessor organizations at the end of the pre-               bank – to provide the resources necessary
                 vious year. The reduction in the regular                  for the Bank to staff its national and inter-
                 workforce was achieved with minimal                       national locations.
                 turnover by a widespread stop in recruit-
                 ment and the promotion of special early                   We aim in the current year to recruit
                 retirement offers.                                        experts for specialist positions – in some
                                                                           cases from narrowly defined professional
                 The merger and consequent new strategic                   segments. In line with this requirement we
                 orientation of certain divisions of the Bank              are positioning ourselves both nationally
                 brought with it the need for many employ-                 and internationally as an attractive
                 ees to adapt to a new job profile or work-                employer.
                 place. Within the context of the implemen-


                 Employee profile
                                                                                                               31.12.2003
                 Total number of employees (Group)                                                                  4,511
                 of whom: female                                                                                    2,127


                 Regular employees                                                                                  4,314
                 of whom:
                 Bank                                                                                               3,207
                 Branches                                                                                            418
                 HSH Nordbank International S.A.                                                                     126
                 HSH Nordbank (Guernsey) Ltd.                                                                           14
                 PLUS BANK AG                                                                                        335
                 Casinos                                                                                             194
                 HSH Nordbank Hypo AG                                                                                   20


                 Trainees                                                                                            148
                 Temporary employees/Interns                                                                            49
                 Employees on maternity and parental leave                                                           186
                 Retired employees and surviving dependants/employees in early retirement                           1,566


                 Part-time employees in %                                                                           15.78
                 Average age (years)                                                                                38.43
                 New appointments (excluding branches and subsidiaries)                                              100
                                                                                             35




Incentives increase attractiveness as an        Company support for playgroup and
employer.                                       after-school places.


HSH Nordbank sees employee relations            A central feature of HSH Nordbank’s HR
based on fairness and high motivation as        policy is the harmonization of family and
an essential pillar of its corporate culture.   workplace. We are continuing the coope-
For this reason we are on the point of          rative project “Company Kids”, providing
introducing a remuneration system, deve-        flexible facilities for children up to the age
loped from that of our predecessor organiz-     of twelve. This was started by our prede-
ations, for employees on both individually      cessor, Hamburgische Landesbank, in tan-
and collectively agreed salary scales. The      dem with the organization Familienservice
system will provide motivation for success      (Family Service). Places are free for HSH
by means of variable bonus payments and         Nordbank employees, and were used inten-
other attractive incentives. We will conduct    sively in 2003. We plan to extend this pro-
performance reviews with each employee          vision to our Kiel location, where employ-
in which we agree upon individual targets       ees currently (as in the past) can use a
and discuss perspectives for professional       contingent of places reserved in Arbeiter-
and personal development as well as remu-       wohlfahrt (Workers’ Welfare) children’s
neration. The instruments we use for em-        facilities.
ployee advancement include management
and professional qualification measures,
a mentoring program concentrating espe-
cially on equal opportunities for high-
potential female staff, and systematic per-
sonnel development programs. Some of the
HR concepts and systems inherited from
our predecessor banks have not yet been
fully integrated, but we are confident in
our ability to reach new solutions, in coope-
ration with the employees’ council, in the
course of the current year.
Group Overview   36




                 Our involvement in the arts, culture, sports
                 and the environment

                 Firmly rooted in the region of Hamburg and Schleswig-Holstein,
                 HSH Nordbank upholds the longstanding tradition of cultural and
                 social commitment shown by its predecessors before the merger.
                 We see ourselves not only as an attractive regional employer, but as
                 an enterprise with widespread cultural and social responsibilities.
                                                                                            37




Widely committed to culture and the arts.      Principal sponsor of the Schleswig-
                                               Holstein Music Festival.
HSH Nordbank supports contemporary art
and culture in Schleswig-Holstein via an       Along with its partners in the Savings
Arts Foundation established by Landesbank      Banks Finance Group, HSH Nordbank is a
Schleswig-Holstein in 1992. The Foundation     principal patron of the Schleswig-Holstein
appoints an expert curator for a period of     Music Festival – one of Europe’s biggest
one to two years, with the task of creating    and best known music events. In 2003 the
and implementing an arts program. Last         Bank sponsored the Festival’s concert pre-
year, for example, the Bank sponsored the      ludes for the first time, and we also pro-
“NORD-KUNST: Schleswig-Holstein in the         mote the Festival’s ideals by supporting
20th Century” exhibition that toured the       talented young musicians. In 2003 we
region, paying homage to the whole spec-       awarded a prize for woodwind soloists.
trum of art from the north. For the cur-       Reflecting our image as a partner and
rent year the well-known solo clarinetist      sponsor of culture and the arts, as well as
Sabine Meyer has been engaged as Founda-       science and sports, HSH Nordbank suppor-
tion Curator.                                  ted a number of other cultural and social
                                               events in the past year, ranging from indi-
                                               vidual exhibitions to the HSH Nordbank
Longstanding partnership with the              Cup, a sailing regatta attracting internatio-
Hamburg and Kiel Kunsthalle museums.           nal competitors. And, as a committed cor-
                                               porate citizen, the Bank supports selected
With HSH Nordbank’s sponsorship of the         social projects.
new “Kunst in Hamburg. Heute” (“Art in
Hamburg. Today”) section of the Hamburg
Kunsthalle, a fresh element has entered        Boats, sea and Kiel Week – side by side
the longstanding collaboration between         with the world’s biggest sailing event.
the Bank and the museum. Focused on
completing the collection of works by          Kiel Week is one of the world’s biggest and
Hamburg artists, the project demonstrates      most prestigious sports events. Every year
HSH Nordbank’s significant contribution        its top level competitions and wide accom-
to maintaining the City’s artistic heritage.   panying program of cultural events draw
We also have a well-established partnership    large numbers of visitors from all over the
with the Kunsthalle in Kiel, where we have     world. As a partner for sports and culture,
been principal sponsor of an annual ex-        HSH Nordbank will sponsor Kiel Week for
hibition each year from 2003 to 2005. In       the next three years, making a major con-
2003 this enabled the Kiel museum to stage     tribution to the attractiveness and dyna-
its “SEE History” exhibition, presenting its   mism of the entire north German region.
own collection – including works by Emil
Nolde and Max Liebermann – in a new
context.
Group Overview   38




                 Principal sponsor of the HSH Nordbank           Committed to climate protection.
                 Run – around Hamburg’s Hafencity.
                                                                 Environmental care is important to HSH
                 Newly renamed “HSH Nordbank Run”, the           Nordbank. Our goal is to reduce CO2
                 former “Hafencity Run” is a 4.5 km race         emissions as far as possible. We have not
                 through Hamburg’s “Hafencity” docklands         only consistently lowered our own energy
                 complex sponsored by HSH Nordbank. In           consumption, but also support other envi-
                 cooperation with the “Hamburger Abend-          ronmental projects in Schleswig-Holstein,
                 blatt” newspaper, part of the proceeds of       including reforestation and the reinstating
                 this race are devoted to social projects. The   of large wetland areas, making a significant
                 “Children Help Children” initiative, for ex-    and sustained contribution to compensa-
                 ample, provides support for underprivil-        ting carbon dioxide emissions around our
                 eged children and their families, organi-       Kiel location. In addition, HSH Nordbank is
                 zing regular and reliable care and contact      a member of the “Hamburg Partnership for
                 services as well as financial help.             the Environment”, an initiative started in
                                                                 2003 by the City State with local industry
                                                                 and commerce to support sustained ecolo-
                 Backing for the “Employment Initiative”.        gical modernization and use of resources.
                                                                 We see membership of this group as mean-
                 Like its pre-merger predecessors, HSH Nord-     ingfully complementing our commitment
                 bank supports innovative educational and        to environmental management.
                 training schemes geared to strengthening
                 the regional economy. In the “Employment
                 Initiative – Schleswig-Holstein Regional
                 Network”, HSH Nordbank and Provinzial
                 Nord Insurance Group have established a
                 joint project aiming to integrate young
                 people into work. In 2003 the “Schools and
                 the Economy” prize was awarded to regio-
                 nal schools for the second successive year.
39
THE FUTURE IS A NEW GOAL
Shipping Clients

With a business volume of more than EUR 20.8 billion,
HSH Nordbank is the world’s largest ship financing
house. Our Shipping division offers, alongside classical
and structured ship financing, the entire range of
financing and hedging instruments optimally tailored
to the requirements of internationally operating
shipping companies.
                                                                                             43




Number-one ship financing provider,            HSH Nordbank’s own innovative rating
with comprehensive know-how and                system takes account of quantitative and
customized solutions.                          qualitative factors in making loans.


Our core region of northern Germany has        In cooperation with other banks, we have
a long tradition of shipbuilding, maritime     developed a rating system for mortgage-
trade and travel and ship financing. For       based ship financing that has set a new
this reason the Shipping division ranks high   benchmark. It enables risk to be assessed
among HSH Nordbank’s core activities. The      and calculated as objectively and verifiably
Bank has a particularly long tradition of      as possible. As well as the purely quanti-
financing activities in Germany, Scandinavia   tative measurement of a transaction’s cash
and Greece, but customers from other           flow, a number of qualitative factors such
European countries, the USA and Asia also      as management, support by parent compa-
comprise a large section of our balanced       nies and the technical condition of the ship
and diversified lending portfolio covering     are taken into account – and here the long
numerous market segments. We provide           experience of HSH Nordbank and its pre-
our clients with investment services for all   decessors, as well as our good customer
regular types of merchant ship, with a focus   relationships, plays an essential role. In this
on new vessels in the three principal mar-     way we are able to offer our business part-
kets: container ships, tankers and bulk        ners even better advice and provide finan-
carriers. In addition we offer our depth of    cing precisely tailored to their individual
experience and know-how to provide tailor-     requirements.
made financing for cruise ships, ferries
and many special ship types. In the second-
hand market we help our customers to find
flexible short-term solutions appropriate
to these specific market requirements.
Group Segments   44




                 2003 – significant market recovery.              bulker segments – even hit record levels.
                                                                  A powerful driver behind this development
                 The three main ship financing markets –          was China, whose importance as a producer
                 container ships, tankers and bulk carriers –     of manufactured goods, within the frame-
                 developed in an unexpectedly positive way        work of the increasing internationalization
                 in 2003. Charter rates rose throughout the       of the division of labor, is constantly grow-
                 year, and – especially in the container and      ing. China’s raw materials requirement for
                                                                  steel and energy production is increasing
                 Portfolio by Country/Region                      accordingly – a phenomenon from which
                 in %
                                       5.3 0.9
                                                                  all market segments continue to draw high
                                 6.9                              profits. In the container vessel market we
                           6.4                                    saw a boom in orders, especially from
                                                                  German shipping companies, for so-called
                        6.9
                                                           54.8
                                                                  super-post-Panamax ships with a capacity
                          10                                      of over 7.5 million TEU, to cover the basic
                                                                  transportation requirements of worldwide
                                 8.8                              scheduled services. Reflecting its position as
                   Germany 54.8                                   national market leader, HSH Nordbank has
                   Scandinavia/Baltic States 8.8
                                                                  gained very substantially from the demand
                   Greece 10
                   North America 6.9                              for financing generated by this upturn.
                   Far East 6.4
                   Rest of Europe 6.9
                   Turkey/Eastern Europe 5.3
                   Various 0.9
                                                                  Dynamic growth in shipping division.

                 Portfolio by Ship Type                           Especially on the domestic front, the strong
                 in %
                                          6.6                     demand by German shipping companies in
                                    2.2
                                 2.5
                                                                  2003 for financing for new jumbo container
                           8.9                            34.1
                                                                  ships had a positive impact. Foreign trade
                                                                  also flourished. Our new business amounted
                        8.9
                                                                  to EUR 9 billion, and at year-end 2003 our
                                                                  total business volume for ship financing
                               18                                 stood at EUR 20.8 billion. This included
                                                   18.8
                                                                  open commitments amounting to EUR 3.1
                   Container ships 34.1
                   Oil tankers 18.8
                                                                  billion.
                   Bulk carriers 18
                   Chemical and product tankers 8.9
                   Passenger ships/ferries 8.9
                   Cruise ships 2.5
                   Gas tankers 2.2
                   Other 6.6
                                                   45




After the merger we continued to extend
and deepen our traditionally good relation-
ships with our customers – for example, by
offering individually tailored capital market
products. We also provided innovative finan-
cing structures – such as leasing offers –
to meet changing customer requirements.
Our increasing role as arranger has enabled
us to strengthen our market position still
further, and thanks to commission income
from cross-selling activities, our overall earn-
ings developed positively in 2003, despite
the weakness of the US dollar.




Optimally equipped for the future.


The introduction of our rating system for
ship financing provision has already enabled
us to fulfill the new equity capital stipula-
tions of Basle II. As a result, we see ourselves
well positioned for future activities in the
ship financing segment, and expect our bu-
siness to continue its dynamic development.
The positive market climate and current
global upswing will also have a positive
impact on ship financing and offer good
opportunities for lending. At the same time,
we will intensify our market presence, using
our many contacts in the banking world to
further raise the level of our syndication
activities.
THE FUTURE NEEDS PLANNING
Real Estate Clients

Successful completion of ambitious real estate pro-
jects presupposes the perfect interplay of know-how,
concept and capital. As an expert financial services
provider, HSH Nordbank is continuously and systema-
tically developing its comprehensive product spec-
trum, ranging from classical financing to real estate
investment banking. In addition, HSH Nordbank has
for several years been investing in shareholdings that
directly support the goals of its Real Estate Clients
business. The goal of this strategy is to extend and
enhance customer loyalty and generate additional
earnings.
                                                                                               49




Purposeful expansion of our strong               In order to continue firmly on our success-
domestic position and selective growth in        ful course, we further developed our fun-
attractive international markets.                damental strategy in the real estate sector
                                                 after the merger in 2003, adjusting it to
Commercial real estate clients form one of       reflect the Bank’s enhanced market position
HSH Nordbank’s core business areas, and          and new orientation toward the capital
one that creates – as it did with our two        markets. Apart from broadening our pro-
predecessor houses – a strong foundation         duct range in response to customer require-
for the Bank’s continuing growth. We run         ments, we aim to focus more strongly on
our real estate business from numerous           the growing requirement of our business
locations – apart from Hamburg, Kiel and         partners for syndicated and securitized
Berlin, we are represented in London, New        loans. Our goal is to consistently extend
York, Copenhagen, Stockholm, Warsaw and          our position in the national market, and at
Amsterdam.                                       the same time achieve substantial growth
                                                 in selected international markets.
On the domestic market our real estate
financing activities are concentrated on         A further important goal for HSH Nordbank
commercial and residential properties,           is the rapid integration of HSH Nordbank
with regional focuses on Hamburg, Berlin,        Hypo AG into the Group, acquired through
northern Germany and the major popula-           the purchase of an existing mortgage bank.
tion centers of western Germany. Already         The main task of this new 100 % subsidiary
today we are the leading provider of real        is the refinancing of HSH Nordbank’s long-
estate financing in northern Germany.            term real estate lending business. Tranches
Parallel to this, our activities abroad conti-   of first mortgage are transferred to HSH
nue to grow in importance, with properties       Nordbank Hypo via loans acquired and
in prime locations in major American and         processed by HSH Nordbank, where they
European cities. In addition, we are further     are refinanced with secured mortgage
expanding our Real Estate Clients division       bonds. The necessary procedures were set
to reflect our claim to provide “all-round       up in 2003, and the first refinancing acti-
real estate service” in this segment. In addi-   vities have already been completed. This
tion to classical financing, we offer our        aspect of the Bank’s activities continues the
customers attractive innovative products         longstanding and successful tradition of its
from the real estate investment banking          two predecessor houses in mortgage bond
spectrum. HSH Nordbank’s real estate client      issues.
portfolio totaled more than EUR 21 billion
in 2003, with international activities ac-
counting for some EUR 5.5 billion. Total         Fiscal 2003 – encouraging development in
business volume as at December 31, 2003          difficult market environment.
amounted to some EUR 27.8 billion.
                                                 Real estate business is subject to cyclical
                                                 trends. This is reflected in the uneven deve-
                                                 lopment of our major business segments
                                                 during the past year. Nevertheless the whole
Group Segments   50




                 picture gives grounds for considerable satis-      customer groups both nationally and inter-
                 faction. Our success is built on a balanced        nationally, among them investors in both
                 product portfolio, adapted and optimized           commercial and residential property, real
                 in response to changing environmental              estate corporations, project developers and
                 conditions. In the domestic residential mar-
                 ket, for instance – in contrast to commer-         Portfolio by Property Type
                                                                    in %
                 cial properties – we see a medium-term
                 recovery taking place, with demand and                          24
                                                                                                      30
                 rentals both picking up. On the other hand,
                 in our principal international markets, the
                                                                             2
                 USA and UK, we expect a growing demand
                 over the same period.

                                                                                  44


                 Balanced portfolio structure ensures long-           Residential (domestic) 30
                                                                      Commercial (domestic) 44
                 term business success.                               Residential (international) 2
                                                                      Commercial (international) 24

                 Apart from increasing internationalization,
                 the balanced diversification of our portfolio      residential property companies. Our port-
                 ensures maximum independence from the              folio continues to be concentrated in the
                 cyclical fluctuations of the real estate sector.   domestic market, which accounts for 74 %
                 For this reason, we started at an early date       of our activities. New business, however,
                 to extend our product range as widely as           will further increase the contribution of
                 possible. Today we serve a large number of         the international segment. At 68 %, the
                                                                    dominant focus of our financing activities,
                 Portfolio by Customer Segment                      both nationally and internationally, is on
                 in %
                                       6                            commercial projects – for example, office
                                                 12
                                                                    accommodation and shopping malls.

                          26
                                                           20
                                                                    New business – increasing importance of
                                                                    international segment.
                               8

                                                28
                                                                    After a sluggish beginning in difficult mar-
                                                                    ket conditions, we were able to conclude
                   Residential property companies (domestic) 12
                   Residential property investors (domestic) 20     new business amounting to some EUR 4.7
                   Commercial property investors (domestic) 28      billion without easing our careful lending
                   Real estate corporations (domestic) 8
                   International investors 26                       policies. Some 62 % of our domestic new
                   Other investors (domestic) 6
                                                                    business, with a total volume of EUR 1.3
                                                                    billion, was concentrated in our home
                                                                                                 51




region of northern Germany and in the            New Business by Country/Region
                                                 (International)
Berlin metropolitan area. Remaining do-          in %
                                                                          4 2
mestic new business in 2003 continued to                              3
                                                               8
be focused on the major German metro-
                                                                                    34
politan areas. With some EUR 2.6 billion –
                                                         11
amounting to 26 % of our total portfolio –
international new business added its own
                                                           5
considerable impulse. Some 34 % of our
international new business was concentra-
ted in the USA, where – in cooperation                                      33
                                                   USA 34
with powerful partners – we invested above         UK 33
all in the so-called 24 hour cities like New       Netherlands 5
                                                   Poland 11
York and Washington. Our international             Rest of Europe 8
                                                   France 3
European new business focused on the UK –
                                                   Spain 4
principally on the Greater London area.            Canada 2



                                                 financing structures, focusing on selected
Prospects for 2004.                              core markets. Within this framework we
                                                 will consistently pursue our established
With the overall economy recovering very         course, developing from a pure lending
slowly, we see little opportunity for growth     institution into a more complex real estate
in the domestic real estate financing mar-       investment banking house.


New Business by Customer Segment
in %
                                                 Segment backed by participations –
                            5
                                   8             completing our product range and
                                                 strengthening our market position.

                                            20
                                                 Parallel to our real estate financing activi-
        55
                                                 ties, HSH Nordbank has for some years in-
                                                 vested in participations that actively support
                                       12
                                                 the business operations of our Real Estate
                                                 Clients division. The goal of this strategy is
  Residential property companies (domestic) 5
  Residential property investors (domestic) 8    to extend and enhance customer loyalty
  Commercial property investors (domestic) 20
  Real estate corporations (domestic) 12
                                                 and achieve additional earnings. Our hold-
  International investors (total) 55             ings are confined to medium to long-term
                                                 investments, with assets currently spread
ket. Therefore, to operate effectively in this   across four areas – project development,
still volatile environment, we aim to concen-    issuing business connected with real estate
trate on top quality, high margin business.      investment funds, participations (including
On the international front we will continue      real estate equity funds) and services.
to maintain our conservative
Group Segments   52




                 Project development.                            Issuing business – real estate investment
                                                                 funds.
                 HSH N Immobilien Holding GmbH is the
                 company responsible within the Group for        Since January 1, 2002 our real estate invest-
                 all real estate projects in which the Bank      ment fund activities have been concentrated
                 has an equity stake. In the year under review   under the umbrella of HGA AG (formerly
                 the company was able to further expand its      HGA Hamburgische Grundbesitz Beteili-
                 activities, and is currently participating in   gungs AG), an HSH Nordbank subsidiary.
                 seven projects with a total volume of EUR       For this purpose, our entire stake in HGA
                 990 million. The largest single project – in    Capital Grundbesitz und Anlage GmbH,
                 which HSH N Immobilien Holding joined           HGA Management Investor und Anlage
                 forces with the ALLIANZ Group – is the          GmbH (formerly "Katharinen" Verwaltungs-
                 EUROPA-Passage, a shopping mall and office      gesellschaft mbH) and LB Immo Invest
                 space development under construction by         GmbH (formerly HGA Investment GmbH)
                 Projektgesellschaft Alida Grundstücksgesell-    was transferred to our HGA holding in the
                 schaft mbH & Co. KG in a prime location in      course of fiscal year 2002.
                 central Hamburg. Completion and opening
                 are scheduled for the end of 2006. Parallel     Fiscal 2003 saw an overall growth in fund
                 to its equity business, HSH N Immobilien        volume from HGA Capital closed-end
                 Holding has significantly expanded its ser-     public funds. During the past year, three
                 vice activities in the project development      new funds were set up with real estate
                 and management areas, via its subsidiary        properties in Frankfurt, Vienna and Pecs
                 HSH N Immobilien Development GmbH.              (Hungary). The HGA New Office Campus-
                 The company’s direct involvement in this        Kronberg Fund set up in April 2002 was
                 area creates not only qualitative improve-      fully placed (with partial recourse to the
                 ments – enhanced technical know-how –           placement guarantor), as was the HGA
                 but also earns additional income without        Mitteleuropa I Fund with a shopping mall
                 incurring higher risks or absorbing capital.    in Pecs (Hungary). In addition, the HGA
                                                                 USA III Fund is at an advanced stage of
                                                                 placement in New York. With these funds
                                                                 HGA Management controls a fund and
                                                                 property volume of some EUR 1.1 billion.
                                                                 Jointly with ECE – a project developer and
                                                                 manager of shopping malls – HGA Capital
                                                                 is currently developing its specialized fund
                                                                 activities in central Europe, based on the
                                                                 construction of state-of-the-art shopping
                                                                 facilities in Hungary, the Czech Republic
                                                                 and Poland.
                                                                                             53




In 2003 the capital investment company LB      HSH Nordbank’s key equity investment acti-
Immo Invest set up two open-end real estate    vities during the past fiscal year included
funds for institutional investors, leaving     the acquisition of the remaining 50.1 %
highly respected competitors behind in         shares in LEG Schleswig Holstein Landesent-
growth-rate terms. Additional capital com-     wicklungsgesellschaft GmbH. The complete
mitments have already been made, enabling      privatization of LEG brought the operating
the purchase of further properties on a        companies – as well as the core real estate
considerable scale. As from April 1, 2003,     activities of B&L Immobilien AG – under
two partners from the Landesbank sector –      the LEG umbrella. In the wake of the
Helaba, and REAL I. S. AG Gesellschaft für     amalgamation, LEG changed its name to
Immobilien Asset Management, a subsidiary      DGAG Deutsche Grundvermögen GmbH
of BayernLB – joined LB Immo Invest, in        (DGAG). The new company is owned by B&L
order to broaden the property purchasing       Immobilien AG (62 %) and HSH Nordbank
base and boost product sales in Germany.       AG (38 %). DGAG develops, buys, sells, man-
                                               ages and administers real estate properties.
                                               In the shopping facilities segment the
Participations – including real estate         company’s portfolio comprises retail outlet
equity funds.                                  rentals totaling some 143,000 sq. m. and
                                               commercial property of some 297,000 sq.
Our activities in this segment comprise        m. throughout Germany. As well as its own
property companies and equity funds.           residential holding of more than 19,400
GEHAG GmbH manages some 20,000 resi-           rental units, the company manages some
dential units in Berlin. The company’s core    3,300 rental units for third parties. DGAG
activities include traditional management,     is looking to achieve incorporation in the
development of the core portfolio, and         near future. The company plans to enhance
individual property sales. GEHAG improved      and extend its position in the German
its business processes in 2003 and pushed      property market during 2004, especially in
ahead with the optimization of its property    its core shopping facilities and residential
portfolio. During the year under review, the   business segments.
company restructured its borrowing and
placed a significant tranche of funding with   Since the end of 2002 HSH Nordbank (before
a bank syndicate led by HSH Nordbank AG.       that date Hamburgische Landesbank) has
The company fulfilled its economic plan        invested in various international equity
for 2003, and will concentrate in the cur-     funds, among them US and Canadian funds.
rent fiscal year on tapping optimization       The Bank’s total commitment amounted to
potentials.                                    some EUR 70 million (equivalent value), of
                                               which some EUR 4 million had been called
                                               as at December 31, 2003. The funds are
                                               invested mainly in real estate financing and
                                               project developments for office and com-
                                               mercial accommodation.
Group Segments   54




                 Regional focuses are the USA, Canada and       Property services.
                 major west European cities. The investments
                 aim not only to grow attractive earnings,      Our core activity in this segment consists of
                 but also to enhance networking with inter-     comprehensive consulting services for our
                 national investor groups, and thereby gene-    clients on all real estate business matters.
                 rate additional follow-up income.              We aim to extend this service during the
                                                                current year.
                 Goal-oriented real estate portfolio manage-
                 ment requires not only the acquisition of
                 new investments and the development of         Planned establishment of a real estate
                 existing ones, but also continuous alertness   holding entity to bundle activities.
                 to appropriate exit openings. Thus, at the
                 end of 2003 the sale of our stake in West-     HSH Nordbank intends in the course of
                 Invest Gesellschaft für Immobilienfonds        2004 to reorganize those of its real-estate
                 and Westdeutsche ImmobilienHolding             related activities that take place outside the
                 brought attractive returns – WestInvest        Bank, bundling them in a single holding
                 issues and manages open-end (as well as        company, HSH N Real Estate, which will
                 one closed-end) property funds. Similarly,     also house the funds business, equity/
                 at the beginning of the year under review      opportunity investments, real estate project
                 HSH N Composits GmbH (a 100 % subsidiary       development and property services. As well
                 of HSH Nordbank) held 32.8 % of the capital    as unifying and optimizing our market
                 in HVG Heimbau GmbH (HVG) – itself a           impact, this reorganization will create
                 holding company owning 76.6 % of the           earnings synergies and facilitate clear and
                 capital in the real estate enterprise BIG      effective management. Relations with the
                 Heimbau AG. These investments were sold        Bank will be maintained via our Real Estate
                 in 2003 to Deutsche Annington Erste            Clients division.
                 Wohnungsbeteiligungs- und Verwaltungs
                 GmbH & Co. KG. Finally, negotiations are
                 currently at an advanced stage to sell the
                 Bank’s interest in W. Jacobsen AG to an
                 institutional investor. W. Jacobsen AG is a
                 listed real estate company with property in
                 northern Germany.
55
THE FUTURE DEMANDS COMMITMENT
Corporate Clients

The Corporate Clients segment comprises not only the
worldwide corporates business run from the Bank's
head offices in Hamburg and Kiel, but also the corpo-
rates activities of the Copenhagen Branch (Nordic Cor-
porates) in the Baltic Sea region. In our core region
of Hamburg and Schleswig-Holstein, HSH Nordbank
enjoys a predominant market position in this business
segment. We also maintain a comprehensive network
of branches and representative offices in Scandinavia
and the Baltic Rim countries, substantiating our claim
to be a powerful bank of the north. We aim to rein-
force and extend this position in future. Good foun-
dations have been laid in the course of the merger,
with the bundling of competencies and the expansion
of the product portfolio, as well as with our growing
international orientation and our solid expertise in
both our own and our customers' business activities.
                                                                                                 59




Corporates and Structured                        Taking account of tax and corporate struc-
Finance                                          tures, as well as rating aspects, we have
                                                 developed our structured finance capability
Leading-edge position further                    with a clear focus on quality, in order to
strengthened.                                    meet the rising demands of our customers,
                                                 who increasingly see the optimization of
Corporates and Structured Finance concen-        their own financing as an important stra-
trates on the top end of the medium-sized        tegic task. Our wide experience and high
company segment, above all in northern           level of expertise in arranging finance for
Germany. In our home region of Hamburg           infrastructure and wind-energy projects, for
and Schleswig-Holstein we are the leading        example, as well as for acquisition financing
bank in this segment – a position reinforced     makes us a sought-after partner at both
by the merger of Hamburgische Landesbank         national and international levels.
and Landesbank Schleswig-Holstein into
HSH Nordbank. Our goal is to develop this
strong market position dynamically and           Selective business expansion.
systematically, with clear customer orienta-
tion and sound and reliable strategies. Our      Despite the weak economic environment
clear priority here is on long-term customer     throughout the year, Corporate Clients
satisfaction. We want our customers to look      business developed well in 2003. Focusing
to us as their company bank – a close and        more closely on earnings and risks, we
trusted partner for all their banking require-   achieved a business volume of EUR 16 bil-
ments. We see structured finance solutions,      lion, including structured finance activi-
which play a key role in this context, as one    ties. A rise in costs, due principally to the
of our central growth areas.                     merger process, was more than offset by
                                                 very satisfactory earnings from deposits, as
Our success is built on intelligent product      well as services and commission business.
development. We offer financing, interest        Overall results were significantly up on the
rate and currency management solutions           previous year.
precisely tailored to our corporate clients’
requirements. We have special expertise in
foreign trade, logistics, port administration,   Customer relationships and market
manufacturing business, health and social        position strengthened by targeted
services. Our Corporate Finance, Leasing,        participations.
Export and Trade Finance, Asset Manage-
ment and e-Banking units add further sup-        In addition to comprehensive service pro-
port, ensuring that our products effectively     vision, HSH Nordbank has for some years
meet customer requirements.                      invested in shareholdings as an aspect of its
                                                 Corporate Clients activities. The goal of this
                                                 strategy is to extend and intensify the bank-
                                                 client relationship as well as to boost earn-
                                                 ings. As a matter of principle, investments
                                                 are made only on a medium to long-term
                                                 basis.
Group Segments   60




                 Through the holding company Timene               reflected in ongoing good results. The all-
                 Beteiligungsgesellschaft mbH & Co. KG,           round picture in 2004, with the one-off
                 HSH Nordbank owns approximately 10 % of          burdens of the merger process behind us,
                 the shares in Norddeutsche Affinerie AG.         enables us to face the future optimistically.
                 The results of Norddeutsche Affinerie AG
                 for fiscal 2002/2003 were affected by the
                 generally weak economy, as well as rising        Nordic Corporates
                 costs and competitive distortions on inter-
                 national raw materials markets. However,         Powerfully present in the Baltic Sea
                 despite the difficult economic and market        region.
                 situation, overall results were encouraging.
                                                                  As a leading regional bank in northern
                 So far as sales of segment-oriented holdings     Europe, HSH Nordbank maintains a comp-
                 are concerned, we successfully sold our 75 %     rehensive network throughout Scandinavia
                 share in Miles Handelsgesellschaft Inter-        and the Baltic Rim countries. Alongside
                 national mbH in December 2003 via our            our Main Branch in Copenhagen, we have
                 Lamatos subsidiary. Miles is active in the       Branch Offices in Stockholm and Helsinki,
                 preparation of fashions collections and sub-     and Representative Offices in Oslo, Riga,
                 sequent make-to-order production in Asia,        Tallinn and Warsaw. In our prime target
                 as well as in a wide variety of textile sales.   segments, HSH Nordbank already ranks
                                                                  among the top German banks operating
                 As a result of the realization of collateral     throughout the Baltic Sea region. This gives
                 provided for loans to Sirius Beteiligungs-       us a clear competitive edge that we aim
                 gesellschaft mbH, Hamburg, HSH Nordbank          to utilize for our customers’ and our own
                 received 12,948,800 individual shares (offset    benefit. With this strong regional presence
                 against claims) in IVG Immobilien AG, Bonn       we are in a position to offer our customers
                 as at February 23, 2004. This amounts to an      innovative financial services on the spot –
                 11.16% holding in the company.                   complemented with tailor-made, high-per-
                                                                  formance products from the entire HSH
                                                                  Nordbank Group.
                 Clear customer orientation as basis for
                 continuing positive development.
                                                                  Nordic Corporates continues its success
                 We expect business to liven up during the        story.
                 current year, not only because of the overall
                 improvement forecast for the economic en-        Nordic Corporates, which covers the cor-
                 vironment, but also and above all because        porate clients activities of the Bank in the
                 of our clear commitment to the medium-           Baltic Sea region, reported a business vol-
                 sized business sector. Our strong customer       ume of EUR 7.2 billion as at year-end 2003.
                 focus has already met with very positive         The market was characterized throughout
                 response in our target group, and this is
                                                                                                      61




High-performance network around the Baltic


                                                                     Helsinki
                                     Oslo
                                                                                Tallinn
                                              Stockholm




                                                                                Riga


                                            Copenhagen

                                 Kiel
                                    Lübeck
                       Hamburg
                                                            Warsaw
                                             Berlin




the year by intense competition. Despite                 ing team specifically tasked with acquiring
this, we were able to confirm the upward                 funds from corporate clients as well as
trend of previous years' results. During the             institutional investors. With a strengthened
past financial year we firmly established                treasury team dedicated to medium-sized
our structured finance services at the Stock-            corporate clients, the increased demand for
holm Branch, enabling us to provide our                  interest-hedging instruments, stemming
customers with an even higher level of sup-              from currently low interest rates, can be
port. Our focus here is acquisition finance/             met. We view this segment as providing
leveraged finance, export and project finance            considerable potential for further growth,
and asset backed structures. Nordic Corpo-               which we intend to systematically utilize.
rates now has 30 professionals dedicated to
these three business areas.
                                                         Solution-oriented customer focus.


Stronger focus on medium-sized                           In today’s markets, integrated financing
customers.                                               solutions are the key to success. For this
                                                         reason cooperation between our Financial
The traditional focus of HSH Nordbank’s                  Markets, Commercial Banking and Struc-
wide range of products and services in the               tured Finance services has been further
Baltic Sea area has been large companies,                intensified, enabling us to meet the grow-
institutional investors and real estate custo-           ing demands and increasingly complex
mers. During the past financial year we                  requirements of our customers. Nordic
consistently widened this focus, and are                 Corporates will to an increasing extent
now in high demand as a business partner                 work in step with our Corporate Finance
providing new products and services for                  units in Denmark, Sweden, Finland and
many of the region’s medium-sized enter-                 Germany, as well as with other divisions of
prises. The past year also saw a significant             the Bank, in order to deliver optimal solu-
development in our refinancing and trea-                 tions to our customers.
sury activities, with a newly extended fund-
THE FUTURE MEANS NEW DEPARTURES
Special Corporate and
Institutional Clients

As a national as well as international provider of
specialized financing, HSH Nordbank’s activities
within this segment are concentrated in its divisions
of Transportation, Lease Finance, Financial Institu-
tions/Global Trade Finance, and – for the north
German home region – Savings Banks/Public Sector
Customers. Our longstanding experience and exper-
tise in our own and our customers’ business, com-
bined with a product range designed for specialized
applications, creates the best basis for optimal cus-
tomer solutions in all relevant fields.
                                                                                             65




Transport Finance                               and rail networks, air traffic systems provi-
                                                ders and logistics companies. Our diversi-
High performance transport finance              fied spectrum covers the entire value added
provider with comprehensive product             chain of transportation and logistics. Our
portfolio.                                      strategic goal is to consistently develop our


HSH Nordbank offers its customers in the        Portfolio by Region
                                                in %
international transportation and logistics
                                                                       34.0
industries a wide range of attractive advis-
ory, financial and other services for air and            1.2
rail transportation, as well as for logistics           1.4
                                                       1.4
and infrastructure. From our Kiel, London              2.8

and New York branches we serve our busi-               8.8

ness partners worldwide with a continu-
ously expanding, innovative product port-                                     50.4
folio.                                            Europe 34.0
                                                  North America 50.4
                                                  Asia 8.8
Portfolio by Market Segment                       Middle East 2.8
in %                                              Africa 1.4
                     8.3                          Pacific Rim 1.4
                                                  South America 1.2
         14.9

                                                existing strengths as a finance house with
                                                specialist expertise in products, markets
                                                and customer relations, providing our
                                                customers with a wide range of financial
                                 76.8           products and services. To achieve this, we
  Aviation 76.8
                                                are able to call on the know-how of the
  Rail 14.9
  Logistics/Infrastructure 8.3                  entire HSH Nordbank Group, tailoring
                                                solutions – for example, interest and
Our Aviation subdivision is concentrated on     currency-based products – to the precise
airlines and leasing companies, as well as      requirements of our business partners, and
airplane and aero-engine manufacturers          thereby also cementing deep customer
and their supply industries. In our Rail and    loyalties.
Logistics/Infrastructure subdivisions we
are a specialized and competent financial
partner serving rail companies, railcar and     New, return-oriented business flourishing
rolling stock manufacturers and local pub-      despite difficult environment.
lic transport providers, as well as airport
                                                Subject to divergent underlying conditions,
                                                our core markets – air transportation, rail
                                                and logistics – developed in very different
                                                ways. In the first half of 2003 the aviation
                                                market was hit by the Iraq crisis and the
                                                outbreak of SARS. However the
Group Segments   66




                 second half – especially the fourth quarter –     Against this background, the development
                 already brought signs of recovery, and the        of transport financing activities in 2003
                 industry as a whole is now experiencing a         was encouraging. By intensifying existing
                 discernible upswing. Nevertheless, recent         customer relationships, and selectively
                 tendencies toward consolidation look set to       expanding our customer base, we were able
                 continue, with the market in future looking       to achieve a profit-driven new business
                 to be characterized by certain dominant           volume of some EUR 1 billion. The opening
                 alliances. The logistics market also maintai-     of our New York branch in the last quarter
                 ned its trend toward consolidation. Public        of 2002 brought us closer to our American
                 sector budgetary restrictions led to a further    customers, and had a very positive impact
                 privatization of services and the growth of       on our performance in the important US
                 Public Private Partnerships. The liberaliza-      transport finance market. Due to higher
                 tion of European rail transport markets is        margins, earnings achieved significantly
                 also an ongoing story. Since spring 2003,         higher levels overall than in the previous
                 rail freight has been open to free compe-         year. Business volume stood at some EUR
                 tition throughout the EU, and there has           5.5 billion as at December 31, 2003. The
                 also been a further opening of local public       moderate growth in lending is due to a
                 transport provision to tenders from the           selective business policy as well as exchange
                 private sector.                                   rate developments. An adequate level of
                                                                   risk provision was created.
                 Despite numerous challenges, HSH Nord-
                 bank enjoys an excellent market position in
                 almost all core business areas. In the avia-      Positive outlook for fiscal 2004.
                 tion finance segment, for instance, a consi-
                 derable number of national players have           In line with our strategic focus, the Trans-
                 withdrawn, and their places have to some          port Finance unit is concentrated – along
                 extent been taken by British and French           with most of its activities – on the USA and
                 banks as well as by capital market financ-        Europe. This enables us to minimize overall
                 ing. Other finance providers have turned –        country risks. In new business we continue
                 for reasons of diversification – to rail trans-   to pay close attention to the value of colla-
                 portation. HSH Nordbank will make use of          teral, as well as to the marketability of the
                 this situation, tapping further potential in      means of transportation we are financing.
                 cooperations based on already established         As a transport financing house we will pro-
                 market positions. In the logistics industry       ceed with heightened determination along
                 we see further growth potential above all in      the track we have taken. We expect this to
                 connection with medium-sized companies –          bring positive growth to both our lending
                 a market segment showing a significant            portfolio and earnings in 2004, despite the
                 requirement for financial provision.              many challenges facing us in a still difficult
                                                                   economic environment.
                                                                                                      67




Lease Finance                                           advances to special purpose banks. Domestic
                                                        clients accounted for the major part of the
Excellent position in lease refinancing.                portfolio (some 85 %). The remaining ap-
                                                        proximately 15 % consisted of lending in
In the Lease Finance segment HSH Nordbank               the framework of cross-border leasing
has bundled the longstanding experience                 transactions, with US leases taking the
of its two predecessor banks in refinancing             major share. We regularly monitor the
leasing companies. Leasing has firmly                   borrower’s credit standing – which deter-
established itself on the German market as              mines the quality of the loan – with a
a financing instrument, and has become an               newly developed rating system.
important limb of HSH Nordbank’s business
activities. Our clients are leasing companies           In new lending business concluded in 2003
operating both in Germany and inter-                    we purposely focused more closely on risks
nationally, for whom we provide tailored                and earnings aspects rather than high vol-
refinancing products. In this segment we                ume growth. With a total volume of some
see ourselves as one of the leading players             EUR 2 billion we were not in a position to
in Germany.                                             match the extremely high level of new
                                                        business reached in 2002, which – boosted
                                                        by some individual big-ticket deals – ex-
Lending portfolio steady.                               ceeded EUR 3 billion overall. Nevertheless,
                                                        the significantly higher earnings quality
Due mainly to the strong euro, the total                of the new business we generated gives
business volume in the lease financing                  grounds for satisfaction – the more so since
segment at year-end 2003, amounting to                  the weak economic environment in 2003,
some EUR 9.1 billion, was only slightly up              as well as continuing uncertainty about
on the previous year’s level. The lending               relevant taxation policies, affected the en-
                                                        tire leasing sector.
Portfolio by Market Segment
in %


            25                                          AGV GmbH – the specialist for complex
                                                        and innovative leasing products.
                                          40


                                                        The AGV Group, in which HSH Nordbank
                                                        holds a 90% share, plays a central role in the
                                                        domestic leasing market for both movable
               35
                                                        property and real estate. AGV concentrates
                                                        on structuring complex leasing transactions
  Real estate and large movable property financing 40
  Other movable property financing 35                   and offering innovative solutions for large
  Loans and advances to special purpose banks 25
                                                        movable property (big-ticket leasing). In 2003
                                                        the AGV Group maintained its successful
portfolio was distributed as follows: some              business growth, boosting its new business
40 % loans on real estate and large movable
property, 35 % loans on other movable pro-
perty, and approximately 25 % loans and
Group Segments   68




                 volume from EUR 866 million to EUR 1.1           this, we shall offer our leasing products to
                 billion. Close strategic cooperation between     all HSH Nordbank customers and business
                 HSH Nordbank and Deutsche Leasing AG in          partners. AGV and its subsidiary HSH N
                 Bad Homburg ensures that the company is          Nordic Finance will play a key role in these
                 well equipped for the future.                    activities. Jointly with these companies our
                                                                  product experts will provide our corporate
                 AGV aims to further expand its internatio-       clients and partners in the Savings Banks
                 nal business by tapping cross-selling poten-     network with complex and innovative
                 tials with HSH Nordbank’s market units.          leasing offers geared to generating additio-
                 Since the end of 2003 AGV has owned HSH N        nal new business.
                 Nordic Finance AB, Stockholm, as a subsi-
                 diary well-established on the Scandinavian
                 market and suitably complementing our            Savings Banks and Public
                 own activities. In addition, along with          Sector Clients
                 Deutsche Leasing AG, AGV operates the joint
                 venture ImMobilien-Vermietungsgesellschaft       In association with the local Savings
                 mbH (DIMO), which cooperates with the            Banks network – market leaders in
                 Savings Banks network in real estate leasing.    northern Germany.
                 With new business amounting to some EUR
                 200 million, DIMO ended 2003 on the same         Cooperation with the network of local
                 level as the previous year, and could also       Savings Banks is an important pillar of
                 report further progress in its interface with    HSH Nordbank’s activities. Our cooperation
                 the Savings Banks network.                       covers not only the traditional segments of
                                                                  Savings Bank refinancing, investment busi-
                                                                  ness and customer activities – especially
                 Leasing business continues to grow in            securities business – but also syndicated
                 importance.                                      commercial and municipal lending, and
                                                                  foreign commercial business. A more
                 Against the background of Basle II, as well      recent focus is on innovative financial and
                 as new accounting regulations, leasing has       consultative services.
                 become an increasingly attractive alterna-
                 tive to the classical lending business. As an
                 integral component in the financing mix,
                 leasing enables companies to improve their
                 balance sheet ratios – especially their equity
                 capital position. As a result, we expect the
                 business potential of our main customer
                 groups to grow, and – building on our
                 excellent market position – plan to further
                 expand new business in 2004. As well as
                                                                                              69




A new chapter in our cooperation begins.         In order to open up alternatives to classical
                                                 funding loans, HSH Nordbank – in coopera-
In the first quarter of 2004 HSH Nordbank        tion with the Schleswig-Holstein Savings
and the Savings Banks Association for            Banks network and the Savings Banks Asso-
Schleswig-Holstein entered into an agree-        ciation for Schleswig-Holstein – has set up
ment of association that heralded a new          an electronic register of cover funds as a
era in their cooperation. The foundations        prerequisite for issuing mortgage bonds
had been laid last year by the Schleswig-        secured on real-estate. The register enables
Holstein Savings Banks, the Savings Banks        the Savings Banks to make independent use
Association for Schleswig-Holstein and HSH       of opportunities for issuing mortgage bonds
Nordbank. The agreement governs intensive        or registered mortgage bonds. In November
cooperation in marketing and sales activi-       2003, under the lead of HSH Nordbank, the
ties, in the provision of products and ser-      Kreissparkasse Südholstein issued a Savings
vices for the Savings Banks’ own – as well       Bank mortgage bond secured on real estate
as their customers’ – business activities, and   – an historic first in Germany. After this
in risk, liquidity and portfolio management.     pilot issue, other issues – including registe-
The agreement aims to bundle the new             red mortgage bonds – have been planned
association’s forces to achieve enhanced         for first half-year 2004.
market penetration and synergies, and it
serves as a basis for individual bilateral       HSH Nordbank traditionally provides refi-
sales agreements governing detailed coope-       nancing and liquidity funds for the Savings
ration with every bank in the Schleswig-         Banks, as well as a broad spectrum of invest-
Holstein Savings Banks network.                  ment opportunities, ranging from time
                                                 deposits to asset management. The Savings
                                                 Banks cooperate with us in customer-focused
Innovative products for the associated           activities, using our comprehensive, high
partners.                                        performance product and consultation
                                                 offers – above all in the securities business,
In order to meet the increasing demand by        syndicated commercial and municipal
the Savings Banks for innovative financial       lending and international business. We are
products and consultative services, HSH          also continuously expanding the back-office
Nordbank has developed a sales platform          services we can make available for sharing
for capital market products specifically for     with the Savings Banks network.
the Savings Banks network. Together with
the concentration of our syndicated loans
business with the Savings Banks in an
autonomous central unit, this step has
improved the quality of our consultative
services and enhanced our joint market
impact.
Group Segments   70




                 New horizons in the public sector lending       Financial Institutions/Global
                 business.                                       Trade Finance

                 As a state and municipal bank, we support       New division with special product range
                 the states and municipalities in all matters    for banking and insurance industries.
                 of financing, and we also provide public sec-
                 tor loans. The focus here is on project and     For Financial Institutions, 2003 was above
                 special financing, as well as advice on pri-    all a year of successful strategic develop-
                 vatizations. In contrast to these activities,   ment, in which we tailored our product
                 the classical municipal loan is increasingly    range exactly to the requirements of our
                 losing importance. Within the framework of      target customers from the banking and
                 our new post-merger strategy, our aim is to     insurance industries. Together with Global
                 position the Bank as a comprehensive provi-     Trade Finance – newly formed in the course
                 der not only of products, but also of finan-    of the merger process – Financial Institu-
                 cing and consultation services to the muni-     tions constitutes a single unit with a power-
                 cipalities and their closely related compa-     ful presence in the international markets,
                 nies, and to concentrate customer loyalty       especially in Europe and Asia. Our business
                 still further via one-stop service provision.   volume as at December 31, 2003 amounted
                                                                 to EUR 32.9 billion.


                 Declining loan portfolio – rising service       Our product spectrum covers the arrange-
                 and commission income.                          ment of syndicated loans, sales of innova-
                                                                 tive and traditional capital market solu-
                 Due to the moderate level of loan demands       tions, transaction services and the procure-
                 on the part of the Savings Banks and public     ment of "plain vanilla" as well as structured
                 sector clients, as well as the changed fund-    funding. We see considerable opportunities
                 ing conditions of HSH Nordbank after the        for growth, especially in our core segment
                 abolition of the mortgage bond privilege,       of global trade financing. In the next few
                 business volume declined in the year under      years we aim to develop the Bank's position
                 review to EUR 24.1 billion. At the same         as a specialist commodity financing house.
                 time the realignment of activities toward       Enhanced integration of current activities
                 service and commission products proved          and the completion of the network play a
                 highly successful. Income from services,        key role in achieving this goal.
                 especially from capital market products –
                 for example, the sale of structured bonds –
                 developed very satisfactorily. Against the
                 background of HSH Nordbank’s new stra-
                 tegy, the role of Savings Bank/Public Sector
                 Clients has been newly defined as the cen-
                 tral management and service unit for the
                 value-based coordination of all activities
                 targeted on this segment.
                                               71




Good business in individual product
segments.


The Syndicated Loans product segment had
a very good year. In northern and central
Europe in particular, but also in Asia, we
are among the first addresses as arranger
and book-runner, and we were able to
further consolidate our position in this
market. The excellent customer relations
established in this way serve as an optimal
platform for sales of our wide range of
capital market products. Our new Global
Trade Finance unit focuses principally on
our commercial customers and their
merchandise.



Course set for a successful future.


In the wake of the merger and the restruc-
turing of the Financial Institutions/Global
Trade Finance division we have set the
compass for a successful future. We aim to
intensify existing customer relations and
give top priority to our clients' individual
requirements. Without neglecting our core
competency as arranger of syndicated loan
facilities, we will continue to expand our
product portfolio with structured capital
market products and attractive portfolio
management offers. Against the background
of ongoing expansion in world trade, and
the excellent growth opportunities this
provides, our Global Trade Finance unit will
focus with increasing intensity on world-
wide flows of capital and goods. In addi-
tion, the network established through the
merger will activate synergies to stimulate
our growth still further.
THE FUTURE CALLS FOR COURAGE
Private Clients

Within this segment, HSH Nordbank’s Private and
Business Clients division focuses on services for high
net worth private customers. This target group is
complemented by self-employed individuals as well as
other business clients and foundations. The strategic
focus on the upper private customer segment is central
to our successful business model as a high-perfor-
mance service partner. The concentration of various
subdivisions and competencies in the course of the
merger has enabled us to bundle our know-how and
enhance our competitiveness in this segment.
                                                                                               75




Personalized customer service and a             Steady development in all segments.
diversified product portfolio assure
sustained success.                              Private and Business Clients’ results for
                                                fiscal 2003 were encouraging. Attractive
Our customers’ wealth is made up of many        new lending business with our target
different elements, and for this reason our     group, especially in real estate financing,
service concept is integrated to cover every    enabled us to maintain the business vol-
aspect of asset and finance management.         ume – with careful evaluation of risks –
Our attention is focused on the individual      at last year’s levels, totaling some EUR 3.5
customer, with whom we aim to establish a       billion. Some 75 % of the portfolio consists
relationship of personal trust built on regu-   of real estate financing, 15 % comprises
lar and continuous contact over many years.     asset investment financing and 10 % fixed
                                                rate loans. Private clients account for 95 %
Private and Business Clients offers a highly    of our lending, with 5 % going to business
competitive and comprehensive range of
products and services tailored to customer      Lending Portfolio by Financing Type
                                                in %
requirements, both from our own provision
                                                                   10
and from the best available on the market,
irrespective of the provider. We lay parti-               15
cular emphasis on asset structure analysis
and planning, consultation and asset man-
agement, as well as financing, shareholding
investments and advisory services to foun-                                        75
dations.

                                                  Real estate financing 75
                                                  Asset investment financing 15
                                                  Fixed rate loans 10
Group Segments   76




                 clients. The demand for private real estate    Good prospects for 2004.
                 financing remains very lively in our target
                 group, and business clients’ financing         Services for high net worth private clients
                 requirements also stayed at a high level in    is one of the fastest growing segments in
                 our target region.                             the banking market. Inheritance, company
                                                                sales and the establishment of foundations
                 Liabilities also climbed slightly to some      are among the long term factors suppor-
                 EUR 2 billion as a result of the expansion     ting this development. With our focus on
                 of our activities with our customer target     high net worth private clients we aim to
                 groups. The merger has enabled us to com-      achieve significant growth in our segment.
                 bine many different products in a unified      We expect to see new business livening up
                 portfolio and offer our customers a broad      in 2004, and relations with established
                 range of investment alternatives. Securities   customers intensifying in line with our
                 commissions business, comprising shares,       multi-product approach. The focus here lies
                 bonds and investment funds, retained           not only on lending, but also and above all
                 virtually the previous year’s volume, with     on the service and customer investment
                 sales of shareholding and structured pro-      business. In this way we contribute to the
                 ducts doing particularly well. Earnings        overall results of HSH Nordbank without
                 from services also remained at the previous    absorbing large amounts of capital, and in
                 year’s level, with declining income from       a way that supports the diversification of
                 asset investment financing compensated by      risks across the entire portfolio.
                 income from new products developed spe-
                 cifically for our customer target group.
77
THE FUTURE COMES FROM CURIOSITY
Financial Markets

In order to create an effective and unified impact
both on the market and on our customers, we have
bundled all our financial market activities in a single
segment, Financial Markets, comprising the Capital
Markets division, Asset Liability Management as well
as Portfolio Management and Investments. These
units are responsible for arranging balanced refinan-
cing facilities and for trading activities, advisory
services and the sale of capital market products, as
well as for efficient liquidity management across the
entire Bank. As a result of their successful implemen-
tation of individual strategies developed within the
context of the merger, all these units made a signi-
ficant contribution in fiscal 2003 to assuring the long-
term capital market readiness of HSH Nordbank.
                                                                                            81




Capital Markets                                 with a highly liquid resource. The first five-
                                                year issue was accompanied by a big road-
Bank-wide funding strategy optimized.           show in Europe, presenting the Bank’s
                                                strategy to existing and potential investors.
Capital Markets had a successful year in        The successful placement of three bench-
2003. In particular, bond market activities     mark bonds with a total volume of EUR 3.5
developed in a thoroughly gratifying way.       billion in 2003 provided investors with
The past fiscal year was dominated both by      liquid securities covering the whole matu-
the merger and by the future abolition of       rity range. Alongside these benchmark
state guarantees. Already before the merger,    issues, structured private placements – with-
Capital Markets had, in collaboration with      in the framework of the EMTN program, as
Asset Liability Management, developed a         well as domestic issues – were used with
sustainable funding strategy for the Bank as    great success to optimize funding. Regular
a whole. Central to this was the ongoing        issues of foreign currency bonds completed
expansion of the Bank’s investor base, both     Capital Markets’ range of activities.
internationally and across the various
segments, as well as a broadening of the        HSH Nordbank has more than ten years’
product range. The targeted funding             experience in structured product issues,
volume for fiscal 2003 was successfully         and has become one of the largest and most
raised on the capital markets. As the propor-   successful players in this field worldwide –
tion of long-term refinancing rose beyond       a development repeatedly confirmed by the
expectations, money market funding could        leading place taken by the Bank in relevant
be reduced accordingly.                         league tables. In 2003 HSH Nordbank was
                                                among the five biggest issuers of structured
Funding is secured with a broad spectrum        equity products worldwide, and in struc-
of products. Euro Medium Term Note pro-         tured interest rate products the Bank held
gram (EMTN) issues are used for medium to       ninth place worldwide. Among German
long-term funding on national and inter-        issuers the Bank was number two in both
national capital markets. The practice of       categories.
launching benchmark issues, successfully
pursued by our predecessor houses, has
also been continued, extending the Bank’s
investor base and providing our customers
Group Segments   82




                 Apart from issuing standardized structured      Successful expansion of trading and sales.
                 products, the Bank has also established
                 an excellent reputation in recent years for     The expansion of trading and sales activi-
                 customized – to some extent highly com-         ties in the Capital Markets division takes
                 plex – product solutions for its customers,     strict account of customer requirements for
                 providing access to a large number of new       market risk protection. In all risk classes
                 investors. Sales of structured products have    solutions are sought for capital market
                 grown continuously over the years, and are      products, and emphasis is laid on tailoring
                 becoming increasingly important for fund-       risk management solutions to individual
                 ing. They currently account for approxi-        customer requirements. Coordination of
                 mately 14 % of long-term funding, and the       this customer business is the responsibility
                 figure continues to rise.                       of the sales platform Capital Markets. In
                                                                 the year under review, business volumes
                 In the wake of the extension of the Com-        and earnings surged by some 100 %. The
                 mercial Paper programs at our foreign           growth in product use that underlay this
                 branches in Luxembourg (Multi Currency          expansion indicates on the one hand a
                 ECP), as well as in London and New York         significant intensification of our customer
                 (USCP), these programs now constitute a         relations, on the other hand it makes high
                 fixed item in our short-term refinancing,       demands on both operational processes
                 with total volumes in each case of US $10       and risk management systems. A concrete
                 billion. Due to the excellent liquidity posi-   example is the successful boosting of
                 tion, we had only used EUR 8.6 billion of       structured retail product sales that enabled
                 these programs as at year-end 2003.             Savings Bank customers to benefit from
                                                                 attractive chances on the capital markets.
                 The issue of a Savings Bank mortgage bond       The systematic expansion of our technical
                 secured on real estate – developed by HSH       asset management programs was similarly
                 Nordbank and launched by Kreissparkasse         successful.
                 Südholstein – attracted a great deal of
                 interest last year. After the creation of the   Market risks from the large number of daily
                 necessary infrastructure for the public         customer transactions are reported in the
                 sector Savings Banks in Schleswig-Holstein,     various risk accounts (shares, derivatives,
                 we were able to realize this pilot project      bonds, interest rate derivatives, borrowers’
                 with Kreissparkasse Südholstein in collabo-     note loans, money market and repo), and
                 ration with the Savings Banks Association       collated as own trading after netting and
                 for Schleswig-Holstein. This provides the       active disposal of risk items. Remaining risk
                 Savings Banks, as of now, with an instru-       is managed in line with market conditions.
                 ment securing them competitive funding
                 on the capital markets after 2005.
                                                                                               83




Consistent application of the principle of       Portfolio Management and
central market-risk books enables higher         Investments
revenues to be generated from customer
cash flows – which are subject to natural        New directions for the future.
market risks – throughout the Bank. As a
result, risk capital requirements fall signif-   In the wake of the merger of the two pre-
icantly and the Bank’s own-account reve-         decessor banks, Portfolio Management was
nue – including interest income – can be         combined with Credit Investments in a
increased.                                       new strategic alliance. In line with the new
                                                 strategy, Portfolio Management and Invest-
                                                 ments (PMI) has assumed the three core
Promising outlook for current year.              functions within HSH Nordbank of capital
                                                 and asset manager, growth enabler and
Our focus for the current fiscal year is on      product manager.
systematic development and continuing
expansion of our strategy. Regular trans-        As capital and asset manager, PMI is res-
actions will establish the presence of HSH       ponsible for procurement and management
Nordbank in the capital markets and en-          of the Bank’s equity capital as well as for
hance the Bank’s profile as an innovative        active portfolio management. This latter
player. Advisory services and the sale of ca-    function involves risk diversification by
pital market products to existing customer       means of investments in credit risks and
groups – especially on the Bank’s lending        market price risks. Strategic recommen-
side – have high priority. We aim in parti-      dations are also given to the Board relating
cular to boost sales of equity-related deri-     to asset allocation, and to achieving the
vative products and structured products in       Bank’s targeted rating. As growth enabler
interest rate and FX trading. Repo business      we systematically free up available equity
continues to play a major role for Capital       capital for lending, providing HSH Nord-
Markets, with the focus on widening our          bank in this way with additional growth
circle of trading partners and expanding our     opportunities. This is effected by placing
product range to cover all ordinary trans-       credit risks on the international capital
action types. Finally, we aim to integrate       markets in securitized form, for example as
our branches step by step more closely into      asset backed securities (ABS). We also sup-
the successful strategy of Capital Markets       port the Bank’s market units in optimizing
and of the whole Bank.                           loan price structures and intensifying busi-
                                                 ness relationships. In our function as pro-
                                                 duct manager we offer advisory services,
                                                 asset management and structuring products
                                                 in order to utilize existing cross-selling
                                                 potentials within the framework of HSH
                                                 Nordbank’s multi-product approach.
Group Segments   84




                 Business developing well in all areas.          book-building process enabled us to raise
                                                                 the volume from an initial EUR 300 million
                 We pursue an active management policy           to EUR 500 million and thereby achieve an
                 for HSH Nordbank’s strategic market price       optimally diversified investor spectrum.
                 risks. With an optimized risk position in       The success of ReSPARC II was clearly seen
                 the asset classes interest rates, forex and     as a vote of confidence in HSH Nordbank in
                 equities we were once again able to achieve     relation to its imminent repositioning on
                 excellent results in the year under review.     the market.
                 In accordance with our Global Head ap-
                 proach, sub-portfolio managers will in
                 future be located in additional branches of     New opportunities through innovation
                 HSH Nordbank – for instance in Luxem-           and integration.
                 bourg and Copenhagen – with a view to
                 gaining wider access to international capi-     Close observation of market price changes
                 tal markets.                                    has enabled Portfolio Management and
                                                                 Investments to develop an early warning
                 In order to diversify credit risks, HSH Nord-   system for credit risks signaling potential
                 bank’s loans securities portfolio is managed    counterparty default. The system aims to
                 on a worldwide basis – in particular by de-     provide the Bank with a means of antici-
                 ploying derivatives like asset backed secu-     pating possible credit defaults or rating
                 rities (ABS) and single name investments.       downgrades, so that appropriate and timely
                 We concentrated last year above all on con-     action can be taken to contain the risk. The
                 tinuously consolidating the portfolio in        system was already installed in 2003 for a
                 line with the Bank’s high quality standards.    large number of listed borrowers, and will
                 Management of the Bank’s core portfolio         be extended in the course of the current
                 also achieved a record result in 2003, con-     year to all relevant HSH Nordbank custom-
                 tributing to HSH Nordbank’s good net            ers.
                 interest income.


                 Another extremely successful operation last
                 spring was HSH Nordbank’s equity capital
                 transaction ReSPARC II (Reengineered Silent
                 Participation Assimilated Regulatory Capi-
                 tal Issue). This equity instrument proved
                 valuable in presenting a convincing credit
                 story to the Bank’s international investors.
                 The positive market response during the
                                                                                            85




The development and establishment of an         Ambitious goals for fiscal 2004.
internal equity market within HSH Nord-
bank was also a PMI priority during the         Our goal for 2004 is to again make a deci-
year under review. In the course of the year,   sive contribution to HSH Nordbank’s aggre-
equity capital limits were reallocated, with    gate results with our successful business
the result that units actively engaged in       activities. The implementation of the stra-
market activities could generate additional     tegy decided upon for securing the Bank’s
business and achieve higher earnings. At        ongoing capital market readiness also pre-
the beginning of 2004 an internal market        sents a considerable challenge for Portfolio
for collaterals was also set up to facilitate   Management and Investments – but one
active management of collateralizable           that we face with absolute fitness and total
securities. A further task of PMI is to ease    commitment.
the Bank’s equity position by placing risk
bearing balance sheet assets on the capital
market. The systematic development of exit      Asset Liability Management
channels in the Bank’s core segments pro-
motes HSH Nordbank’s ongoing transition         Concentration and expansion of liquidity
from asset financer to asset manager. In        management.
this context, the planned placement of
selected assets, to be effected in 2004, was    Against the background of the coming abo-
actively pursued during the year under          lition of state guarantees, and an upward
review.                                         trend in funding and liquidity costs, HSH
                                                Nordbank has bundled all liquidity man-
                                                agement activities in an ex-panded Asset
Global outlook with strong regional roots.      Liability Management (ALM) division. As the
                                                Bank’s liquidity manager, ALM is respon-
With its twin locations in Kiel and London,     sible for securing and managing liquidity,
as well as its capital market activities,       for strategic funding management, and for
Portfolio Management and Investments has        liquidity brokerage. The goal is to lower
a strong international orientation. But we      liquidity/refinancing costs and still further
never lose sight of our north German regio-     minimize liquidity risks.
nal focus. Above all our rating advisory
service supports the Bank’s Savings Bank
and public sector clients in the implemen-
tation of our joint strategy with the asso-
ciated Savings Banks in Schleswig-Holstein.
The Savings Banks responded eagerly to the
recommendations of HSH Nordbank’s advi-
sory service on capital market activities,
opening the prospect of sustained and suc-
cessful collaboration within the Savings
Banks Finance Group.
Group Segments   86




                 In its function as liquidity manager, ALM is    Development of liquidity and funding
                 responsible for managing of the Bank’s          situation.
                 liquidity risks, and for earnings obtained
                 from the transformation of liquidity matu-      Liquidity costs did not rise in 2003 – indeed,
                 rities. We focus particularly on the security   over a period of four years they have slightly
                 and cost-efficiency of the measures taken to    fallen. In order to prepare the Bank for
                 safeguard liquidity. As strategic funding       increasing competition and tougher rating
                 manager, ALM is responsible for optimal         criteria, a new funding strategy was deci-
                 management of the Bank’s refinancing acti-      ded at the beginning of 2003, and in the
                 vities. In order to fine-tune costs and mini-   course of the year many elements of this
                 mize liquidity risks, funding requirements      strategy were implemented. Extremely
                 are determined for the lending activities of    successful – especially long-term – funding
                 the market units, and from these require-       brought a sustained improvement in liqui-
                 ments appropriate funding parameters are        dity, and consistently favorable funding
                 inferred and continuously monitored and         costs, along with the Bank’s positive market
                 adjusted.                                       profile, reflect HSH Nordbank’s excellent
                                                                 market position today.
                 As liquidity broker between HSH Nordbank’s
                 lending and refinancing units, as well as its
                 various branches, ALM is responsible for
                 pricing, limiting and allocating the scarce
                 resource of liquidity, assuring its efficient
                 deployment through the Bank as a globally
                 operating whole. Anticipating not only the
                 rising demands of the rating agencies but
                 also possible new regulations of the super-
                 visory authorities, professional liquidity
                 management is an essential prerequisite for
                 the Bank’s future competitiveness.
87
THE FUTURE NEEDS TEAMWORK
Strategic Participations/
Transaction Services

Activities that cannot be directly ascribed to other
business segments are included in the segment “Other/
Consolidation” – among them special service units like
Transaction Services, as well as our strategic participa-
tions portfolio. We aim in our strategic participations to
enhance our coverage of specific segments and to open
up new ones.
                                                                                                  91




HSH Nordbank                                       The bank established individual value ad-
International S. A.                                justments to cover all discernible risks in
                                                   the lending business. The entire securities
Foreign subsidiary on the right road.              portfolio (liquidity and investment) was
                                                   valued at lower of cost or market. As in the
The core business segments of HSH Nord-            previous year, the bank again took mea-
bank International S.A. (HSHI) are internatio-     sures to strengthen internal structures and
nal lending, money market and foreign ex-          reserves. General administrative expenses
change activities as well as securities and pri-   fell 4 % as a result of strict cost manage-
vate clients business. Total assets remained       ment. Profit for the year amounted to
stable throughout fiscal 2003 in comparison        EUR 55 million after tax (prior year EUR 50
with the previous year, ending on EUR 7.9          million) – the highest earnings in the hist-
billion (a slight drop of 0.6 %) as at Decem-      ory of HSHI. This enabled the bank not only
ber 31, 2003. The assets/liabilities structure     to service the parent company’s silent par-
also remained virtually unchanged. On the          ticipation but also to pay out a dividend and
assets side, fixed-income securities remained      allocate the remaining profit to reserves.
the most important item, with 42 % of the
total. Liabilities were dominated by liabili-
ties to banks at 86% of the total. In addition,    Building blocks for positive operational
the bank’s obligations from lending and            growth.
guarantor commitments amounted – as in
the previous year – to EUR 0.5 billion.            With its strongly international orientation,
                                                   HSHI is in a position to make foreign cur-
                                                   rency loans in virtually all convertible cur-
Fiscal 2003 – highest profit in the bank’s         rencies. Our lending portfolio remains
history.                                           excellently balanced, with borrowers from
                                                   EU member states accounting for 68 % of
Again in the past fiscal year HSHI experien-       total exposure and, as such, constituting a
ced positive growth. Net interest income           preferred customer segment. Exposure
dropped slightly by 3%, but – at EUR 52.6          within the EU and other western industria-
million – still remained high. At EUR 23.3         lized countries totals 81 %. A considerable
million (prior year EUR 31.4 million), results     portion of this exposure is toward states,
from financial transactions were again             state banks and other banks, or is covered
highly satisfactory. The positive results deri-    by guarantees from these institutions.
ved primarily from price developments in
securities transactions. In comparison with        Interbank money market trading is used for
the previous year’s results it must be noted       liquidity settlement purposes, as well as for
that the year under review was burdened            fine-tuning interest rate risks. In addition
with a one-off effect from the sale of deri-       to the balance sheet items, the bank also
vatives.                                           uses innovative financial instruments for
                                                   this purpose. The resulting claims on banks
                                                   rose slightly in comparison with the pre-
                                                   vious year from EUR 790 million to EUR
                                                   800 million.
Group Segments   92




                 As in previous years, the portfolio of own       The improved capital market environment
                 securities represents a pool of mostly listed    worldwide has stimulated HSHI’s customers
                 securities which serve to underpin HSHI’s        into renewed activity, and commission in-
                 earnings and liquidity. Due to high matu-        come from this segment has risen accord-
                 rities and only partial replacement with         ingly.
                 new security purchases, the fixed income
                 securities portfolio declined by about EUR
                 200 million to EUR 3.3 billion. The port-        Stake in Nobis Société des Banques Privées
                 folio consists of securities that can be con-    increased.
                 verted into cash at short notice and are
                 mostly funded at matching maturities. As         HSHI holds an 80 % stake in Nobis Société
                 large amounts will also become due in the        des Banques Privées Luxembourg. Nobis’s
                 current year, HSHI does not expect the           activities focus on private banking and asset
                 securities portfolio to maintain the same        management. As in HSHI itself, private
                 level as in the previous year. Again in 2003     client business was helped on by the posi-
                 the portfolio generated highly gratifying        tive climate on the stock markets, and the
                 price gains as well as a substantial contri-     greater readiness of customers to invest.
                 bution to net interest income.                   After completion of the fiscal year, HSHI’s
                                                                  holding was raised by 10 % to 90 %. In addi-
                 HSHI continues to refinance its activities       tion, HSHI owns a 51.62 % stake in Inter-
                 mainly through other banks, and by parti-        national Fund Services and Asset Manage-
                 cipating in Banque Centrale de Luxem-            ment S. A. (IFSAM). With its broad product
                 bourg’s open market operations, as well as       and service provision, IFSAM functions as
                 by deposits from private and corporate           a Competence Center investment fund.
                 clients. Liabilities to banks totaling EUR 6.8   IFSAM has achieved significant growth in
                 billion, and liabilities to customers totaling   both deposited securities and transaction
                 EUR 0.6 billion have scarcely changed from       volumes, and earnings development was
                 the previous year’s levels.                      also gratifying.


                 HSHI’s Private Banking division targets
                 international private clients holding me-
                 dium to large securities portfolios. The
                 bank provides these customers with an
                 individual advisory service adapted to con-
                 tinuously changing market conditions.
                                                                                               93




HSH Nordbank (Guernsey)                          PLUS BANK
Limited
                                                 Specialized in securities transactions.
HSH Nordbank (Guernsey) Limited was es-
tablished in 1998 by Hamburgische Landes-        PLUS BANK has been operating indepen-
bank, and holds a full banking license. Its      dently on the market since July 2002,
principal function is to complement and          providing its customers with the complete
extend HSH Nordbank’s international acti-        range of securities transaction services.
vities. HSH Nordbank (Guernsey) Limited          During the last fiscal year the bank con-
invests in bank bonds, credit derivatives,       centrated on developing its existing busi-
asset backed securities (ABS) and collate-       ness relationships and attracting new,
ralized debt obligations (CDO). The bank         potentially long-term customers. Against
also performs deposit and lending activi-        the background of modest growth in trans-
ties. The past fiscal year saw this subsidiary   action volumes in 2003, PLUS BANK inten-
generating growth in all core activities and     sified its service provision, designing and
reporting higher profits. Total assets as at     developing numerous products oriented to
December 31, 2003 were up by more than           current and future customer requirements
11% to some EUR 1.5 billion.                     and geared to boosting sales as well as
                                                 enhancing customer loyalty. Along with the
                                                 development of innovative products and
HSH N Finance (Guernsey)                         the improvement of processes, PLUS BANK
Limited                                          also consistently extended the scope and
                                                 functions of the EWS PLUS system and
HSH N Finance (Guernsey) Limited was also        brought it technically up to date.
established in 1998. Within the framework
of the Euro Medium Term Note (EMTN) pro-
gram, the company places issues in accor-        Profiting from the outsourcing trend.
dance with English law on the national and
international capital markets, and is stra-      The core market for securities transactions
tegically integrated into HSH Nordbank           banks was characterized in 2003 by an
Group’s refinancing activities, acquiring        ongoing trend toward outsourcing securi-
funds for deployment across the Group. All       ties processing operations. This was reflec-
market risks are passed on to the parent         ted in the number of contracts issued for
Bank and monitored here. Counterparty            tender, six of which were decided in favor
risks are confined exclusively to HSH Nord-      of PLUS BANK. The resulting projects have
bank. HSH N Finance experienced very             already been – or will shortly be – set up.
positive development during the past fiscal      Despite the widespread reluctance to in-
year, with new business volume of almost         vest, resulting from the overall economic
EUR 2.4 billion, and total of assets more
than EUR 12.5 billion as at 31.12.2003. With-
in the framework of the EMTN program,
HSH N Finance will continue to play a key
role for the Group in the future.
Group Segments   94




                 situation, this success rate demonstrates a    HSH Nordbank Hypo AG
                 high level of acceptance of PLUS BANK’s
                 service offer. The number of clients re-       New subsidiary plays decisive role in
                 mained stable over the fiscal year, with two   funding real estate lending.
                 new customers acquired to replace the two
                 banking customers who withdrew. The new        In September 2003, HSH Nordbank AG took
                 customers have already been successfully       over the share capital in HKB Hypotheken-
                 migrated.                                      und Kommunalkredit-Bank AG, established
                                                                in 1998 and based near Munich in Hallberg-
                                                                moos. The new subsidiary was transformed
                 Merger with TxB Transaktionsbank to            into HSH Nordbank Hypo AG and relocated
                 take place with retroactive effect from        in Hamburg. Its equity capital was raised by
                 1.1.2004.                                      an initial injection of EUR 58 million, with
                                                                further funds pending, up to a total of EUR
                 At the beginning of May 2004, HSH Nord-        200 million. With the purchase of HKB
                 bank, Bayerische Landesbank (BayernLB)         Hypotheken- und Kommunalkredit-Bank,
                 and Landesbank Hessen-Thüringen (Helaba)       HSH Nordbank is once again in a position
                 agreed the merger of their securities trans-   to issue covered mortgage bonds. This refi-
                 actions houses. This step was taken in order   nancing instrument available to our two
                 to maintain future competitiveness, and        public sector predecessor banking houses
                 achieve the strategically necessary market     was lost by virtue of the legal incorporation
                 volume. PLUS BANK and TxB (Dornach) –          that took place within the merger process.
                 a joint subsidiary of BayernLB and Helaba –
                 will be retroactively merged with effect       To fund our long-term real estate financing
                 from January 1, 2004. The headquarters of      activities, tranches of first mortgage loan
                 the new company will be Dornach (near          acquired and processed by HSH Nordbank
                 Munich), with offices in Hamburg and           will be transferred to HSH Nordbank Hypo,
                 Offenbach (near Frankfurt). HSH Nordbank       where they will be refinanced via covered
                 will own 25.1% of the merged company, the      mortgage bonds. The necessary procedures
                 remaining shares being held by BayernLB        were set up in 2003, and business opera-
                 and Helaba.                                    tions began soon afterwards. In 2004 we
                                                                will be in a position to start our issuing
                                                                activities, and our goal is to establish HSH
                                                                Nordbank Hypo as an innovative operator
                                                                in this market. Acquisition of business part-
                                                                ners will take place in close consultation
                                                                                              95




with the parent company. A second strate-        volume by 25 %, and virtually doubling
gic model comprises the public sector lend-      pre-tax income, in the second year of its
ing business, which will be pursued to a         activities – the result of seven successfully
limited extent – so far as reasonable margins    completed contracts that firmly established
can be achieved. Finally, we plan a refinanc-    HSH N Corporate Finance in the mid-upper
ing platform for private real estate loans,      echelons of Germany’s M&A consultants.
where we will be working together mainly         Major operations in this context were the
with local Savings Banks and insurance           sale of CG Nordfleisch AG to Best Meat BV,
companies. HSH Nordbank has signed a             advising Damp Holding AG on the acquisi-
letter of comfort for HSH Nordbank Hypo.         tion of Klinikum Stralsund, and the sale of
                                                 the Miles Fashion Group to MPC. The com-
                                                 pany’s strategic focus is on the region’s
Outlook for 2004.                                medium-sized companies, especially those
                                                 from the four core segments of consumer
HSH Nordbank Hypo’s financial statements         goods, health and social care, utilities and
for the year under review reflect the settle-    real estate. HSH N Corporate Finance is
ment of the activities of the original HKB       looking to sign a further series of major
Hypotheken- und Kommunalkredit-Bank              contracts in these fields during the first
arising from their business plan at the time     quarter of 2004.
of the merger. With total assets of EUR 1.3
billion as at year-end 2003, a loss of EUR 5.6
million was incurred for the fiscal year. This   Gudme Raaschou
result was, however, critically affected by      Bankaktieselskab A/S
restructuring and integration costs. As these
expenses will, for the most part, cease in       Another of HSH Nordbank’s corporate
2004, we expect the current year to record       finance units is Gudme Raaschou Bankak-
a balanced result, and the following years       tieselskab A/S, an investment banking sub-
to show increasing income.                       sidiary with headquarters in Copenhagen
                                                 and a branch in Stockholm. The bank’s
                                                 activities cover the corporate finance, debt
                                                 capital markets and equities segments.
HSH N Corporate Finance                          Results for 2003 were considerably better
                                                 than for the previous year – a consequence
HSH N Corporate Finance GmbH, one of             above all of the repositioning of the com-
HSH Nordbank’s corporate finance units,          pany initiated in 2002, as well as the up-
has made a name for itself as a leading          swing on the international capital markets.
financial consultant in the M&A field in         Gudme Raaschou participated in a number
northern Germany. Despite the difficult          of projects in the year under review, mainly
market environment, HSH N Corporate
Finance succeeded in raising its business
Group Segments   96




                 in the industrial and energy sectors, among     The flourishing markets in Russia and the
                 them the sale of the regional energy provider   Baltic States will generate further growth
                 Energigruppen Jylland to the state-owned        potential. The Russian market in particular
                 Danish energy company DONG. These trans-        is currently benefiting from a sustained
                 actions aroused lively interest at the begin-   improvement in stability, and PCA is expec-
                 ning of the year. Along with HSH N Corpo-       ting lucrative contracts to come from the
                 rate Finance, Gudme Raaschou also played        food, forestry, oil and gas industries. Overall
                 a consultative role in the sale of CG Nord-     the company reported moderate improve-
                 fleisch AG to the Danish company Best           ment in results in fiscal 2003 compared
                 Meat BV – a merger that created the second      with the previous year.
                 largest meat producer in Europe.


                                                                 Integration of corporate finance activities
                 PCA Corporate Finance Oy                        decided.


                 PCA Corporate Finance Oy, with headquar-        All three corporate finance units of HSH
                 ters in Helsinki, is another of HSH Nord-       Nordbank will be brought together in 2004.
                 bank’s corporate finance units. PCA’s core      The integrated unit will employ some 100
                 activities are in the M&A field, with increa-   highly specialized experts and have a strong
                 sing focus on international transactions.       presence throughout the Scandinavian/
                 In cooperation with HSH Nordbank, PCA           Baltic Sea region. This move aims to further
                 played an advisory role in last year’s acqui-   extend the Bank’s leading role in the
                 sition of the Finnish real estate enterprise    region, and to provide a springboard into
                 Polar by the German company IVG GmbH.           other core sectors. Business activities will
                 The coming year is expected to see a signi-     focus on small to medium-sized companies.
                 ficant influx of foreign investors onto the     An initial step in this process will be to
                 Finnish real estate market. The trend will      increase HSH Nordbank’s stake in PCA to
                 be boosted by the stable economic deve-         100%.
                 lopment of Finland as an EU member state,
                 combined with high earnings prospects.
                 PCA also provided consultation services for
                 the energy, technology and industrial sec-
                 tors, as well as advising the Finnish govern-
                 ment on specific projects.
                                                                                                            97




Private Equity                                                 plan, and continues to show encouraging
                                                               growth. Our equity fund holdings remain
Both the former Hamburgische Landesbank                        regionally concentrated in Europe, and our
and Landesbank Schleswig-Holstein made                         direct investments are mostly in Germany.
equity investments in the past, with the aim
of realizing returns adequate to the risks
incurred. These investments were generally                     HSH N Kapital and
in the form of private equity fund and, to a                   HSH N Invest
lesser extent, direct participations. Landes-
bank Schleswig-Holstein used its wholly                        Both HSH N Kapital GmbH and HSH N
                                                       1)
owned subsidiaries HSH N Kapital GmbH                          Invest GmbH experienced moderate busi-
                                  2)
and HSH N Invest GmbH to handle these                          ness turnover in 2003. The main reason for
investments.                                                   this was that the high investment quality
                                                               standards imposed by both companies
As part of the merger process, these two                       obliged them to reject a large number of
operational units were brought under the                       requests for participation. Despite this, the
umbrella of HSH Nordbank and newly orga-                       year brought several promising new invest-
nized. Our private equity fund business is                     ments in different sectors. Among them
now run by the Participations/Research                         was an indirect investment in Envitec Wis-
division. Our direct investments business is                   mar GmbH made by HSH N Invest in May
run primarily through the two companies                        2003. Envitec is active in the medical and
HSH N Kapital and HSH N Invest, in close                       environmental technology fields, and has
consultation with the customer-oriented                        already attracted notice in the past with its
Corporates and Structured Finance division,                    innovative products. This investment is
and serves as direct back-up for our busi-                     developing very positively. HSH N Kapital
ness divisions.                                                was also able to expand its portfolio with
                                                               attractive investments last year, above all in
At year-end 2003, total investments amoun-                     its core region of northern Europe, among
ting to EUR 658 million had been commit-                       them a 5 % holding in Danske Traelast, Den-
ted, of which EUR 271 million had been                         mark’s leading building materials company.
called. The Private Equity Portfolio, which                    Danske Traelast operates a large number of
is still at an early stage of development, was                 builders’ merchants and DIY stores under
expanded in 2003 in line with our business                     various brand names. Another HSH N Kapi-
                                                               tal investment was in the acquisition of
                                                               Beeck Feinkostsalate effected via a holding
                                                               in Deutsche See Fischmanufaktur. Both
                                                               HSH N Kapital and HSH N Invest are confi-
                                                               dent in their ability to further expand their
                                                               investment activities.




1)
     Formerly: Schleswig-Holsteinische Kapital-Beteiligungsgesellschaft mbH (KBG).
2)
     Formerly: LB Kiel Unternehmensbeteiligungsgesellschaft mbH (UBG).
Group Segments   98




                 Transaction Services                            with the sale of ships or conditional pay-
                                                                 ments. In addition we provide comprehen-
                 Position and strategy.                          sive individual advisory and consultative
                                                                 services on all questions of payment pro-
                 The products and services provided by the       cessing, foreign trade (foreign payments,
                 Transaction Services division are a key         documentary services) and e-commerce.
                 element in HSH Nordbank’s sales strategy.
                 With high-performance competitive and           The market in these fields was highly
                 innovative products, Transaction Services       competitive throughout 2003, but we were
                 has positioned itself in the market as a        able to maintain our strong position,
                 value-based product division, and has devel-    especially in the medium-sized business
                 oped a sales force providing professional       segment. We retained our high market
                 back-up for market oriented segment sales,      share and even expanded it in the docu-
                 especially with regard to the Payment Ser-      mentary transactions segment. With the
                 vices and Documentary Service subdivi-          technical migration of payment systems
                 sions. The Transaction Services division has    and documentary settlement processes, the
                 been reorganized to reflect the Bank’s new      third and fourth quarters saw a further
                 strategic concept, and its non-capital-bind-    major step of the merger process comple-
                 ing products make a strong contribution to      ted. The integration of the settlement units
                 HSH Nordbank’s earnings.                        and their systems has led to a bundling of
                                                                 know-how and a sustained optimization of
                                                                 processes that will enhance vital synergies
                 Strong earnings-oriented product                and lower the unit costs of external pro-
                 division.                                       viders. Cooperation with these external
                                                                 service partners guarantees the ongoing
                 Transaction Services has long and extensive     quality, speed and flexibility of our pay-
                 experience in payment systems and docu-         ment systems and document-based pro-
                 mentary transactions. Ongoing simplifica-       cedures.
                 tion and streamlining of data transmission
                 and processing allows payment systems to        The merger of Landesbank Schleswig-
                 be exactly tailored to the requirements and     Holstein and Hamburgische Landesbank to
                 circumstances of individual organizations.      create HSH Nordbank AG has further
                 In this way we offer our customers rapid,       strengthened the market position of the
                 easy and secure settlement of all payment       payment systems and documentary trans-
                 processes. In the documentary transactions      actions segments in northern Germany, as
                 segment we provide export/import com-           well as extending their customer base.
                 mercial letters of credit and collection pro-
                 cedures, as well as guarantees, standby
                 letters of credit and extensive special ser-
                 vices – for instance in connection
99
Management Report
                                              101




102   Management Report
102   Overview – Global Economy
105   Banking Environment
106   HSH Nordbank – Business Development
116   Risk Report


132   Annual Accounts
132   Group Balance Sheet
136   Group Statement of Income
138   HSH Nordbank AG – Balance Sheet
142   HSH Nordbank AG – Statement of Income
144   General Information
146   Accounting and Valuation Principles
150   Consolidated Companies and
      Consolidation Principles
151   Notes to the Balance Sheet
161   Notes to the Statement of Income
162   Other Notes


183   Auditor’s Certificate


184   Additional Information
184   Glossary
188   Addresses
Management Report   102




                    Overview – the Global Economy

                    Gradual recovery worldwide.


                    In 2003 the global economy continued to suffer external shocks – the Iraq conflict and the
                    SARS outbreak in spring, along with ongoing repercussions of September 11, 2001. Whilst
                    these shocks were cushioned by considerable fiscal and monetary impulses, overall uncer-
                    tainty about economic prospects remained high. Private investment on the capital markets
                    as well as corporate reinvestment, proceeded cautiously. However, the strong expansion in
                    the USA and Asia looks set to put the global economy on a firmer footing in 2004/2005.




                    USA as growth engine – Asia demonstrates powerful expansion.


                    Starting last year, the upswing in the US economy is to a great extent the result of decisive
                    expansionary monetary and fiscal policies. Interest rates hit an historic low when the
                    Fed lowered key rates again in June and the government implemented a broad package of
                    tax breaks. Both these measures boosted private consumption, which – together with the
                    upturn in investment – kick-started the transition to self-sustaining growth in the USA.
                    Once again last year the Asian economies demonstrated their ability to drive the world
                    economy, with China expanding strongly on the basis of a sustained wave of investment
                    and flourishing external trade. Japan continued to benefit from a dynamic regional envi-
                    ronment, despite the ongoing structural problems within its economy. Greater political
                    security on the domestic front, along with the impact of the US recovery, led to the stabil-
                    ization of major economies of Latin America – Brazil, Argentina and Mexico.




                    Western Europe lacking dynamism – Eastern Europe robust.


                    The global economic downturn in 2003 had an uneven impact on European economies.
                    Whilst the UK achieved a respectable 2.3 % growth in GDP, Euroland only managed 0.4 %.
                    Against this background of slow economic growth, the ECB maintained its expansionary
                    monetary policy. Growth in private and public consumption across the Eurozone remained
                    stable, but investments fell substantially. This scenario is likely to change in 2004, with
                    investments and exports once again boosting economic expansion, and a 2 % growth in
                    GDP is expected.


                    In Scandinavia, 2003 was a year of stagnation for the Danish and Norwegian economies,
                    but Sweden and Finland achieved growth rates significantly above the Eurozone average.
                    We expect 2004 to see growth rates of 2 % or more in this region of northern Europe,
                    thanks in part to expansionary fiscal policies.
                                                                                            103




Eastern European GDP rose significantly again in 2003, with growth hitting 5.5 %. Above
all the Baltic States and Russia pulled strongly ahead, but Poland also left its period of weak
growth behind. In 2004 we expect the region to maintain its vigor. However, EU member-
ship (since May 1, 2004) presents a major challenge to several states in the region – above
all in reducing high budgetary and balance of payments deficits.




End of stagnation in Germany.


In the early months of 2003 the German economy kept its downhill course, but the end
of military operations in Iraq, together with the recovery in the global economy, brought
increasing stability as the year progressed. On balance, GDP fell just short of the 2002 level –
a drop of 0.1 %. The gap between flourishing external trade and sluggish domestic perform-
ance remains wide, with private households currently reluctant to spend their real income
growth. This is partly the result of the ongoing discussion about major structural reform.
Whilst 2003 was a year of falling investment, we expect investment to pick up during the
coming quarters, thanks to significantly improved sales prospects. Order books have already
begun to fill, and production figures are rising strongly. The major driving force behind
this recovery is likely to be foreign trade, with Germany benefiting from the stability of the
US economy, and from its close links with the dynamic countries of central and eastern
Europe, as well as China. Our overall forecast for 2004 is growth of 1.5 %.




Hamburg and Schleswig-Holstein – economic situation set to improve in 2004.


The slow pace of economic development also affected Hamburg and Schleswig-Holstein.
After two years of low growth rates – during which Hamburg’s economy performed rather
better than Germany’s as a whole – the City’s GDP dropped by 0.5% in 2003. Service indus-
tries, which play a proportionately larger role in Hamburg than in the country generally,
also felt the force of the wind more keenly – in particular those serving the corporate sec-
tor. In contrast to this, however, the City of Hamburg, as a major trade and transportation
hub, benefited from the upswing in other regions of the world, with the Port of Hamburg
achieving record results for the year.


Schleswig-Holstein’s economy also performed poorly in 2003, with real GDP falling 0.6 %.
This was mainly the result of a drop in performance in the manufacturing and construc-
tion sectors. Service industries performed rather better. The visibly improved business
climate in both federal states around the turn of the year suggests that the bottom of the
curve has now been passed. We expect both Hamburg and Schleswig-Holstein to report
discernible growth again in 2004, with GDPs of 1.75 % and 1.5 % respectively.
Management Report   104




                    Financial markets – stocks getting under way, yields rising.


                    After three years marked by widespread losses, international stock exchanges again posted
                    strong gains in 2003. With the geopolitical situation returning to stability after the end of
                    the war in Iraq, share prices profited not only from high liquidity levels and the all-round
                    improvement in the economic environment, with better prospective corporate earnings,
                    but also from a greater willingness on the part of investors to take risks. The Dow Jones
                    ended the year up 25 %, the DAX up 37 % and the STOXX50 up 10 %.


                    Bonds and interest rates were subject to high levels of volatility. Increased optimism in the
                    economy – and with it the fear of a pending change in US and European key lending rates –
                    led to temporary increases in returns. However, recurrent uncertainty about the sustain-
                    ability of growth in the leading economies kept bonds in continuous demand. The develop-
                    ment of the US dollar – which fell 20 % against the euro and 11 % against the yen in 2003 –
                    continues to be a decisive force on international stock and bond markets in 2004. If growth
                    prospects continue to strengthen, yields may rise further as the year progresses. Share
                    returns, however, have already been very largely anticipated in price structures, so price
                    growth potential in this segment is limited.


                    DAX*
                    8,000

                    7,000

                    6,000

                    5,000

                    4,000

                    3,000

                    2,000
                              1.1.01                                    1.1.02          1.1.03                1.1.04

                       200 day average
                       DAX



                    10y Bunds*
                    6%



                    5%



                    4%



                    3%
                              1.1.01                                    1.1.02          1.1.03                1.1.04

                       200 day average
                       Yield on 10 year Bunds

                    * The charts are not a formal component of the Management Report.
                                                                                            105




The Banking Environment 2003

German banking industry at the crossroads.


In the past year, the situation of the German banks improved. Risk provisions fell below
the levels of the previous year, although – due to the large number of company insolven-
cies – they still remained relatively high. Thanks in great measure to the recovery on the
stock exchanges, the overall picture was again more encouraging. After hitting an interim
low of 2,188 points in March 2003, the German shares index (DAX) showed significant
improvement during the rest of the year. However, this encouraging development cannot
conceal the fact that German banks continue to face the challenge of improving their in-
come position without losing track of costs. The past year again brought profound changes
to German banking, reflected in the increasing number of mergers. The favorable climate
discernible again in the banking industry appears set to continue throughout the current
year, despite the fact that the financial sector is also suffering from the persistently weak
growth of the German economy, as well as from a spate of business insolvencies.


The Landesbanks (public sector banks of the German states), in addition, are currently
faced not only with the challenge of new regulations – IAS and Basle II – but also with the
abolition (in July 2005) of Anstaltslast (maintenance obligation) and Gewährträgerhaftung
(guarantee obligation) incumbent on their public sector owners. This loss of state guaran-
tees will inevitably impair Landesbank ratings, and consequently the conditions governing
their refinancing operations. The capital markets have to some extent already anticipated
this step, with refinancing costs for the Landesbanks currently running at considerably
higher levels than hitherto. In a highly competitive market, this has significant impact on
earnings. The Landesbanks are working intensively to adjust their business models to the
changed situation, with the aim of improving their profitability and achieving competitive
ratings without the benefit of guarantees from their respective states.
Management Report   106




                    HSH Nordbank – Business Development 2003

                    HSH Nordbank reacted quickly to the upcoming abolition of state guarantees. The phasing
                    out of Anstaltslast (maintenance obligation) and Gewährträgerhaftung (guarantee obliga-
                    tion) has far-reaching implications for the Bank’s business operations, because it entails
                    a significant rise in the cost of funding. The merger and incorporation of the Bank, com-
                    pleted last year, was an initial response. At the end of 2003 the Bank successfully passed
                    another milestone when it promulgated its new strategy. The encouraging results of 2003,
                    achieved under difficult conditions, as well as the results of the predecessor houses posted
                    in previous years, confirm that HSH Nordbank possesses all the essential prerequisites to
                    meet coming challenges. Group net income climbed 9.5 % to EUR 261.9 million, and allowed
                    significant strengthening of reserves. Accordingly, a gross dividend of EUR 56.25 million on
                    ordinary shares in the amount of EUR 450 million, and a gross dividend of EUR 8.75 mil-
                    lion on preference shares in the amount of EUR 50 million, together with an allocation of
                    EUR 165 million to retained earnings, was recommended to the Annual Shareholders’
                    Meeting on May 12, 2004.




                    Merger and formation of HSH Nordbank.


                    HSH Nordbank AG was established by the merger of Landesbank Schleswig-Holstein Giro-
                    zentrale, Kiel, and Hamburgische Landesbank – Girozentrale –, Hamburg. After ratification
                    of a State Treaty between the Free and Hanseatic City of Hamburg (FHH) and the State of
                    Schleswig-Holstein, the merger became effective with entry of the stock corporation in the
                    commercial registers of Hamburg and Kiel on June 2, 2003. For accounting and tax pur-
                    poses incorporation took effect retroactively as of January 1, 2003.


                    The transitional arrangements defined in the Brussels Agreement of July 17, 2001 on the
                    abolition of Anstaltslast and Gewährträgerhaftung are also applicable to HSH Nordbank.
                    The states of Hamburg and Schleswig-Holstein determined in the State Treaty that these
                    obligations apply in identical terms to HSH Nordbank as they did to the predecessor banks
                    Hamburgische Landesbank and Landesbank Schleswig-Holstein.


                    The Bank sees the merger and simultaneous conversion into a stock corporation as an
                    important step toward ensuring long-term competitiveness and capital market readiness.
                    The merger joined two strong partners, both of them with deep roots in the Hamburg/
                    Schleswig-Holstein region, and both complementing each other perfectly in geographical
                    focus as well as business strategy. By the third year following the merger, HSH Nordbank
                    expects to benefit from synergies amounting to approximately EUR 150 million per annum
                    in earnings and expenses. Incorporation was an essential step for a possible stock market
                    listing.
                                                                                            107




IT migration.


It was decided early in the merger process to take over the IT platform used by Landesbank
Schleswig-Holstein as the principal solution for HSH Nordbank, and to migrate Hambur-
gische Landesbank’s business databases onto the new system. The integration of the two
systems established some major milestones in the course of 2003. Temporary problems
arising in the course of IT migration were identified and analyzed – and have to a great
extent already been solved. Internal bank operations were at no time materially impaired.
We expect that, after completion of all IT migration operations, unified state-of-the-art
systems will be in place for all divisions by early 2005.




Consolidated companies.


HSH Nordbank’s individual accounts cover the Bank as established with co-headquarters in
Hamburg and Kiel and subsidiaries in Germany and abroad. As at year-end 2003 the Bank
had branches in Lübeck, Berlin, Luxembourg, Copenhagen, Stockholm, Helsinki, London,
New York, Hong Kong and Singapore. On April 1, 2004 a branch was opened in the Cayman
Islands.


Investitionsbank Schleswig-Holstein (IB) and Landes-Bausparkasse (LBS), both of which were
formerly legally dependent but organizationally independent entities within Landesbank
Schleswig-Holstein, were spun off from Landesbank Schleswig-Holstein before the merger.


The Group accounts comprise HSH Nordbank’s individual accounts as well as those of HSH
Nordbank International S. A., Luxembourg1) and its subsidiaries Nobis Société des Banques
Privées S. A., Luxembourg, and International Fund Services & Asset Management S. A., Luxem-
bourg. They further include the accounts of HSH Nordbank (Guernsey) Ltd., Guernsey2),
HSH N Finance (Guernsey) Ltd., Guernsey3), HSH N Composits GmbH, Kiel4), and its subsi-
diary HSH N Funding I, Grand Cayman5), the Schleswig-Holstein casinos, PLUS BANK AG,
Hamburg, and METONO GmbH, Hamburg. METONO GmbH is a holding company of
HSH Nordbank with a 50 % stake in PLUS BANK AG. HSH Nordbank Hypo AG, Hamburg6),
acquired in September 2003, is consolidated here for the first time. Its acquisition enables
HSH Nordbank to issue mortgage bonds. Hamburgische Wohnungsbaukreditanstalt (WK),
Hamburg, has not been included in consolidation, as it was sold before the merger.




Comparison with previous year.


In order to compare the development of the economic situation of HSH Nordbank AG and
the HSH Nordbank Group, and in line with article 265 paragraph 2 sentence 3, and article
294 paragraph 2 sentence 2, respectively, of the German Commercial Code (HGB), the




1) Formerly: Landesbank Schleswig-Holstein International S. A., Luxembourg.
2) Formerly: Hamburgische Landesbank (Guernsey) Ltd., Guernsey.
3) Formerly: Hamburgische LB Finance (Guernsey) Ltd., Guernsey.

4) Formerly: LB Kiel Nord Capital GmbH, Kiel.

5) Formerly: LB Kiel Funding I, Grand Cayman.

6) Formerly: HKB Hypotheken- und Kommunalkredit-Bank Aktiengesellschaft, Hallbergmoos.
Management Report   108




                    figures and details of the previous year are presented as if the merger had already taken
                    place as at 1.1.2002. This has entailed calculating separately the assets and results of IB, LBS
                    and WK.




                    Financial situation.


                    In comparison with the opening balance sheet as at 1.1.2003, the Group’s total assets
                    dropped EUR 9.5 billion (5.3 %) to EUR 171.7 billion. The total assets on the Bank’s indivi-
                    dual accounts declined 6.1 % to EUR 166.0 billion (1.1.2003: EUR 176.7 billion). The main
                    reasons for the decline in total assets of both Group and Bank were on the one hand the
                    significant depreciation of the US dollar in the course of the year, and on the other the
                    Bank’s policy of qualitative rather than quantitative business expansion. In order to use
                    available equity capital more efficiently, and to optimize return on equity, the Bank has
                    selectively concentrated new business in sectors and regions in which its strong market
                    position can realize attractive profits.


                    Group business volume fell 2.9 % to EUR 204.9 billion. Bank business volume fell 2.4 % to
                    EUR 210.4 billion. Group lending volume was down 3.0% to EUR 205.0 billion. Bank lending
                    volume was down 3.1% to EUR 210.4 billion.




                    Lending and derivatives business.


                    On the assets side of the Group balance sheet, loans and advances to customers are the
                    biggest item, with approximately 46.1%, amounting to some EUR 79.2 billion (1.1.2003:
                    EUR 78.9 billion). This represents a slight rise (0.4 %) on the opening figure. Loans to custo-
                    mers abroad comprise some 35.5 % of this item. Claims secured by mortgages rose 4.7%
                    to EUR 17.7 billion; those secured by ship mortgages declined slightly (-5.2 %) to EUR 11.5
                    billion – mainly as a result of the depreciation of the US dollar. Low-margin public sector
                    loans reduced significantly further (-14.1%) to EUR 12.5 billion.


                    Loans and advances to banks fell 18.5% to EUR 37.3 billion. The securities portfolio declined
                    3.8 % to EUR 50.9 billion.


                    On the Bank’s individual accounts, loans and advances to customers also rose slightly (0.4 %)
                    to EUR 78.2 billion (1.1.2003: EUR 77.9 billion), whilst loans and advances to banks dropped
                    20.3 % to EUR 37.1 billion. The securities portfolio declined 4,7 % to EUR 46.1 billion.


                    We again expanded our derivative financial instruments business to meet our customers’
                    specific financing requirements, but also to minimize risks and make use of market oppor-
                    tunities. Interest-rate derivatives accounted for more than three-quarters of the volume.
                    The remainder was accounted for by currency-related products. Equity and other price risks
                    were a comparatively negligible quantity. At Group level the nominal volume of derivatives
                    as at 31.12.2003 amounted to EUR 349.9 billion (1.1.2003: EUR 279.8 billion), at Bank level
                    to EUR 343.6 billion (1.1.2003: EUR 273.5 billion). Risk measured in terms of credit risk
                                                                                             109




equivalents amounted to EUR 2.1 billion (1.1.2003: EUR 1.9 billion) in both Group and Bank
as at 31.12.2003. At year-end the nominal volume of credit derivatives stood at EUR 9.5 bil-
lion (1.1.2003: EUR 12.0 billion) in the Group, and at the same figure in the Bank (1.1.2003:
EUR 11.8 billion).




Refinancing.


The principal source of funding in the Group is certificated liabilities, at 35.9 % of all
funding and a volume of EUR 61.5 billion (1.1.2003: EUR 66.8 billion). To optimize long-
term funding, the Bank is increasingly concentrating on its own issuing activities on the
international capital markets. Securities are issued with medium to long maturities –
among other models on the basis of a EUR 25 billion EMTN program. In the year under
review, benchmark issues totaling EUR 3.5 billion, as well as structured bond placements,
contributed substantially to the optimization of funding activities. For short-term refinan-
cing HSH Nordbank is currently using two commercial paper programs with a volume of
USD 10 billion each. The Bank’s certificated liabilities portfolio (individual accounts) fell
to EUR 49.7 billion (1.1.2003: EUR 57.3 billion). In addition to these activities, the Bank has
also issued mortgage bonds in 2004 – through HSH Nordbank Hypo AG, acquired in Sep-
tember of the previous year.


Liabilities to banks fell steeply – by 14.3 % to EUR 47.6 billion at Group level, and by 10.1%
to EUR 54.9 billion at Bank level. At year-end, liabilities to customers stood at EUR 48.0 bil-
lion (Group), an increase of 5.7 %. At Bank level liabilities to customers rose 4.5 %.




Equity capital situation.


The Group’s liable equity capital comprises, as core capital, the on-balance-sheet equity
capital and the fund for general banking risks. As supplementary capital it comprises
subordinated liabilities, profit participation capital, and reserves in line with article 340f
of the German Commercial Code. As at 31.12.2003, liable equity capital amounted to EUR
10.7 billion (1.1.2003: EUR 10.3 billion) in both Group and Bank, representing an increase
of 3.9 % on the previous year.


The details of the Group’s equity capital situation are as follows: share capital stood at
EUR 500 million; silent participations qualifying as core capital stood at EUR 4.6 billion.
These silent participations – for the most part with unlimited maturities and permanently
available – were taken up both by the shareholders and on the capital markets. In the year
under review, silent participations amounting to EUR 500 million were again placed with
international investors. Remaining growth in equity capital mainly comprises subordinated
liabilities and allocations to the fund for general banking risks in line with article 340g of
the German Commercial Code.
Management Report   110




                    Group balance sheet

                    € millions                                        31.12.2003   1.1.2003      Change on       Change on
                                                                                              previous year   previous year
                                                                                                    in € m.           in %
                    Cash reserve, debt instruments issued by
                    public institutions, bills of exchange eligible
                    for refinancing                                         360        366              -6            -1.6
                    Loans and advances to banks                          37,319     45,772         -8,453            -18.5
                    Loans and advances to customers                      79,207     78,876             331             0.4
                    Total securities                                     50,892     52,907         -2,015             -3.8
                    Equity investments in non-affiliated and
                    affiliated companies                                   1,425     1,276             149            11.7
                    Trust assets                                            377        340              37            10.9
                    Other assets                                           2,080     1,636             444            27.1


                    Total assets                                        171,660    181,173         -9,513             -5.3


                    Liabilities to banks                                 47,570     55,491         -7,921            -14.3
                    Liabilities to customers                             47,966     45,393           2,573             5.7
                    Certificated liabilities                             61,547     66,836         -5,289             -7.9
                    Trust liabilities                                       377        340              37            10.9
                    Subordinated debt                                      2,841     3,027           -186             -6.1
                    Profit participation capital                           1,497     1,497               0             0.0
                    Fund for general banking risks                          365        252             113            44.8
                    Equity capital                                         6,485     5,776             709            12.3
                    Other liabilities                                      3,012     2,561             451            17.6


                    Total liabilities                                   171,660    181,173         -9,513             -5.3


                    Lending volume                                      205,016    211,254         -6,238             -3.0
                    Business volume                                     204,926    211,105         -6,179             -2.9




                    On balance sheet date, the ratio between own funds qualifying as liable capital, and total
                    risk-weighted assets plus market price risk positions (solvency ratio), stood at 10.6 %
                    (1.1.2003: 9.7 %) for the Group, and 10.9 % (1.1.2003: 10.4 %) for the Bank. During the year
                    under review the principles governing capital adequacy and liquidity were observed at all
                    times.


                    Solvency ratio                                                             31.12.2003        1.1.2003
                    Principle 1 – Bank                                                              10.9 %          10.4 %
                    Principle 1 – Group                                                             10.6 %           9.7 %
                    BIS ratio                                                                       10.2 %           9.4 %


                    Core capital ratio
                    Bank                                                                             6.9 %           6.3 %
                    Group                                                                            6.6 %           6.0 %
                    BIS ratio                                                                        6.3 %           5.6 %




                    Earnings position.


                    In a banking environment that again proved tough throughout 2003, HSH Nordbank main-
                    tained the positive trend established over many years by its predecessor banks. Operating
                    profit before risk provisions and evaluations at Group level rose 4.6 % by EUR 51.4 million
                    to EUR 1,162.1 million (prior year EUR 1,110.7 million). The result for the Bank was up 4.3%
                    by EUR 46.6 million to EUR 1,126.8 million (prior year EUR 1,080.2 million).
                                                                                              111




Results from operations were consistently better than in the previous year. As with the
predecessor banks, the main source of operating income was net interest income, which
increased 2.2 % (EUR 31.6 million) to EUR 1,499.1 million at Group level. Resulting from a
policy of selective expansion and credit pricing that more accurately reflected actual risks,
most of the Bank’s segments achieved higher profits with their new business. This more
than compensated the negative impact of US dollar depreciation and the decline in dividends
from equity holdings. At Bank level, interest income increased 2.0 % (EUR 29.0 million) to
EUR 1,450.0 million.


Net commission income at Group level jumped 13.3 % to EUR 223.3 million, driven by
commissions from international lending activities, as well as higher income from securities
business at the subsidiary PLUS BANK AG, and the HSH Nordbank International, S. A. Group,
Luxembourg. At Bank level the increase in commission income was somewhat lower (5.4 %),
amounting to EUR 181.7 million.


Net income from trading at Group level increased 5.7% to EUR 83.2 million; at Bank level
the increase was 6.0 % to EUR 74.7 million.


At Group level, other operating income surged 121.8 % in the year under review to
EUR 88.7 million. It must be noted in this context that restructuring expenses resulting
from the merger, which amounted to some EUR 84 million in 2002, were reduced to
around EUR 20 million in 2003. This item also benefited from tax refunds from the pre-
vious years. At Bank level the increase was 120.3 %, to EUR 87.0 million.


Administrative expenses rose 8.9 % in the Group and 7.0 % in the Bank – rather less than
in the past with the predecessor banks. — The development in personnel expenses reflects
a reduction of 193 in employee numbers to a total of 4,511 (prior year 4,724). To realize
savings derived from the merger, the Bank encourages measures such as early retirement
schemes that promote employee turnover. At the same time there has been ongoing recruit-
ment, with the focus on filling specialist positions. At Bank level, personnel expenses, at
EUR 305.4 million, were only slightly higher than in the previous year (EUR 303.7 million).
At Group level, personnel expenses rose 4.4 % to EUR 347.7 million, due to slight increases
in employee numbers in various Group companies, as well as the first-time consolidation
of HSH Nordbank Hypo AG. — Operating expenses rose 13.3 % in the Group to EUR 384.5
million, and 13.1% in the Bank to EUR 361.2 million. The increase is largely due to goodwill
write-downs at Group level, as well as to a rise in depreciation resulting from higher invest-
ment in plant and equipment in recent years. Higher advisory services costs – to some
extent related to the merger and the development of the Bank’s new strategy – also contri-
buted to the increase in this item.


The relation of total administrative expenses to operating income (cost income ratio)
achieved an excellent level both in the Group – 38.7 % (prior year 37.7 %) – and in the Bank:
37.2 % (prior year 36.6 %).


Throughout 2003 we maintained our traditionally strict risk standards. Overall risk provi-
sions and evaluations were up once again – at Group level by 18.5 %, and in the Bank by
17.1%. It must be noted that in the previous year revenue from sales of shareholdings
Management Report   112




                    lowered reported risk provisions. Disregarding this effect, risk provisions have fallen
                    considerably in the year under review, due particularly to the large reduction in provisions
                    on the securities portfolio. As at year-end, these amounted to EUR 43.4 million (prior year
                    EUR 380.9 million) in the Group, and EUR 59.4 million (prior year EUR 387.1 million) in
                    the Bank. Loan loss provisions, on the other hand, were again raised in 2003, against the
                    background of persistent weakness in the economy. At Group level, net allocations to loan
                    loss reserves amounted to EUR 436.7 million (prior year EUR 365.9 million); at Bank level to
                    EUR 406.8 million (prior year EUR 362.1 million). Reserves as defined by article 340g of the
                    German Commercial Code were again substantially increased. With these measures, HSH
                    Nordbank has adequately covered all ascertainable and future risks.


                    At Group level, operating profit after risk provisions and evaluations dropped by EUR
                    39.0 million (-6.3 %) to EUR 582.7 million (prior year EUR 621.7 million). At Bank level this
                    ratio was down 6.4 % to EUR 551.4 million (prior year EUR 588.9 million).


                    The contributions of the various segments of the HSH Nordbank Group7) to the operating
                    result are presented below.8) With reference to the column Other/Consolidation, it must be
                    observed that – along with consolidation details and reconciliation to Group results – this
                    segment includes earnings from subsidiaries or shareholdings not related to specific seg-
                    ments, as well as other central income and expense items. For example, personnel and
                    other operating expenses are reported here if they are not causally linked to any other
                    segment. Likewise, equity investment revenues are reported here. Central risk provisions
                    mainly covers general bad debt provisions and allocations to specific bank reserves. On
                    balance, the segment Other/Consolidation posts a negative operating result that does not
                    impact other segments.




                    Notes on individual segments:


                    Despite the weakness of the US dollar, the Shipping Clients segment experienced brisk
                    business activity in 2003 and posted an operating result of EUR 230.3 million after risk pro-
                    visions and evaluations. Return on core capital reached 21.5 %. In difficult circumstances,
                    the Real Estate Clients segment achieved an operating result after risk of EUR 93.4 million.
                    Return on capital amounted to 8.9 %. The Corporate Clients segment includes not only the
                    worldwide corporates business run from the Bank’s Hamburg and Kiel head offices, but
                    also the corporate client activities of the Copenhagen Branch (Nordic Corporates). Despite
                    the persistent weakness of the economic environment, business in this segment developed
                    briskly, thanks to the Bank’s strong market position in sharply focused customer segments.
                    The operating result stood at EUR 177.0 million after risk provisions and evaluations, with




                    7) SeeAnnual Accounts.
                    8) In
                        line with the option allowed by German Accounting Standard No. 3, previous year’s results are not cited in
                     segment reporting.
                                                                                                                    113




return on core capital of 18.7 %. The Special Corporate and Institutional Clients segment
comprises Financial Institutions/Global Trade Finance, Savings Banks/Public Sector Custo-
mers, Lease Finance and Transportation. This segment posted an operating result after risk
provisions of EUR 131.2 million, with return on core capital of 14.5 %. In a highly competi-
tive overall market environment, the Private Clients segment posted an operating result
after risk provisions and evaluations of EUR 31.9 million, with return on core capital
standing at 19.5 %. The Financial Markets segment includes Asset Liability Management
(ALM), Portfolio Management and Investments (PMI) and Capital Markets. The very success-
ful activities of this segment achieved an operating result after risk of EUR 350.6 million
and a return on core capital of 25.8 %9).


Primary segment structure10)
HSH Nordbank

                                             Special Cor-                                  Other/
  Shipping      Real Estate    Corporate     porate and        Private      Financial
                                                                                           Consolida-       Group
  Clients       Clients        Clients       Institutional     Clients      Markets
                                                                                           tion
                                             Clients
                               Corporates    Financial                       Asset
                                                             Private and
                Real Estate    and           Institutions/                   Liability       Central
  Shipping                                                   Business
                Clients        Structured    Global Trade                    Manage-         results
                                                             Clients
                               Finance       Finance                         ment
                                             Savings                       Portfolio
                               Nordic        Banks/Public                  Manage-
                               Corporates    Sector                        ment and
                                             Customers                     Investments

                                                Lease                         Capital
                                                Finance                       Markets



                                               Transpor-
                                               tation




Return on equity (RoE)11) stood at the same level (11.0 %) as the previous year. The Bank’s
individual account RoE rose slightly from 10.4 % to 10.5 %.


Due mainly to further placements, dividends on silent participations rose by 21 % at both
Group and Bank level to some EUR 317 million.


Taxes on income fell by 96.8 % at Group level to EUR 3.9 million, and at Bank level by
95.9 % to EUR 4.6 million. In the year under review the Bank had to apply the German
Accounting Standard (DRS) No. 10 “Deferred Taxes in Consolidated Financial Statements”
for the first time. In line with this standard, both tax accruals and deferrals were reported
in the annual accounts. The significant excess of deferrals over accruals is reflected in a
reduction of taxes as reported in the Group Statement of Income.




9) The  customer-related segment structure used here entails that net commission income from capital market products
   is not reported under Financial Markets.
10) The chart is not a formal component of the Management Report.
11) (Operating result after risk/evaluation + allocation to reserves in line with article 340g of the German Commercial

    Code HGB)/(average on-balance-sheet equity – net retained earnings + average reserves in line with article 340g HGB)
Management Report   114




                    At EUR 261.9 million, Group net income was up EUR 22.8 million (9.5 %) on the previous
                    year (EUR 239.1 million). At Bank level net income stood at EUR 230.0 million, 7.3 % up on
                    the previous year.

                    Group statement of income

                    € millions                                   2003       Pro forma      Change on       Change on
                                                                                 2002   previous year   previous year
                                                                                              in € m.           in %
                    Operating income
                     - net interest income                     1,499.1        1,467.5           31.6             2.2
                     - net commission income                     223.3         197.1            26.2            13.3
                     - net income from trading                    83.2          78.7             4.5             5.7
                     - other net operating income                 88.7          40.0            48.7           121.8
                    Administrative expenses
                     - personnel expenses                       -347.7        -333.1           -14.6             4.4
                     - operating expenses                       -384.5        -339.5           -45.0            13.3
                    Operating profit before risk
                    provisions/evaluations                     1,162.1        1,110.7           51.4             4.6
                    Risk provisions/evaluations                 -579.4        -489.0           -90.4            18.5
                     - loan loss provisions                     -436.7        -365.9           -70.8            19.3
                     - securities                                -43.4        -380.9           337.5           -88.6
                     - shareholdings                               4.5         364.8         -360.3            -98.8
                     - reserves in line with 340 f/g HGB        -104.3        -135.4            31.1           -23.0
                     - changes to special reserve item             0.5          28.7           -28.2           -98.3
                     - other                                       0.0          -0.3             0.3          -100.0
                    Operating profit after risk
                    provisions/evaluations                       582.7         621.7           -39.0            -6.3
                    Extraordinary income                           0.0            0.0            0.0             0.0
                    Net income before taxes                      582.7         621.7           -39.0            -6.3
                    Dividends on silent participations          -316.9        -261.9           -55.0            21.0
                    Taxes on income                               -3.9        -120.7           116.8           -96.8
                    Net income                                   261.9         239.1            22.8             9.5




                    Occurrences after balance sheet date.


                    In 2003 HSH Nordbank opened negotiations with Bayerische Landesbank (BayernLB) and
                    Landesbank Hessen-Thüringen (Helaba) on the amalgamation of their securities trans-
                    actions houses. An outline agreement was drawn up, according to which PLUS BANK and
                    TxB LB Transaktionsbank GmbH (Dornach) – a joint subsidiary of BayernLB and Helaba –
                    will be retroactively merged with effect from January 1, 2004. The headquarters of the new
                    company will be in Dornach (near Munich), with offices in Hamburg and Offenbach (near
                    Frankfurt). HSH Nordbank will own 25.1% of the merged company, the remaining shares
                    being held by BayernLB and Helaba. The transaction banking market is currently going
                    through a phase of strong concentration. The merger is an important measure to safeguard
                    an adequate market share and retain a competitive position in future.


                    The Bank also decided at the end of 2003 to outsource major elements of its IT and related
                    services. Contracts are expected to be exchanged during first half-year 2004. This will
                    achieve significant cost savings in the medium term.
                                                                                              115




EU “unlawful subsidy” dispute.


In November 2002 the European Commission initiated proceedings against Hamburgische
Landesbank and Landesbank Schleswig-Holstein, as well as other Landesbanks, for receiv-
ing unlawful subsidies. Regarding HSH Nordbank’s predecessor houses, the question is
whether an equity contribution in the form of shares in various public development banks
in Hamburg and Schleswig-Holstein constituted unlawful subsidy. As the equity bears ade-
quate interest, we do not expect the proceedings to have a negative impact. Hamburgische
Landesbank and Landesbank Schleswig-Holstein shed the shares in question before the
foundation of HSH Nordbank.




Outlook.


In global terms, 2003 already saw widespread economic recovery taking place, driven by
the USA and Asia, and there are sufficient indicators that in Europe and Germany the
bottom of the curve has also been passed. With its international business operations, HSH
Nordbank is positioned to benefit from the growing dynamism in the world economy –
as it will from an economic upswing in the Hamburg/Schleswig-Holstein region, which is
central to its activities.


With the merger and simultaneous conversion into a stock corporation, HSH Nordbank
created an excellent platform for ensuring its future competitiveness. The Bank’s new
strategy, launched at the end of 2003, is aimed above all at enhancing profitability and
capitalization and optimizing capital structure. Various measures taken in the current year
are directed toward realizing these goals. HSH Nordbank’s strategy is closely linked to that
of its twin predecessor banking houses, developing their longstanding strengths in a
consistent direction. The Bank sees itself, accordingly, as a powerful regional bank of the
north and an international provider of specialized financing. It intends by 2006 to raise
return on equity beyond the 15% mark, and the core capital ratio to over 7 % – whilst at
the same time limiting risk-weighted assets to EUR 100 billion. The necessary growth in
earnings on the basis of a static lending volume is to be achieved through sales of non-
capital-binding products and services (multi-product approach), as well as by generating
higher profits in the Bank's traditional lending business. Activities will be concentrated in
segments where the Bank’s strong market position can realize attractive prices, and its
special expertise in specific sectors and regions will be employed to further extend its excel-
lent competitive position as a provider of specialized financing solutions – for example
ship, real estate and transport finance.


HSH Nordbank is confident that the achievements already in place, and the measures
introduced in the context of the new strategy, will bear fruit in the current year, and that
this will take visible effect in the annual accounts for 2004.
Management Report   116




                    Risk Report 2003

                    The success of a bank depends critically on a responsible, professional approach to risks.
                    For this reason, active risk management ranks high in the philosophy of HSH Nordbank.
                    The Bank understands risk as any unfavorable development that might impair the Bank’s
                    financial, earnings or liquidity situation. The Bank distinguishes counterparty, market,
                    liquidity, operational and strategic risks.



                    Risk management system

                    The individual elements of risk management comprise a system that ensures the identifi-
                    cation, analysis, evaluation, management, continuous monitoring and reporting of risks.




                    Organization of risk management.


                    Responsibility for risk management is clearly defined within the Bank. Risk policy – includ-
                    ing the methods and procedures to be applied in the quantification, monitoring and man-
                    agement of risks – is decided by the full Managing Board, which accordingly bears overall
                    responsibility for the Bank’s risk management. With the Chief Risk Officer sitting on the
                    Managing Board, the functional separation of market from non-market units, as recom-
                    mended by the Mindestanforderungen an das Betreiben von Handelsgeschäften der Kredit-
                    institute (MaH – Minimum Standards for Trading Activities of Credit Institutions) and the
                    Mindestanforderungen an das Kreditgeschäft der Kreditinstitute (MaK – Minimum Stand-
                    ards for Lending Activities of Credit Institutions) is safeguarded at all organizational levels.


                    Central Risk Controlling develops the methods and instruments used for quantifying,
                    monitoring and managing risks, thereby ensuring that the risks themselves remain evi-
                    dent and controllable. Operational risk reporting is carried out by an independent entity –
                    typically by Transaction Services. The Bank’s Internal Audit, which directly reports to the
                    Board, guarantees independent scrutiny of the appropriateness and effectiveness of our
                    risk management system. The Bank’s risk profile is frequently reviewed by the Supervisory
                    Board’s Risk Committee.




                    Risk management and controlling.


                    Our risk management and controlling system is continuously refined in line with current
                    business management and regulatory criteria, and is a constituent element of the Bank’s
                    overall management system. In this context, it is of elementary importance that man-
                    agement focus on the risk/return profile of business activities at all relevant levels of the
                    Bank’s structure. The Bank uses a Raroc (Risk-adjusted return on capital) approach for
                    calculating the value added ratio of all business activities.
                                                                                              117




HSH Nordbank’s business segments are run on the global head principle. This also applies
to risk controlling, where methods and instruments are centrally developed, implemented
and sanctioned, ensuring unified and systematic Bank-wide risk controlling.


For the authorization and execution of its business activities the Bank has established clear
rules defining competencies and detailing reporting obligations. Mandatory formal checks
are imposed before new or adapted products are launched, or business deals signed in new
markets. These require the Managing Board’s consent, which will only be given if the activity
in question can be modeled in accordance with the Bank’s relevant processes and systems.


A risk reporting process in line with MaK was developed and introduced in the Bank in the
course of 2003, keeping both the Managing Board and Risk Committee regularly informed
about the Bank’s risk situation. It will in future also serve to monitor implementation
of credit risk strategy, which will define the risk-bearing parameters of planned lending
activities.




Risk-bearing capability.


Acceptance of risk is subject to the principle of risk-bearing capability. As an economic safe-
guard against potential loss, the ability of the Bank to carry risks is regularly monitored
with a view to establishing risk parameters. A global limit covering all Bank risks, and
individual limits for specific risk types, are derived from this ratio. These limits are deter-
mined by the Managing Board.



Default risks.

Lending is a core activity of HSH Nordbank, and the incurring, management and limita-
tion of default risks is, therefore, a core competency. The organization of the lending busi-
ness and the methods of risk management and controlling undergo continuous updating
to meet the demands of changing market conditions and new regulations (Basle II, MaK).
Default risks are differentiated into credit, settlement, country and equity risks.
Management Report   118




                    Credit risks.


                    Credit risks comprise not only classical loan loss risks but also issuer and counterparty risks.
                    They differ from settlement risks in occurring throughout the entire term of the deal.


                    Classical credit risk refers to potential loss arising from credit risk mitigation or the default
                    of business partners in a loan transaction. Issuer risk refers to the risk of deterioration in
                    the credit rating of an issuer of securities. Counterparty risk refers to potential loss arising
                    from the default, or deterioration in the credit rating, of business partners, mainly in off-
                    balance-sheet – for example, derivatives – transactions. Counterparty risks only arise here
                    in business that has positive value for the Bank, where default would entail the need for a
                    new transaction on less advantageous market terms. Counterparty risks are calculated via
                    counterparty limits on a mark-to-market basis.


                    As at year-end 2003, the nominal value of derivatives transactions amounted to EUR 349.9
                    million (prior year EUR 279.8 million). To cover risks arising from such transactions, the
                    Bank concluded collateral and netting agreements with a number of major counterparties.
                    Irrespective of these netting agreements, replacement costs for derivatives transactions
                    amounted to EUR 2,100 million as at year-end (prior year EUR 1,888 million). Replacement
                    costs in this context refer to the potential costs of a new transaction required to restore a
                    position forfeited through default of a business partner.




                    Settlement risks.


                    HSH Nordbank distinguishes between risks associated with advance settlement and final
                    settlement. Advance settlement risks arise in the time-span between notification of an
                    advance payment and its receipt. The risk limit is calculated in relation to the sum due.


                    Settlement risks occur when the counterparty does not fulfill its obligations on schedule
                    and the Bank consequently suffers loss because of market price changes. A risk limit is
                    calculated in relation to the difference (as impacting HSH Nordbank) between the agreed
                    settlement price and the actual market value of the underlying transaction.




                    Country risks.


                    Country risks are understood as the risk of partial or total default on agreed capital pay-
                    ments – or failure to pay on time – due to restrictions in international payment trans-
                    actions, or illiquidity, or nonpayment by debtor states or guarantors. These risks are not
                    related to the creditworthiness of the debtor.
                                                                                                119




The table below provides an overview of the Bank’s foreign exposure, which totaled
EUR 87,657.1 million as at 31.12.2003 (prior year EUR 95,087.9 million). Foreign exposure is
understood as the exposure of foreign lending and trading activities, taking account of
collateral security relevant to transfer risks – for example guarantees or sureties.


Region                                                             Foreign exposure Foreign exposure
                                                                               in %             in %
                                                                              2003             2002
Western Europe                                                                65.5             67.3
– EU countries                                                                60.2             61.2
– non-EU countries                                                             5.3              6.1
Central and eastern Europe                                                     3.4              3.6
– EU accession countries 2004                                                  2.0              2.0
Africa                                                                         0.4              0.1
North America                                                                 17.2             15.6
Central and South America                                                      4.4              4.3
Middle East                                                                    0.4              0.5
Asia and the Pacific                                                           8.1              7.4
International organizations                                                    0.3              0.6
Special purpose companies                                                      0.3              0.6
Total                                                                        100.0            100.0




Equity risks.


Management of opportunities and risks related to equity investments is based on a clearly
defined, proactive shareholding strategy. Equity risks are risks of loss arising from provi-
sion of equity capital to third parties. The Bank’s equity investment controlling is continu-
ously refined as an instrument for managing these risks.


As well as the quantitative evaluation of equity risks, detailed qualitative analyses are
performed before new equity investments are incurred or existing ones changed. Within
the context of due diligence reviews, the financial, legal and management situation of
the company in question is carefully examined. Whilst these measures are appropriate to
ascertaining risks and opportunities prior to the acquisition of an equity holding, existing
investments are subject to ongoing risk assessment and management procedures. An
essential prerequisite for the early detection and management of risks is that appropriate
competencies are established in company statutes and procedural regulations, and that the
Bank is represented on the supervisory boards of key affiliates.


Ongoing assessment of the profitability of equity investments is carried out on the basis of
predefined ratios. In addition, regular reports on the business development of selected
companies, analyzed from the point of view of the Bank as shareholder, enable risk contain-
ment to be optimally effected.
Management Report   120




                    Organization of lending business.


                    A large number of qualitative standards relating to the structure and organization of
                    lending business, as determined by the MaK, were put in place by HSH Nordbank in the
                    course of 2003, or will shortly be implemented.


                    In line with MaK standards, the Bank’s structural organization takes account of the prin-
                    ciple of functional separation of market from non-market units. This principle applies –
                    right up to Managing Board level – both to the lending process itself and to credit control-
                    ling, and is of central importance to decisions about loans. The structure and organization
                    of HSH Nordbank’s credit decision process aims to ensure the lasting basis and quality of a
                    loan decision, especially from the risk angle. As an independent non-market unit, Credit
                    Risk Management bundles, coordinates and integrates risk management functions within
                    the lending process, such as credit decision-making, rating and collateral security assess-
                    ment, loan recovery controlling, loan settlement and provisioning against risks.


                    HSH Nordbank has established voting on loan applications by both market and non-market
                    units, not only as a constituent element, but as an essential prerequisite of the loan decision,
                    with different competency levels accorded to voting and decision-making.


                    In this way the decision at the competent management level is preceded by intense and
                    rigorous analysis at two further levels, each of which is independent of the other. The first
                    vote takes place in a market unit which, with its customer-oriented approach, looks at
                    wider global factors in the lending process than sales alone.


                    If the market and non-market votes disagree, voting competency passes successively to the
                    next higher level. The consistent integration of Credit Risk Management in the decision-
                    making chain ensures that the market-independent vote retains its decisive weight in this
                    eventuality as well.


                    In line with MaK’s opening clause, HSH Nordbank has opted to waive the requirement of
                    a second vote in the non-market area for specific loans not classified as risk relevant. This
                    applies to credit decisions relating to specific sectors (municipal loans, loans to domestic
                    banks covered by Gewährträgerhaftung), short-term overdrafts, and particularly loans of an
                    order that falls below predetermined risk parameters.


                    Rating plays a key role at various stages of the lending process, as well as impacting the
                    regulation of competencies. On the basis of the proposal put forward by the market unit,
                    rating is reviewed and determined by Credit Risk Management, which scrutinizes the
                    appropriateness and adequacy of the selected rating process, as well as the efficiency with
                    which it has been applied.
                                                                                               121




Inspection of collateral security is the responsibility of the Surveyors unit in Credit Risk
Management. This unit evaluates real estate offered as security, lays down standards for the
assessment of ships, airplanes, rail transportation and other movables, and scrutinizes the
criteria selected by external assessors, as well as checking their implementation.


Bank-wide risk provision management is also the responsibility of Credit Risk Management –
especially the evaluation of recommendations for forming risk provisions, the determina-
tion of provision levels, and the reporting system on the development of risk provisions.
The central Loan Recovery Controlling/Risk Provision Management unit is responsible for
identifying, calculating and processing appropriate provisions for commitments involving
risks.


Finally, identification and monitoring of problem loans and their settlement also falls
within the remit of Credit Risk Management.




Risk limitation in lending business.


Limitation of default risks in HSH Nordbank is currently implemented at various hierarchi-
cal levels. The Bank’s risk capital limit is set for the whole Bank, with the limitation of
default risks depending on a confidence level in line with Basle II. Regulatory limitation in
line with Principle 1 is located both at Bank-wide and at Competence Center level, where it
takes place within the context of equity capital allocation.


A further limitation at Bank-wide level takes place in the framework of country risk man-
agement. Management of foreign commitments is a two-stage process. On the one hand the
maximum nominal external lending volume of HSH Nordbank is limited, in line with the
Bank’s own risk policy, by means of clustered country-rating categories. On the other hand
business is fine-tuned in individual countries on the basis of risk-adjusted credit amounts.
These amounts are projected onto individual country limits derived from rating-class limits
as well as from the specific economic standing of the country concerned. The limits are set
by the Managing Board, and their utilization is continuously monitored by the Country
Management unit (located in Economic Research).


Borrower/borrower-unit limits are set within the management framework for large-scale
risks, as well as via limitation of classical lending and trading activities.


Management procedures for large-scale risks ensure that the Bank stays within the regula-
tory limits set for major risks at Bank and Bank Group levels. It enables the Bank to recog-
nize potentially excessive risks at an early stage, and implement measures to prevent them
from arising.
Management Report   122




                    Risk provisions.


                    HSH Nordbank’s risk management pays the utmost attention to default risks. The Bank’s
                    cautious business policy is demonstrated by the fact that – despite the difficult economic
                    environment of the past few years, and a resultant increase in the loss-rate in 2003 to
                    0.13 % (prior year 0.04 %) – the average rate for the past five years remains low, at 0.09 %
                    (prior year 0.07 %). Risk provisions in the form of individual value adjustments/allocations
                    to reserves as at 31.12.2003 stood at EUR 1,581 million (prior year EUR 1,493 million),
                    representing 0.75 % of the total lending volume (prior year 0.71%). General bad debt provi-
                    sions amounted to EUR 163 million (prior year EUR 123 million). In addition, the Bank
                    made further provisions in line with articles 340 f and g of the German Commercial Code.




                    Basle II.


                    As a preliminary to Basle II, the Bank is pushing ahead with a number of projects deve-
                    loping credit risk management instruments. For example, within the framework of cooper-
                    ations with other Landesbanks and with the German Savings Banks and Giro Association
                    (DSGV), complex rating procedures based on scorecard and simulation models have been
                    developed, all of which meet Basle II standards. The internal rating procedures developed
                    by the Bank cover virtually the whole of the loans portfolio that falls within the scope of
                    Bank-wide strategy, and they are already being used in market segments as well – for in-
                    stance the ship financing and leasing modules developed cooperatively under the lead of
                    HSH Nordbank. The entire shipping portfolio has already been rated with this new module.
                    The rating systems enable the Bank to comply with regulatory and economic parameters
                    for the identification and analysis of risks, and provide an essential platform for all-round
                    portfolio management.


                    In cooperation with the other members of this project, HSH Nordbank also established
                    RSU Rating Service Unit GmbH & Co. KG, tasked with the maintenance and ongoing devel-
                    opment of the rating systems. This step guarantees unified rating procedures that meet
                    the quality standards of bank regulatory bodies.


                    To ensure the consistent depiction of different portfolio segments on a single rating scale –
                    which is a prerequisite for valid comparisons – the Bank uses a master-scale that also allows
                    mapping with external ratings. The rating classification provided by the modules serves to
                    evaluate object-related and project-related as well as creditworthiness risks, and as such is
                    an essential tool in fulfilling the stipulations of Basle II and IAS, as well as for implement-
                    ing bank-wide management and loans-portfolio limitation parameters.


                    The year under review also saw the establishment for HSH Nordbank of a foundational
                    LGD/EAD (Loss Given Default/Exposure At Default) concept. The Bank had pursued the
                    development of the LGD project in tandem with the other Landesbanks, with the goal of
                    applying the LGD conceptual framework to key segments of its portfolio. This framework
                    facilitates mapping of the input data, definitions and computational regulations for LGD
                    analysis.
                                                                                             123




The Bank has already started gathering the LGD/EAD data that will form the basis for
LGD/EAD assessments in line with Basle II. The internal LGD/EAD assessment is also being
increasingly used for pricing credit risk positions. In the ship-financing segment, an
existing loan loss history covering a period of twenty years serves as a database for the LGD
assessments that have been continuously undertaken since mid 2002. A basis for the LGD
history required by Basle II has also been promptly laid in the other segments covered by
the Landesbank project, by assembling data on cases where individual value adjustment
occurred during the period from 2000 to 2002. These preparatory steps, as well as other
organizational measures, will enable HSH Nordbank to fully meet the criteria of the
“advanced internal rating based approach” determined by Basle II, which will be applied
sequentially in each segment.


HSH Nordbank is also engaged in developing consolidated and logically centralized data-
storage systems for analyzing, monitoring and reporting risks. These systems fulfill Basle
II’s stipulations on the provision of data, other information and cross-sectional functions
for the following areas: external (regulatory) reporting, disclosure, internal reporting,
validation/calibration of rating models, validation/calibration of LGD models, supervision
and internal audit, credit risk controlling, market risk controlling and operational risk
controlling. In this context, 2003 also saw the development of key elements of a system
adapted to the specific requirements of HSH Nordbank for calculating equity capital in
line with Basle II regulations.



Liquidity risks

Liquidity risk denotes the risk that current or future payment obligations cannot be ful-
filled, or cannot be wholly fulfilled or cannot be fulfilled on the expected terms. It occurs,
therefore, when refinancing can only be effected at a premium, or not at matching matur-
ities, or assets can only be sold at a discount.



Liquidity flow balance sheet.


The relevant assets and liabilities are arranged by life-span in time bands to create a balance
sheet depicting liquidity flow. This indicates the surplus or shortfall of assets in relation to
liabilities for each time band. Limits and internal ratios are imposed on open liquidity
positions across the entire Bank, as revealed in the liquidity flow balance sheet. If these are
overrun, appropriate escalation procedures are triggered. The Bank’s good market position,
both nationally and internationally, as well as its consistent diversification, ensure ability
to pay on a daily basis, as well as access to short-term liquidity. A further instrument under-
pinning liquidity is the large portfolio of liquid securities in the Bank’s liquidity reserves,
especially those eligible as collateral with the ECB. These security measures ensure that the
Bank is at all times in a position – via repo or Central Bank transactions – to furnish an
adequate volume of liquidity.
Management Report   124




                    Management and monitoring.


                    Utilization of limits, as well as compliance with the qualitative parameters set by Asset
                    Liability Management for the liquifiable securities portfolio, is monitored by Risk Control-
                    ling as a functionally and organizationally distinct unit. Conception and validation of the
                    procedures employed is the responsibility of Risk Controlling and Asset Liability Manage-
                    ment. The Managing Board is regularly informed about the Bank’s liquidity situation. In
                    the year under review limits were at no time infringed.


                    On the basis of the already determined funding requirement, Asset Liability Management
                    assumes responsibility for structural management of liquidity for the current year and
                    beyond, whilst FX/MM trading manages its operational implementation. Asset Liability
                    Management analyzes the future business plans of the market units in the light of their
                    impact on the Bank’s liquidity position, and manages liquidity and refinancing structures
                    by submitting appropriate funding details to Capital Markets.


                    HSH Nordbank’s funding strategy takes account of changes in the business environment,
                    and focuses on meeting the requirements of national and international investors. The
                    opening of the New York Branch has provided the Bank with new forms of funding in the
                    US dollar area, and has enhanced structural diversification of refinancing with regard to
                    available instruments, countries and currencies, as well as investor groups. In its role as an
                    internationally recognized issuer, HSH Nordbank increasingly places certificates of deposits,
                    medium term notes and benchmark bonds, as well as other instruments.


                    The safeguarding of liquidity on acceptable market conditions has high priority for HSH
                    Nordbank, and numerous steps were taken in the course of 2003 to further improve
                    management and monitoring instruments.


                    As well as ensuring compliance with the external regulatory framework, the ratio of
                    Liquidity Directive II serves as a further risk-control parameter. This ratio was at no time
                    infringed.
                                                                                              125




Market risks

Market risks denote losses that can potentially arise for our positions as a result of market
price changes due to changes in interest rates (interest rate risks), exchange rates (foreign
exchange risks), share prices and indexes, fund prices, and prices of precious metals, raw
materials or other tradable goods (other price risks) and their levels of volatility.




Organization of market risk management.


The Managing Board determines the methods and processes by which market risks are
measured, contained and managed, and sets an overall global limit for them. Within this
upper loss-limit, the risks deriving from all activities carrying market risk are contained
via a dynamic system of limits covering loss and risk. Daily market risk reports keep the
Managing Board and trading units continuously informed about risk levels and the actual
utilization of limits.


Market risk management takes place immediately in the trading units Capital Markets
and Portfolio Management and Investments, as well as Asset Liability Management. Selected
strategic positions carrying market risks are the responsibility of the Asset Liability Com-
mittee, composed of the CEO, the Chief Trading Officer, the Chief Risk Officer and represen-
tatives of the market units.


In accordance with MaH standards, the organizational separation of risk controlling from
risk management is ensured at all levels.




Market risk measurement methods.


The Bank’s system for measuring and managing market risks is based on the value at risk
(VaR) approach, where the market risk of a position is the maximum loss (in EUR) that,
with a given probability, will not be exceeded within a given time-span until the position is
hedged or restored to liquidity.


For the bulk of its portfolio, HSH Nordbank uses the historical simulation method to calcu-
late VaR. The calculation is based on a confidence level of 99 %, a holding period of one day
and an observation history of 250 trading days. Accordingly, VaR is the maximum expected
loss that, with a probability of 99 %, will not be exceeded when a position is held for one
trading day.


In the wake of the migration of the predecessor banks’ IT systems, a common platform
for market risk controlling is being created. Until the process is completed, risk evaluation
for some few portfolios temporarily uses a variance/covariance approach based on risk
parameters. In line with the Basle supervisory standards for banks, the calculation of these
parameters is derived from historical market fluctuations. It is likewise based on a confi-
dence level of 99 %, a holding period of one day and an observation history of 250 trading
Management Report   126




                    days. For interest rate, foreign exchange and other price risk categories, separate para-
                    meters reflecting the different impacting factors are calculated. These are updated on a
                    quarterly basis, or in line with major market movements.




                    Daily value at risk in the year under review.


                    The following chart shows the development of daily value at risk for HSH Nordbank’s
                    trading and banking book for the period July through December 2003. The VaR calculation
                    was unified in July and based on a confidence level of 99 % and a holding period of one
                    day. Market risk lay between EUR 39-78 million. Total VaR for the Bank amounted to
                    EUR 49 million as at last trading day 2003.


                    HSH Nordbank: Daily Value at Risk, July through December 2003
                    in € millions

                    80




                    70




                    60




                    50




                    40




                    30
                              7/03         8/03           9/03           10/03          11/03           12/03


                           daily
                           maximum
                           minimum
                           average




                    Until June 2003, measurement of market risks was calculated on a different basis in each
                    of the two predecessor banks. In Hamburgische Landesbank (HLB), market risk calculations
                    were based on a confidence level of 99 % and a holding period of 10 days for trading book
                    positions and 20 days for banking book positions. Landesbank Schleswig-Holstein’s risk
                    calculations were based on a confidence level of 95 % and a holding period of one day. Due
                    to the difference in method, the market risks of the two banks for the period January
                    through June 2003 cannot be directly compared. For an identical position, VaR was up to
                    six times higher in Hamburgische Landesbank than in Landesbank Schleswig-Holstein. The
                    following table shows daily value at risk for all trading and banking book positions, calcu-
                    lated according to the different methods used:
                                                                                                      127




in € millions                                      2003          2003           2003      2002      2002
                                                    HSH           HLB2)       LB Kiel3)   HLB2)   LB Kiel3)
                                             Nordbank1)    Jan. – June    Jan. – June
                                             July – Dec.
Average                                             56.3          83.8           27.1      94.3      24.4
Maximum                                             77.9          98.1           43.3     117.8      31.1
Minimum                                             39.4          72.4           15.6      71.9      19.6

1) Confidence   level 99 %, holding period 1 day.
2) Confidence   level 99 %, holding period 10/20 days.
3) Confidence   level 95 %, holding period 1 day.



The following table shows value at risk by risk categories as at year-end (trading and
banking book positions):


in € millions                                                                  2003       2002      2002
                                                                                HSH       HLB2)   LB Kiel3)
                                                                          Nordbank1)
Interest rate risks                                                              40.8      18.2      19.3
Foreign exchange risks                                                           11.7       9.4        2.7
Other price risks                                                                  4.2     50.4        2.6
Total market risks                                                               49.0      78.0      24.6

1) Confidence   level 99 %, holding period 1 day.
2) Confidence   level 99 %, holding period 10/20 days.
3) Confidence   level 95 %, holding period 1 day.



Market risks from derivatives transactions – including volatility risks resulting from options
positions – are contained in the values shown.




Backtesting.


The Bank checks its VaR estimates by means of regular backtesting. Assuming unchanged
positions, the theoretical results for the current day – on the basis of observed market
developments – are compared with the previous day’s VaR estimates based on historical
simulation. A special form of backtesting is applied to the risk parameters based on the
variance/covariance approach. Backtesting results are taken into consideration in the
ongoing development of the Bank’s value at risk methods.




Stress testing.


In line with MaH, and as a complement to daily risk measurements, the Bank performs
regular stress tests to ascertain the impact of extraordinary market shifts on market risks
of all categories. In addition, separate interest-rate stress tests are performed, simulating
the accumulated impact of standard interest rate shifts (“interest rate shocks”) across all
interest-rate risk positions.
Management Report   128




                    Regulatory requirements.


                    On the basis of the (optional) standard procedures laid down in Principle 1 of the German
                    Banking Act (KWG), HSH Nordbank determines at monthly intervals the equity capital
                    requirement for market coverage risk. During the year under review, none of the stipulated
                    limits was at any time infringed.


                    Within the context of Basle II project activities, the management functions of interest rate
                    risks in the banking book were also further extended.



                    Operational risks

                    HSH Nordbank defines operational risks (OR) as the “risk of direct or indirect loss caused
                    by the inappropriateness or failure of internal infrastructure, internal processes or staff or
                    as a result of external factors”. The definition covers legal risks as well as risk of damage to
                    reputation.


                    The identification, evaluation and management of operational risks is of key importance
                    to HSH Nordbank. We see the management of operational risks as an essential component
                    of our internal management systems, and one whose significance will continue to grow in
                    the future. The reasons for this are the dynamic banking environment, the limited possi-
                    bilities of risk transfer, and the increasing demands of rating agencies and other market
                    players.


                    At the same time, our activities focus on meeting regulatory requirements. In the context
                    of future equity capital coverage for operational risks, we are currently creating a platform
                    to provide us with the option of selecting an advanced rating approach.




                    Organization of operational risk management.


                    HSH Nordbank possesses an independent central unit for the identification, evaluation and
                    analysis of operational risks. Central Operational Risk Controlling is responsible for the
                    development and upkeep of the controlling instruments, for nurturing expertise and pro-
                    viding advice on operational risks, as well as for the promotion of an internal operational
                    risk culture throughout the entire Bank. This unit reports independently to the manage-
                    ment of the Bank that bears overall responsibility for these risks. The actual management
                    of operational risks impacting the whole Bank across the business lines is coordinated by a
                    central unit.
                                                                                            129




Central Operational Risk Controlling is backed up by a decentralized network of experts.
All business units have OR officers and assistants, who are responsible for the upkeep of
the controlling instruments and function as a link between the central controlling unit
and the decentralized organizational units. The OR officers and assistants are trained by
Central Operational Risk Controlling and ensure that decentralized know-how from the
different divisions of the Bank is represented in the controlling process.




Instruments.


Operational risks can impact all products, processes and organizational units. Therefore a
properly functioning internal operational risk culture plays a key role in utilizing the
know-how of employees for the identification of operational risks. HSH Nordbank contin-
uously promotes its internal risk culture via a number of instruments, among them bro-
chures, articles in the house magazine, management talks and a telephone hotline.


Since January 1, 2004, operational risk events have been recorded in a central database. The
introduction of this Bank-wide database was preceded – at both national and international
levels – by comprehensive training of all decentralized OR experts in the use of the database,
together with an information campaign on OR damage reporting involving all employees.
Data relating to operational risk events is gathered decentrally in the relevant organizatio-
nal units and passed directly to the central controlling unit. Central Operational Risk Con-
trolling performs data quality assurance, collates collective loss data where necessary, and
writes analyses and reports. Analysis, assessment and classification of operational risk
events at HSH Nordbank exceeds the requirements of supervisory bodies, and enables rele-
vant reporting to the Bank’s senior management.


The introduction of controlling instruments, training of decentralized experts, as well as
Bank-wide promotion of risk culture, take place in the Bank’s overseas Branches and Repre-
sentative Offices parallel to activities in the German-based units. Communication with
senior management at foreign-based units serves to integrate the specific environmental
conditions governing the activities of these units into the overall management of operatio-
nal risks.


HSH Nordbank plans to develop a self-assessment tool in the course of 2004, based on the
experience of the predecessor banks with this instrument. It will complete reporting of
operational risks to the relevant management units with submission of data on current
and future developments.


Further instruments planned include risk indicators and scenario analyses. Incorporation
of external data is also being currently developed.
Management Report   130




                    Strategic risks

                    Strategic risk denotes the danger of financial losses due to long-term decisions that are
                    erroneous or based on false assumptions. Such decisions can impact individual segments
                    or the entire banking sector. In order to limit risks of this sort, the Bank’s strategic and
                    organizational structures are subjected to regular scrutiny – apart from the annual Bank-
                    wide planning process. In 2003 a comprehensive review of Bank strategy was undertaken,
                    in which, among other aspects, the goals and orientation of each segment were system-
                    atically examined.



                    Summary and outlook

                    In the wake of the merger in 2003, the Bank sets itself the task of creating an integrated
                    risk management system based on the methods and instruments used in its two predeces-
                    sor banking houses for measuring, monitoring and managing risks. This process has been
                    successfully executed. Further Bank-wide projects devoted to the development of new
                    methods and instruments, and the upgrading of existing ones, ensure that negative impact
                    from risk is immediately detected – and response triggered – by the Bank’s risk manage-
                    ment. The Bank possesses a range of instruments that permits it to incur risks intentionally,
                    in a controlled and conscious way.


                    In 2004 we will undertake further measures to optimize our controlling and management
                    systems. The focus here will be on the ongoing implementation of the requirements of
                    Basle II and the Minimum Standards for Lending Activities of Credit Institutions (MaK). As
                    well as meeting regulatory norms, we see considerable economic benefit in the develop-
                    ment of the new risk management system. Furthermore, we are well placed to meet all
                    foreseeable future supervisory requirements.


                    In line with our strict evaluation criteria, we have set aside adequate provisions for all
                    ascertainable risks. Risk provisions (individual value adjustments and allocations to reser-
                    ves) for counterparty risks amounted to EUR 1,458 million (prior year EUR 1,355 million) as
                    at year end. During the year under review, the Bank’s liquidity ratio (Principle II in accord-
                    ance with article 11, German Banking Act) at all times exceeded the minimum requirement.
                    Liable capital as defined by the German Banking Act amounted to EUR 10,656.2 million.
                    The overall Principle I ratio stood at 10.9 % (ratio of risk-weighted assets, including market
                    risk positions, to liable capital).
131
Annual Accounts               132




                            Group Balance Sheet as at December 31, 2003

   Assets                                                    (Notes)
   in € thousands                                                                                                              1.1.2003


    1. Cash reserve
       a) cash on hand                                                                              11,404                      13,864
       b) balances with central banks                                                              328,299                     342,617
            thereof:                                                                                             339,703       356,481
            with Deutsche Bundesbank                                     289,201
                                                          prev. year     270,744


    2. Debt instruments issued by public institutions and bills
       of exchange eligible for refinancing with central banks
       a) treasury bills and discounted treasury notes as well as
            similar debt instruments issued by public institutions                                    3,587                       4,488
            thereof:
            eligible for refinancing with Deutsche Bundesbank                791
                                                          prev. year       1,196
       b) bills of exchange                                                                         16,739                        5,585
            thereof:                                                                                              20,326        10,073
            eligible for refinancing with Deutsche Bundesbank             16,739
                                                          prev. year       5,585


    3. Loans and advances to banks            (7, 8, 19–21, 24, 25)
       a) payable on demand                                                                       4,355,480                   6,696,885
       b) other loans and advances                                                               32,963,537                  39,075,007
                                                                                                               37,319,017    45,771,892


    4. Loans and advances to customers        (7, 8, 20, 21, 24, 25)                                           79,207,345    78,875,605
       thereof:
       secured by mortgages                                            17,666,713
                                                          prev. year   16,866,971
       public-sector loans                                             12,474,002
                                                          prev. year   14,525,853
       secured by ship mortgages                                       11,526,689
                                                          prev. year   12,153,335


    5. Bonds and other fixed-income
       securities                            (9, 20–22, 24, 25, 30)
       a) money market instruments
            aa) issued by public-sector issuers                                       399,421                                  512,876
               thereof:
               eligible as collateral for Deutsche Bundesbank            399,421
                                                          prev. year     507,769
            ab) issued by other issuers                                              2,484,789                                1,041,775
               thereof:                                                                           2,884,210                   1,554,651
               eligible as collateral for Deutsche Bundesbank             60,074
                                                          prev. year           –
       b) bonds
            ba) issued by public-sector issuers                                     11,370,047                               13,724,910
               thereof:
               eligible as collateral for Deutsche Bundesbank           8,983,413
                                                          prev. year   10,088,075
            bb) issued by other issuers                                             31,656,936                               33,155,831
               thereof:                                                                          43,026,983                  46,880,741
               eligible as collateral for Deutsche Bundesbank          14,047,717
                                                          prev. year   12,831,931
       c) own bonds                                                                               2,151,842                   2,026,553
            nominal amount                                              2,057,857                              48,063,035    50,461,945
                                                          prev. year    1,987,318


   To be carried forward:                                                                                     164,949,426   175,475,996
                                                                                                                                 133




                                                         (Notes)                                                           Liabilities
in € thousands                                                                                                             1.1.2003


 1. Liabilities to banks                                (31–34)
    a) payable on demand                                                                      7,892,886                   3,831,971
    b) with agreed maturities or notice periods                                              39,676,938                  51,658,955
                                                                                                           47,569,824    55,490,926


 2. Liabilities to customers                            (32–34)
    a) savings deposits
       aa) with agreed notice periods of three months                             176,611                                   122,615
       ab) with agreed notice periods of more than
           three months                                                             4,208                                      4,929
                                                                                               180,819                      127,544
    b) other liabilities
       ba) payable on demand                                                     8,046,952                                7,777,298
       bb) with agreed maturities or notice periods                             39,737,733                               37,488,049
                                                                                             47,784,685                  45,265,347
                                                                                                           47,965,504    45,392,891


 3. Certificated liabilities                            (32–34)
    a) bonds issued                                                                          52,916,366                  53,538,107
    b) other certificated liabilities                                                         8,630,663                  13,298,019
       thereof:                                                                                            61,547,029    66,836,126
       money market instruments                                     7,242,265
                                                      prev. year   13,298,019


 4. Trust liabilities                                       (35)                                             377,323        339,835
    thereof:
    trust loans                                                       56,212
                                                      prev. year      61,397


 5. Other liabilities                                       (36)                                            1,732,285     1,458,513


 6. Deferred income                                         (37)                                             398,289        357,237


 7. Provisions                                              (14)
    a) provisions for pensions and
       similar obligations                                  (38)                               373,226                      339,636
    b) tax provisions                                                                          169,266                      130,354
    c) deferred taxes                                   (16, 59)                                49,290                              –
    d) other provisions                                     (39)                               289,727                      275,514
                                                                                                             881,509        745,504


 8. Special reserve items                                   (40)                                                   –             521


 9. Subordinated debt                                       (41)                                            2,841,224     3,027,305


10. Profit participation capital                            (42)                                            1,496,565     1,496,565
    thereof:
    maturing in less than two years                                   57,776
                                                      prev. year      51,129


11. Fund for general banking risks                          (43)                                             365,000        251,641


To be carried forward:                                                                                    165,174,552   175,397,064
Annual Accounts             134




   Assets                                              (Notes)
   in € thousands                                                                                1.1.2003


   Carried forward:                                                             164,949,426   175,475,996


    6. Shares and other non-fixed-
       income securities                       (9, 22, 24, 30)                    2,828,564     2,445,159


    7. Equity investments in non-affiliated
       companies                              (12, 22, 30, 55)                     505,279       523,678
       thereof:
       in banks                                                      50,217
                                                    prev. year       52,981
       in financial services institutions                             1,000
                                                    prev. year        1,000


    8. Equity investments in affiliated
       companies                              (12, 22, 30, 55)                     920,199       752,307
       thereof:
       in banks                                                      57,771
                                                    prev. year     153,649


    9. Trust assets                                       (26)                     377,323       339,835
       thereof:
       trust loans                                                   56,212
                                                    prev. year       61,397


   10. Intangible fixed assets                                                     241,250       256,477


   11. Tangible fixed assets                           (6, 30)                     153,523       154,652


   12. Other assets                                       (27)                    1,087,636      888,191


   13. Prepaid expenses                                   (28)                     473,667       336,466


   14. Deferred taxes                                 (16, 59)                     122,946             –


                                                                 Total assets   171,659,813   181,172,761
                                                                                                                                      135




                                                         (Notes)                                                                Liabilities
in € thousands                                                                                                                  1.1.2003


Carried forward:                                                                                               165,174,552   175,397,064


12. Equity capital                                      (45–47)
    a) subscribed capital                                  (44)
       aa) share capital                                                                500,000                                  500,000
       ab) silent partnership capital                                                  4,557,717                               4,106,256
                                                                                                   5,057,717                   4,606,256
    b) capital reserves                                                                            1,164,290                   1,164,290
    c) differences arising from capital consolidation                                                     –                         1,281
    d) profit                                                                                       259,383                              –
    e) minority interests                                                                             3,871                         3,870
                                                                                                                 6,485,261     5,775,697


                                                                   Total liabilities                           171,659,813   181,172,761


 1. Contingent liabilities                                 (52)
    liabilities from guarantees
    and indemnity agreements                                                                                    14,149,357    13,999,922
 2. Other commitments
    irrevocable loan commitments                                                                                12,289,652     9,549,220
Annual Accounts               136




                            Group Statement of Income for the Period
                            January 1 to December 31, 2003

   in € thousands                                           (Notes)                                                   20021)


    1. Interest income from
       a) lending and money market transactions                                7,801,389                           7,844,478
       b) fixed-income securities and book-entry securities                    1,585,558                           1,998,564
                                                                                           9,386,947               9,843,042


    2. Interest expenses                                                                   8,016,164               8,580,702
                                                                                                       1,370,783   1,262,340


    3. Current income from
       a) shares and other non-fixed-income securities                                       89,133                 102,254
       b) equity investments in non-affiliated companies                                      7,478                  30,747
       c) equity investments in affiliated companies                                         26,608                  70,490
                                                                                                        123,219     203,491


    4. Income from profit pooling, profit transfer
        and partial profit transfer agreements                                                            5,150       1,679


    5. Commission income                                                                    309,281                 275,776


    6. Commission expenses                                                                   85,956                  78,684
                                                                                                        223,325     197,092


    7. Net income from trading activities                                                                83,219      78,704


    8. Other operating income                                 (50)                                      166,871     178,170


    9. Income from writing back
       special reserve items                                  (40)                                          521      28,700


   10. General administrative expenses
       a) personnel expenses
          aa) wages and salaries                                                268,258                             241,980
          ab) compulsory social security contributions
              as well as expenses for retirement pensions
              and for other employee benefits                                    79,405                              91,082
                                                                                            347,663                 333,062
              thereof:
              for retirement pensions                                 39,824
                                                         prev. year   52,640
       b) other administrative expenses                                                     312,201                 293,444
                                                                                                        659,864     626,506


   11. Depreciation on and value adjustments to
       intangible and tangible fixed assets                                                              72,344      46,104


   12. Other operating expenses                               (51)                                       39,270     106,067


   13. Write-downs on and value adjustments
       to loans and certain securities as well as
       allocations to loan loss provisions                                                  468,109                 598,559


   14. Income from write-ups on loans and
       certain securities and from the release of
       loan loss provisions                                                                       –                       –
                                                                                                        468,109     598,559


   To be carried forward:                                                                               733,501     572,940
                                                                                                137




in € thousands                                                 (Notes)                       20021)


Carried forward:                                                                  733,501   572,940


15. Allocations to the fund for general banking risks                             113,359    40,000


16. Write-downs on and value adjustments to equity
         investments in non-affiliated as well as affiliated
         companies and securities treated as fixed assets                    –                   –


17. Income from write-ups on equity investments
         in non-affiliated as well as affiliated companies
         and securities treated as fixed assets                           5,897             128,350
                                                                                    5,897   128,350


18. Expenses from the assumption of losses                                          4,367     7,522


19. Profit on ordinary activities                                                 621,672   653,768


20. Taxes on income                                              (59)     3,925             120,753


21. Other taxes not shown under other
         operating expenses (item 12)                                    38,943              32,052
                                                                                   42,868   152,805


22. Profits transferred under partial profit
         transfer agreements                                                      316,949   261,882


23. Net income                                                                    261,855   239,081


24. Minority interests in net income                                                2,472        –


25. Profit                                                                        259,383   239,081

1)   Pro forma figures cf. note 5
Annual Accounts               138




                            Balance Sheet of HSH Nordbank AG as at December 31, 2003

   Assets                                                    (Notes)
   in € thousands                                                                                                              1.1.2003


    1. Cash reserve
       a) cash on hand                                                                               8,522                      11,190
       b) balances with central banks                                                              293,322                     333,086
            thereof:                                                                                             301,844       344,276
            with Deutsche Bundesbank                                     287,661
                                                          prev. year     270,744


    2. Debt instruments issued by public institutions and bills
       of exchange eligible for refinancing with central banks
       a) treasury bills and discounted treasury notes as well as
            similar debt instruments issued by public institutions                                    3,587                       4,489
            thereof:
            eligible for refinancing with Deutsche Bundesbank                791
                                                          prev. year       1,196
       b) bills of exchange                                                                         16,739                        5,584
            thereof:                                                                                              20,326        10,073
            eligible for refinancing with Deutsche Bundesbank             16,739
                                                          prev. year       5,584


    3. Loans and advances to banks            (7, 8, 19–21, 24, 25)
       a) payable on demand                                                                       4,295,778                   6,715,976
       b) other loans and advances                                                               32,765,090                  39,773,198
                                                                                                               37,060,868    46,489,174


    4. Loans and advances to customers        (7, 8, 20, 21, 24, 25)                                           78,154,725    77,871,785
       thereof:
       secured by mortgages                                            17,535,247
                                                          prev. year   16,813,144
       public-sector loans                                             12,084,502
                                                          prev. year   14,106,885
       secured by ship mortgages                                       11,406,872
                                                          prev. year   12,030,627


    5. Bonds and other fixed-income
       securities                            (9, 20–22, 24, 25, 30)
       a) money market instruments
            aa) issued by public-sector issuers                                       399,421                                  512,876
               thereof:
               eligible as collateral for Deutsche Bundesbank            399,421
                                                          prev. year     507,769
            ab) issued by other issuers                                              2,484,789                                1,041,775
               thereof:                                                                           2,884,210                   1,554,651
               eligible as collateral for Deutsche Bundesbank             60,074
                                                          prev. year           –
       b) bonds
            ba) issued by public-sector issuers                                     11,007,717                               13,374,664
               thereof:
               eligible as collateral for Deutsche Bundesbank           8,744,208
                                                          prev. year   10,062,360
            bb) issued by other issuers                                             27,654,643                               29,053,507
               thereof:                                                                          38,662,360                  42,428,171
               eligible as collateral for Deutsche Bundesbank          13,186,160
                                                          prev. year   12,007,834
       c) own bonds                                                                               1,757,293                   1,996,327
            nominal amount                                              1,731,599                              43,303,863    45,979,149
                                                          prev. year    1,938,423


   To be carried forward:                                                                                     158,841,626   170,694,457
                                                                                                                                 139




                                                         (Notes)                                                           Liabilities
in € thousands                                                                                                             1.1.2003


 1. Liabilities to banks                                (31–34)
    a) payable on demand                                                                      7,866,233                   3,667,561
    b) with agreed maturities or notice periods                                              47,082,566                  57,467,183
                                                                                                           54,948,799    61,134,744


 2. Liabilities to customers                            (32–34)
    a) savings deposits
       aa) with agreed notice periods of three months                             176,610                                   122,615
       ab) with agreed notice periods of more than
           three months                                                             4,209                                      4,929
                                                                                               180,819                      127,544
    b) other liabilities
       ba) payable on demand                                                     7,848,658                                7,549,576
       bb) with agreed maturities or notice periods                             38,923,373                               37,274,271
                                                                                             46,772,031                  44,823,847
                                                                                                           46,952,850    44,951,391


 3. Certificated liabilities                            (32–34)
    a) bonds issued                                                                          41,109,998                  44,046,703
    b) other certificated liabilities                                                         8,630,663                  13,298,019
       thereof:                                                                                            49,740,661    57,344,722
       money market instruments                                     7,242,265
                                                      prev. year   13,298,019


 4. Trust liabilities                                      (35)                                              377,323        339,835
    thereof:
    trust loans                                                       56,212
                                                      prev. year      61,397


 5. Other liabilities                                      (36)                                             1,787,793     1,472,260


 6. Deferred income                                        (37)                                              367,772        335,237


 7. Provisions                                             (14)
    a) provisions for pensions and
       similar obligations                                 (38)                                367,434                      335,680
    b) tax provisions                                                                          156,213                       92,441
    c) other provisions                                    (39)                                250,573                      249,533
                                                                                                             774,220        677,654


 8. Special reserve items                                  (40)                                                    –             521


 9. Subordinated debt                                      (41)                                             2,756,376     2,952,683


10. Profit participation capital                           (42)                                             1,496,565     1,496,565
    thereof:
    maturing in less than two years                                   57,776
                                                      prev. year      51,129


11. Fund for general banking risks                         (43)                                              365,000        251,641


To be carried forward:                                                                                    159,567,359   170,957,253
Annual Accounts             140




   Assets                                              (Notes)
   in € thousands                                                                                1.1.2003


   Carried forward:                                                             158,841,626   170,694,457


    6. Shares and other non-fixed-
       income securities                       (9, 22, 24, 30)                    2,798,842     2,421,413


    7. Equity investments in non-affiliated
       companies                              (12, 22, 30, 55)                     505,279       523,678
       thereof:
       in banks                                                      50,217
                                                    prev. year       52,981
       in financial services institutions                             1,000
                                                    prev. year        1,000


    8. Equity investments in affiliated
       companies                              (12, 22, 30, 55)                    1,670,073     1,403,926
       thereof:
       in banks                                                    778,512
                                                    prev. year     789,879


    9. Trust assets                                       (26)                     377,323       339,835
       thereof:
       trust loans                                                   56,212
                                                    prev. year       61,397


   10. Intangible fixed assets                                                        7,286       10,199


   11. Tangible fixed assets                           (6, 30)                     129,500       128,284


   12. Other assets                                       (27)                    1,131,379      872,171


   13. Prepaid expenses                                   (28)                     464,851       333,836


   14. Deferred taxes                                 (16, 59)                      93,206             –


                                                                 Total assets   166,019,365   176,727,799
                                                                                                           141




                                         (Notes)                                                    Liabilities
in € thousands                                                                                      1.1.2003


Carried forward:                                                                   159,567,359   170,957,253


12. Equity capital                      (45–47)
    a) subscribed capital                  (44)
       aa) share capital                                 500,000                                     500,000
       ab) silent partnership capital                  4,557,716                                   4,106,256
                                                                       5,057,716                   4,606,256
    b) capital reserves                                                1,164,290                   1,164,290
    c) profit                                                           230,000                              –
                                                                                     6,452,006     5,770,546


                                                   Total liabilities               166,019,365   176,727,799



 1. Contingent liabilities                 (52)
    liabilities from guarantees
    and indemnity agreements                                                        25,118,361    23,014,276
 2. Other commitments
    irrevocable loan commitments                                                    12,118,319     9,395,769
Annual Accounts               142




                            Statement of Income of HSH Nordbank AG for the Period
                            January 1 to December 31, 2003

   in € thousands                                           (Notes)                                                   20021)


    1. Interest income from
       a) lending and money market transactions                                7,576,465                           7,604,895
       b) fixed-income securities and book-entry securities                    1,388,046                           1,806,001
                                                                                           8,964,511               9,410,896


    2. Interest expenses                                                                   7,715,134               8,262,374
                                                                                                       1,249,377   1,148,522


    3. Current income from
       a) shares and other non-fixed-income securities                                       89,049                 102,165
       b) equity investments in non-affiliated companies                                      7,320                  30,748
       c) equity investments in affiliated companies                                         98,735                 137,557
                                                                                                        195,104     270,470


    4. Income from profit pooling, profit transfer
       and partial profit transfer agreements                                                             5,515       2,052


    5. Commission income                                                                    246,482                 239,206


    6. Commission expenses                                                                   64,725                  66,796
                                                                                                        181,757     172,410


    7. Net income from trading activities                                                                74,685      70,503


    8. Other operating income                                 (50)                                      131,618     144,861


    9. Income from writing back
       special reserve items                                  (40)                                          521      28,700


   10. General administrative expenses
       a) personnel expenses
          aa) wages and salaries                                                232,666                             216,800
          ab) compulsory social security contributions
              as well as expenses for retirement pensions
              and other employee benefits                                        72,742                              86,934
                                                                                            305,408                 303,734
              thereof:
              for retirement pensions                                 38,629
                                                         prev. year   52,029
       b) other administrative expenses                                                     307,609                 278,434
                                                                                                        613,017     582,168


   11. Depreciation on and value adjustments to
       intangible and tangible fixed assets                                                              53,608      41,034


   12. Other operating expenses                               (51)                                       34,689     103,835


   13. Write-downs on and value adjustments to
       loans and certain securities as well as
       allocations to loan loss provisions                                                  465,219                 596,975


   14. Income from write-ups on loans and
       certain securities and from the release of
       loan loss provisions                                                                       –                       –
                                                                                                        465,219     596,975


   To be carried forward:                                                                               672,044     513,506
                                                                                    143




in € thousands                                                                    20021)


Carried forward:                                                       672,044   513,506


15. Allocations to the fund for general banking risks                  113,359    40,000


16. Write-downs on and value adjustments to equity
         investments in non-affiliated as well as affiliated
         companies and securities treated as fixed assets         –                   –


17. Income from write-ups on equity investments
         in non-affiliated as well as affiliated companies
         and securities treated as fixed assets                6,997             124,467
                                                                         6,997   124,467


18. Expenses from the assumption of losses                               4,367     7,522


19. Profit on ordinary activities                                      561,315   590,451


20. Taxes on income                                            4,547             112,752


21. Other taxes not shown under other
         operating expenses (item 12)                          9,951               1,623
                                                                        14,498   114,375


22. Profits transferred under partial profit
         transfer agreements                                           316,817   261,710


23. Net income                                                         230,000   214,366


24. Profit                                                             230,000   214,366

1)   Pro forma figures cf. note 5
Annual Accounts        144




                  Notes to the Annual Accounts and Group Annual
                  Accounts for 2003

                  General Information
                       1 HSH Nordbank AG and its shareholders.

                          HSH Nordbank AG, with registered offices in Hamburg and Kiel, was established by the
                          merger of Hamburgische Landesbank – Girozentrale –, Hamburg, and Landesbank
                          Schleswig-Holstein Girozentrale, Kiel, on June 2, 2003. For accounting and tax purposes,
                          incorporation took effect retroactively as at January 1, 2003.

                          The shares in HSH Nordbank AG are distributed as follows: The Free and Hanseatic City of
                          Hamburg holds 35.38 %, WestLB Beteiligungsholding GmbH1) (Düsseldorf) 26.86 %, the State
                          of Schleswig-Holstein 19.55 %2) and the Savings Bank and Giro Association for Schleswig-
                          Holstein 18.21%. The Free and Hanseatic City of Hamburg and WestLB Beteiligungsholding
                          GmbH notified us in the fiscal year pursuant to § 20 (1) of the German Stock Corporation
                          Act (AktG) that they own more than one quarter and 26.86 %, respectively, of the shares in
                          HSH Nordbank AG.


                       2 Deposit insurance fund, Gewährträgerhaftung (Guarantee Obligation), Anstaltslast
                         (Maintenance Obligation), eligibility of liabilities as cover funds.

                          HSH Nordbank AG is a member of the Landesbanken/Girozentralen support fund, which
                          falls under the support system of the German Savings Banks Organization. The support
                          system ensures the ongoing liquidity and solvency of all affiliated institutions.

                          Irrespective thereof, the owners of HSH Nordbank AG are responsible for the liabilities of
                          HSH Nordbank AG within the scope of Anstaltslast and Gewährträgerhaftung. The transi-
                          tional agreement reached by way of the Brussels Agreement of July 17, 2001 on the expira-
                          tion of these state liability mechanisms also applies to HSH Nordbank AG pursuant to § 2
                          of the State Treaty of February 4, 2003 between the Free and Hanseatic City of Hamburg
                          and the State of Schleswig-Holstein concerning the merger of the predecessor institutions.
                          Hence liabilities entered into up until July 18, 2001 are covered by Gewährträgerhaftung,
                          regardless of their maturities. Gewährträgerhaftung likewise covers liabilities established
                          after this date but prior to July 18, 2005 if they do not mature after December 31, 2015.
                          Anstaltslast will remain in effect until July 18, 2005 in any case.

                          As previous co-owner of Landesbank Schleswig-Holstein Girozentrale, Landesbank Baden-
                          Württemberg (Stuttgart) is liable within the scope of the Gewährträgerhaftung described
                          above for the liabilities agreed upon prior to its withdrawal effective May 23, 2003 and
                          transferred to HSH Nordbank AG by way of the merger.

                          Uncovered debt instruments issued by HSH Nordbank AG are eligible as cover funds in
                          terms of the German Mortgage Banking Act to the full extent based on Gewährträger-
                          haftung. This also applies to all uncovered debt instruments issued by the predecessor
                          institutions, Hamburgische Landesbank – Girozentrale – and Landesbank Schleswig-
                          Holstein Girozentrale.


                       3 Adherence to the principles of the German Banking Act (KWG).

                          HSH Nordbank AG adhered to the regulations in force in the Federal Republic of Germany
                          on regulatory capital and the liquidity of financial institutions in accordance with the
                          German Banking Act at all times during the fiscal year. The same applies to the regulatory
                          Group in accordance with § 10a of the German Banking Act.



                  1)   WestLB Beteiligungsholding GmbH, Düsseldorf, is a wholly owned subsidiary of WestLB AG, Düsseldorf and Münster, which is a wholly owned subsidiary
                       of NRW.BANK (formerly Landesbank Nordrhein-Westfalen), institution under public law, Düsseldorf and Münster.
                  2)   Including 2.69% of GVB Gesellschaft zur Verwaltung und Finanzierung von Beteiligungen des Landes Schleswig-Holstein mbH, Lockstedt; a wholly
                       owned subsidiary of the State of Schleswig-Holstein.
                                                                                             145




4 Applied accounting standards.

  We have prepared the annual accounts of HSH Nordbank AG and the Group as at Decem-
  ber 31, 2003 in accordance with the provisions of the German Commercial Code (HGB),
  the Stock Corporation Act (AktG) and the Ordinance Regarding Accounting for Banks and
  Financial Services Institutions (RechKredV). In addition, we have heeded the pertinent
  statements of the Institute of Independent Auditors in Germany (IDW) and, in the Group
  accounts, the relevant German Accounting Standards (DRS) as well.


5 Notes on the presentation of the merger in the accounts.

  For the purpose of enabling a comparison of the economic situation of HSH Nordbank AG
  and the HSH Nordbank Group over a specific period of time, we have adjusted the previous
  year's figures pursuant to § 265 (2) sentence 3 and § 294 (2) sentence 2, respectively, of the
  German Commercial Code to appear as though the merger had already taken place as at
  January 1, 2002. To this end, all assets and liabilities as well as all income and expenses of
  sold subsidiaries or of detached legally dependent central departments of the predecessor
  institutions were taken out of the calculation. In the case of Hamburgische Landesbank –
  Girozentrale –, this involved Hamburgische Wohnungsbaukreditanstalt and in the case
  of Landesbank Schleswig-Holstein Girozentrale, Investitionsbank Schleswig-Holstein and
  Landes-Bausparkasse Schleswig-Holstein. Except for HSH Nordbank Hypo Aktiengesellschaft,
  which was only acquired on September 1, 2003, the comparative figures were thus calcu-
  lated on the basis of the companies consolidated in the Group accounts as at December
  31, 2003 (cf. note 17).

  All assets and liabilities of the predecessor institutions which existed on the effective date
  of the merger (January 1, 2003) were acquired by amalgamation through the formation of
  HSH Nordbank AG. For this reason, we have specified the opening balance sheet carrying
  amounts of HSH Nordbank AG and the HSH Nordbank Group as at January 1, 2003 as the
  basis for comparison of the balance sheet items. We have calculated the comparative fig-
  ures for the statement of income based on the above-specified group of consolidated com-
  panies on a pro forma basis. Certain comparative figures which were not part of the balance
  sheet or the statement of income were not included in the accounts, as due to the merger
  their calculation would have caused undue cost or effort or they cannot be meaningfully
  interpreted from an economic point of view.
Annual Accounts            146




                        Accounting and Valuation Principles
                           6 Fixed assets.

                             Fixed assets are valued at acquisition or production cost. For depreciable assets we calculate
                             systematic amortization in line with the options provided by tax law, whereby the follow-
                             ing periods of useful life are taken as a basis:

      Fixed assets group                                                                                     Useful life in years
      Buildings                                                                                                               50
      Fixtures in third-party buildings                                                                                    3–7
      Computer equipment                                                                                                       4
      Other plant and office equipment                                                                                    3 – 13


                             In the case of tangible fixed assets, we carry out unscheduled depreciation to the extent
                             that a permanent loss in value has occurred. Should the reasons for this no longer be
                             applicable, write-ups up to a maximum amount of the (amortized) acquisition or produc-
                             tion cost are undertaken.

                             Any acquisition or production cost subsequently incurred is capitalized and depreciated
                             systematically. Expenditure on the maintenance of fixed assets is recognized as expense on
                             an accrual basis.

                             Tangible fixed assets that are regarded as low-value items pursuant to tax regulations are
                             written off in full in the year of acquisition.


                           7 Loans and advances.

                             We state loans and advances to banks and loans and advances to customers (asset items 3
                             and 4) at the nominal value or cost of acquisition, respectively. Premiums or discounts are
                             transferred to prepaid expenses or deferred income and written back over the term of the
                             loan or the shorter fixed-interest period. Pro rata interest is treated on an accrual basis and
                             reported in the corresponding line item. We heed the strict lower of cost or market prin-
                             ciple by strictly applying our risk management principles, which are described in the
                             following.


                           8 Value adjustments to loans and allocations to loan loss provisions.

                             In order to provide for possible loan losses, we make value adjustments in accordance with
                             the following principles; these adjustments are set off against the corresponding balance
                             sheet items. Even if no longer mentioned in the following, this occurs in the case of off-
                             balance sheet transactions by setting up provisions. In order to ensure that our risk man-
                             agement covers all identifiable credit and country risks, it is carried out in three steps.

                             1. Our credit exposures are monitored on an ongoing basis in accordance with strict
                                guidelines. We make individual value adjustments in the amount of the anticipated loss
                                for all credit risks identifiable when examined individually. This anticipated loss results
                                from the amount of the receivable less repayments still expected less the anticipated
                                liquidation value of the collateral after deduction of liquidation costs.

                             2. In addition, we set up general bad country debt provisions for exposures relating to
                                borrowers domiciled in countries rated as non-investment grade countries. The value
                                adjustment rates are differentiated in accordance with rating grades. For countries in
                                default, we increase the value adjustment rates appropriate to the particular situation.
                                In determining the basis for calculation we take individual value adjustments already
                                made as well as risk-reducing factors (such as valuable collateral outside of the country
                                of domicile or the short terms of receivables) adequately into account.
                                                                                                                      147




                       3. Finally, we make general bad debt provisions for the remaining exposures which are
                          not accounted for in the first two steps but involve latent risks by applying a risk factor.
                          The risk factor represents the ratio of actual loan defaults (depletion of individual value
                          adjustments plus direct write-offs less payments on loans written off) of the past five
                          years to the risk exposure. The calculation procedure is in accordance with the tax-
                          approved procedure pursuant to the bulletin of October 1, 1994 by the German Federal
                          Ministry of Finance.

                       All three types of risk provisioning are reversed to the extent that the credit risk no longer
                       applies. In this manner, we comply with tax law and Commercial Code provisions to
                       reverse impairments.


                    9 Securities.

                       For measurement purposes, our securities portfolio (asset items 5 and 6) is divided up into
                       the investment portfolio, the liquidity reserve and the trading portfolio in accordance with
                       the intended use and pursuant to Commercial Code provisions. The following table shows
                       the division of the three portfolios as a percentage on the basis of carrying amounts:

in %                                                                                    Bank                        Group
                                                                   31 Dec. 2003   1 Jan. 2003   31 Dec. 2003   1 Jan. 2003
Investment portfolio                                                      45.3          46.1           43.4          43.4
Liquidity reserve                                                         33.3          41.9           37.2          45.6
Trading portfolio                                                         21.4          12.0           19.4          11.0


                       Given that securities held in the investment portfolio are intended for long-term invest-
                       ment, we value the greater portion in accordance with the diluted lower of cost or market
                       principle. The securities in question are accordingly stated at their acquisition cost in
                       the case of temporary decreases in value. We thus avoid reflecting performance volatility,
                       which would not be economically justified based on the short-term nature of the value
                       fluctuations. In the case of permanent — i.e. usually induced by credit standing — value
                       reductions, we write down the security to the lower stock exchange price, market price or
                       attributable value. Mainly for the purpose of compensatory measurement of hedged items,
                       we value the remaining investment portfolio at the strict lower of cost or market principle
                       (cf. also note 11).

                       We value the securities held in the liquidity reserve and the trading portfolio in accor-
                       dance with the strict lower of cost or market principle. We accordingly state the value of
                       the securities at the lower of acquisition cost or stock exchange price, market price or attri-
                       butable value, irrespective of the duration of the reduction in value.

                       The portfolios in the trading portfolio are set up in accordance with our risk management
                       principles. The securities and derivatives positions in these portfolios are valued at stock
                       exchange or market prices. In the process, we set off measurement gains up to the amount
                       of the corresponding losses (compensatory measurement with due regard to the recogni-
                       tion-of-loss principle).

                       Interest resulting from the entire securities holdings is reported as interest income, whereby
                       pro rata interest is treated on an accrual basis. The measurement results and price gains
                       realized are allocated to the financial investment results (items 16 or 17 in the statement of
                       income) for securities in the investment portfolio, to the credit risk results (items 13 or 14
                       in the statement of income) for securities in the liquidity reserve, and to the trading results
                       (item 7 in the statement of income) for securities in the trading portfolio. Dividends and
                       other payouts are reported under current income from shares and other non-fixed-income
                       securities.
Annual Accounts    148




                  10 Derivative financial instruments.

                     Derivative financial instruments are recognized and measured in accordance with the
                     accounting principles of commercial law, whereby particular consideration is given to the
                     principles of realization and recognition-of-loss. We have linked the conclusion of internal
                     transactions to compliance with uniformly determined conditions. In particular, the terms
                     must be in line with the market conditions.

                     Purchased or written options are carried on the balance sheet as other assets or other
                     liabilities in the amount of the premium paid. If necessary, we set up provisions to heed
                     the lower of cost or market principle and the recognition-of-loss principle. The option pre-
                     mium only affects net income upon sale or close-out, otherwise upon expiry or exercise.

                     To the extent that a margin system is applied in the case of innovative financial instru-
                     ments, the margin payments are capitalized. We meet the lower of cost or market principle
                     by setting up provisions when appropriate.

                     If derivative financial instruments are allocated to the trading portfolio in accordance with
                     their intended use, we report unrealized and realized gains or losses — if applicable within
                     the scope of portfolio measurement — under net income from trading activities. Derivative
                     financial instruments allocated to the investment portfolio or liquidity reserve are gener-
                     ally used for hedging purposes (cf. note 11).


                  11 Hedge accounting.

                     Aside from the compensatory measurement in the trading portfolio (cf. note 9), we form
                     accounting groups in accordance with generally accepted principles for securities and
                     derivatives that are to be regarded as a unit in terms of risks and rewards. If the strict
                     requirements for this have been fulfilled, we value the corresponding hedged items and
                     hedging items as offsetting transactions, taking into account the recognition-of-loss prin-
                     ciple. If perfect hedging relationships exist with regard to the interest rate risk, we waive
                     an interest-induced measurement of the corresponding hedged items and hedging items.
                     The reporting of profits from hedging operations follows the corresponding reporting of
                     the hedged items.


                  12 Equity investments in affiliated and non-affiliated companies.

                     We carry equity investments in affiliated and non-affiliated companies at the cost of
                     acquisition or at the lower attributable value. Our major investment interests are stated in
                     No. 55 of the notes. For more information on these investments, the list we have compiled
                     pursuant to § 285 No. 11 and § 313 (4) of the German Commercial Code may be examined
                     at the Local Courts of Hamburg and Kiel.


                  13 Liabilities.

                     Liabilities are stated at the amount repayable. Premiums and discounts are shown as
                     deferred income and prepaid expenses, respectively, and are released over the term of
                     maturity.


                  14 Provisions.

                     Provisions for pension obligations have been calculated on the basis of actuarial principles
                     based on the life tables of Dr. Klaus Heubeck and are accounted for pursuant to German
                     GAAP.
                                                                                              149




   Other provisions are stated in the amount of the expected call on the provisions according
   to reasonable commercial assessment, whereby we take positive profit contributions –
   such as the anticipated realization value of collateral – adequately into account. We do not
   undertake discounting in principle. We exercise the option for setting up provisions for
   operating expenses (§ 249 (2) of the German Commercial Code) only for restructuring
   expenditure in connection with the merger.


15 Currency translation.

   Currency translation occurs pursuant to § 340h of the German Commercial Code as well as
   to statement BFA 3/95 of the expert banking committee of the German Institute of Inde-
   pendent Auditors (IDW).

   Assets and liabilities in foreign currency are converted at the middle spot rate as at Decem-
   ber 31, 2003. Outstanding spot transactions are converted at the spot rate on balance sheet
   date, and the outstanding forward transactions at the forward rate on the balance sheet
   date. The differences arising from the currency translation of hedged balance sheet items
   and the related hedging transactions are netted out and reported under other assets.

   The balance sheet items and the outstanding positions in foreign currencies allocated to
   current assets are, in principle, classified as “specially hedged” in each currency pursuant
   to § 340h (2) sentence 2 of the German Commercial Code and are accordingly valued. To
   this end, expenses and income from the currency translation are reported in the statement
   of income pursuant to § 340h (2) sentences 1 and 2 of the Commercial Code.

   We convert annual accounts that have been prepared in foreign currencies at the corre-
   sponding middle rate of the ECB on the balance sheet date.


16 Deferred taxes.

   We calculate deferred taxes in the individual accounts in accordance with the provisions
   of § 274 of the German Commercial Code. In the process, we net out tax assets against tax
   liabilities.

   In the Group accounts, we report and measure deferred taxes pursuant to German Account-
   ing Standard No. 10. Thus deferred tax assets and liabilities arise from the different carry-
   ing amounts for assets and liabilities in the commercial and tax balance sheets and are
   computed accordingly. We state deferred taxes on differences that will be reversed in future
   fiscal years. Deferred tax assets are calculated on the basis of these temporary differences as
   well as on tax losses carried forward, provided realization is sufficiently probable. When
   computing deferred taxes, we utilize the tax rates that are expected to apply upon reversal
   of the temporary differences. As prescribed, we do not discount.
Annual Accounts              150




                           Consolidated Companies and Consolidation Principles
                            17 Consolidated companies.

                                The scope of consolidation changed during the period under review (cf. note 5) as follows.
                                HSH Nordbank Hypo Aktiengesellschaft, Hamburg (formerly: HKB Hypotheken- und Kom-
                                munalkredit-Bank Aktiengesellschaft, Hallbergmoos), which was acquired on September 1,
                                2003 for EUR 84.5 million, has been included in the Group statement of income on a pro
                                rata basis pursuant to German Accounting Standard No. 4.

                                Due to their secondary significance for the economic position of the HSH Nordbank Group,
                                160 affiliated companies were not included in the scope of consolidation pursuant to
                                § 296 (2) of the German Commercial Code, resulting in the following group of consolidated
                                companies:

      No. Name and registered office of the consolidated company                                                  Share in capital
                                                                                                                             in %
           1. HSH Nordbank (Guernsey) Ltd., Guernsey 1)                                                                   100.00
           2. HSH Nordbank Hypo Aktiengesellschaft, Hamburg 2)                                                            100.00
           3. HSH Nordbank International S. A., Luxembourg 3)                                                             100.00
           4. Nobis Société des Banques Privées S. A., Luxembourg 4)                                                       80.00
           5. International Fund Services & Asset Management S. A., Luxembourg 4)                                          51.61
           6. HSH N Composits GmbH, Kiel 5)                                                                               100.00
           7. HSH N Funding I, Grand Cayman 6)                                                                             58.26
           8. HSH N Finance (Guernsey) Ltd., Guernsey 7)                                                                  100.00
           9. METONO GmbH, Hamburg                                                                                        100.00
      10. PLUS BANK AG, Hamburg 8)                                                                                        100.00
      11. Spielbank SH GmbH, Kiel                                                                                         100.00
      12. Spielbank SH GmbH & Co. Casino Flensburg KG, Flensburg                                                           90.00
      13. Spielbank SH GmbH & Co. Casino Kiel KG, Kiel                                                                    100.00
      14. Spielbank SH GmbH & Co. Casino Lübeck-Travemünde KG, Lübeck-Travemünde                                          100.00
      15. Spielbank SH GmbH & Co. Casino Stadtzentrum Schenefeld KG, Schenefeld                                           100.00
      16. Spielbank SH GmbH & Co. Casino Westerland auf Sylt KG, Westerland/Sylt                                           90.00

      1) Formerly: Hamburgische Landesbank (Guernsey) Ltd., Guernsey.
      2) Formerly: HKB Hypotheken- und Kommunalkredit-Bank Aktiengesellschaft, Hallbergmoos.
      3) Formerly: Landesbank Schleswig-Holstein International S. A., Luxembourg.
      4) As subsidiary of 3.

      5) Formerly: LB Kiel Nord Capital GmbH, Kiel.

      6) Formerly: LB Kiel Funding I, Grand Cayman; as subsidiary of 6.

      7) Formerly: Hamburgische LB Finance (Guernsey) Ltd., Guernsey.

      8) Including shares held indirectly via 9.




                            18 Consolidation principles.

                                The individual accounts of the companies included in the Group accounts were prepared
                                in accordance with uniform accounting and valuation principles of HSH Nordbank AG.
                                Only in the case of the Spielbank Group did the reporting date vary (September 30, 2003).
                                Insofar as necessary, the annual accounts were adapted to the forms applicable for
                                financial institutions.

                                With regard to capital consolidation, the carrying amounts of the holdings were set off
                                against equity in accordance with the revaluation method pursuant to § 301 (1) No. 2 of
                                the German Commercial Code. The effective date for first-time consolidation is the date of
                                acquisition (§ 301 (2) of the Commercial Code). The resulting asset-side differences are re-
                                ported as goodwill under intangible fixed assets and are systematically depreciated over a
                                period of 20 years. Liabilities-side differences from first-time consolidation (negative good-
                                will) have been accounted for in the income statement in the period under review.

                                All claims and liabilities as well as expenses and income between the companies included
                                in the Group accounts have been consolidated.
                                                                                                                 151




                  Notes to the Balance Sheet
                  Notes to assets.

                  19 Claims on associated Savings Banks.

                     Loans and advances to banks (item 3) include claims on associated Savings Banks:

in € thousands                                                                     Bank                        Group
                                                              31 Dec. 2003   1 Jan. 2003   31 Dec. 2003   1 Jan. 2003
                                                                6,830,640     6,571,941      6,834,913     6,594,151



                  20 Affiliated companies.

                     The following items include both securitized and unsecuritized claims on affiliated
                     companies.

in € thousands                                                                     Bank                        Group
                                                              31 Dec. 2003   1 Jan. 2003   31 Dec. 2003   1 Jan. 2003
3. Loans and advances to banks                                   2,889,767    2,676,904          5,845       301,121
4. Loans and advances to customers                               1,395,942      757,573        647,225       752,799
5. Bonds and other fixed-income securities
       b) bonds                                                   292,836        91,814         13,397        91,814



                  21 Non-affiliated companies.

                     Claims on non-affiliated companies in which an equity investment is held are included in
                     the following items:

in € thousands                                                                     Bank                        Group
                                                              31 Dec. 2003   1 Jan. 2003   31 Dec. 2003   1 Jan. 2003
3. Loans and advances to banks                                     37,726       906,578         37,726       906,578
4. Loans and advances to customers                                318,715       469,233        318,715       469,233
5. Bonds and other fixed-income securities
       b) bonds                                                   317,026       170,976        317,026       170,976
Annual Accounts          152




                        22 Notes to securities.

                            We have portrayed additional information on securities in the order of the balance sheet
                            items:

      in € thousands                                                                              Bank                        Group
                                                                             31 Dec. 2003   1 Jan. 2003   31 Dec. 2003   1 Jan. 2003
      5. Bonds and other fixed-income securities
             a) money market instruments
                eligible and listed on a stock exchange                          792,073       550,822        792,073       550,822
                eligible, but not listed on a stock exchange                   2,092,137     1,003,829      2,092,137     1,003,829
             b) bonds
                valued using the diluted lower of cost or market principle     7,715,457     5,177,931      8,099,098     5,177,931
                ba) issued by public-sector issuers
                    eligible and listed on a stock exchange                    9,703,300    11,865,866     10,050,916    12,223,354
                    eligible, but not listed on a stock exchange               1,304,417     1,508,693      1,319,131     1,508,693
                bb) issued by other issuers
                    eligible and listed on a stock exchange                   23,683,853    24,597,836     26,963,391    28,394,997
                    eligible, but not listed on a stock exchange               3,970,790     4,468,485      4,693,546     4,719,343
             c) own bonds
                eligible and listed on a stock exchange                        1,590,226     1,939,330      1,831,280     1,952,055
                eligible, but not listed on a stock exchange                     167,067        56,997        320,563        74,498
      6. Shares and other non-fixed income securities
             valued using the diluted lower of cost or market principle        1,166,218       542,160      1,169,718       542,160
             eligible and listed on a stock exchange                              94,196        96,812        116,560       100,362
             eligible, but not listed on a stock exchange                      1,007,443       533,163      1,014,800       546,019
      7. Equity investments in non-affiliated companies
             eligible and listed on a stock exchange                               6,646        44,753          6,646        44,753
      8. Equity investments in affiliated companies
             eligible and listed on a stock exchange                              32,200        37,000         32,200        37,000
             eligible, but not listed on a stock exchange                         43,497        52,978         43,497        52,978



                        23 Repurchase agreements.

                            As a borrower in repurchase agreements, we have sold assets in the following amounts
                            (carrying amounts) and simultaneously contracted to repurchase the same assets at a later
                            date. The assets continue to be carried on our balance sheet; the consideration received in
                            return for the assets is reported under the corresponding liability item.

      in € thousands                                                                              Bank                        Group
                                                                             31 Dec. 2003   1 Jan. 2003   31 Dec. 2003   1 Jan. 2003
      Carrying amounts of the assets sold under repurchase agreements            871,685       987,226        871,685       987,226



                        24 Subordinated assets.

                            The Bank reports subordinated assets under the following items:

      in € thousands                                                                              Bank                        Group
                                                                             31 Dec. 2003   1 Jan. 2003   31 Dec. 2003   1 Jan. 2003
      3. Loans and advances to banks
             b) other loans and advances                                         119,214        70,693        119,214        70,693
      4. Loans and advances to customers                                          22,861         2,184         22,861         2,184
      5. Bonds and other fixed-income securities
             b) bonds                                                            482,960       690,413        584,911       774,768
      6. Shares and other non-fixed-income securities                             28,203        27,569         28,203        27,569
                                                                                                                     153




                    25 Residual maturities.

                       The balance sheet items below are classified in accordance with their residual maturities
                       as follows:

in € thousands                                                                         Bank                        Group
                                                                 31 Dec. 2003    1 Jan. 2003   31 Dec. 2003   1 Jan. 2003
3. Loans and advances to banks
       b) other loans and advances
          – up to 3 months                                         12,673,123    18,286,002     11,204,250    16,770,405
          – more than 3 months up to 1 year                         3,952,499     6,298,277      4,443,137     6,491,022
          – more than 1 year up to 5 years                         11,521,299     9,611,864     12,507,844    10,175,430
          – more than 5 years                                       4,618,169     5,577,056      4,808,307     5,638,149
4. Loans and advances to customers
          – up to 3 months                                         13,596,948    12,134,449     13,564,780    11,908,672
          – more than 3 months up to 1 year                         7,417,828     8,293,004      7,571,464     8,439,177
          – more than 1 year up to 5 years                         25,805,982    23,641,549     26,285,644    24,057,771
          – more than 5 years                                      30,049,987    31,535,822     30,501,476    32,203,023
          – with undetermined maturity                              1,283,980     2,266,960      1,283,980     2,266,960
5. Bonds and other fixed-income securities
          – due in the following year                              13,273,248    10,704,054     14,333,549    11,854,826



                    26 Trust assets.

                       Trust assets concern the following balance sheet items:

in € thousands                                                                         Bank                        Group
                                                                 31 Dec. 2003    1 Jan. 2003   31 Dec. 2003   1 Jan. 2003
3. Loans and advances to banks                                           990            990            990           990
4. Loans and advances to customers                                   376,333        338,845        376,333       338,845



                    27 Other assets.

                       The major components of other assets are:

in € thousands                                                                         Bank                        Group
                                                                 31 Dec. 2003    1 Jan. 2003   31 Dec. 2003   1 Jan. 2003
Adjustment items for currency translation                            417,682        229,032        392,550       235,046
Claims on fiscal authorities                                         228,511         64,940        254,220        93,471
Claims under options and interest limitation agreements              131,907        103,583        131,907       103,583
Temporarily acquired land and buildings                               31,386        193,416         31,386       193,416
Claims under profit transfer agreements and on dividends              57,319            189         57,319           189



                    28 Prepaid expenses.

                       The major items comprising prepaid expenses are:

in € thousands                                                                         Bank                        Group
                                                                 31 Dec. 2003    1 Jan. 2003   31 Dec. 2003   1 Jan. 2003
Discounts (liabilities and bonds issued)                             300,554        146,124        301,741       146,124
Premiums (claims)                                                     15,061         20,707         20,258        20,707
Annual Accounts                   154




                                29 Assets pledged as collateral.

                                     The following items were assigned or pledged to third parties to secure the Bank’s/Group’s
                                     own liabilities.

      in € thousands                                                                                                                     Bank                                      Group
                                                                                                         31 Dec. 2003           1 Jan. 2003         31 Dec. 2003          1 Jan. 2003
      Assignment of claims for loans raised                                                                    520,419                291,401             520,419                291,401
      Own securities pledged to central banks                                                              12,607,677           13,990,342           12,607,677           13,990,342



                                30 Statement of changes in fixed assets.

      Bank
      in € thousands                                             Acquisition        Additions/        Disposals/         Accumu-         Deprecia-           Carrying            Carrying
                                                                  cost as at        Write-ups         Reclassifi-            lated            tion           amount              amount
                                                                                                         cations        deprecia-                               as at               as at
                                                                                                                        tion as at
                                                                        1 Jan.            2003              2003           31 Dec.             2003           31 Dec.             1 Jan.
                                                                         2003                                                2003                               2003               2003
      Securities 1)                                             21,697,123 11,187,066 12,361,908                           25,910            14,284 20,496,371 21,697,123
      Equity investments in non-affiliated
      companies                                                      523,678            37,263           53,617              2,045            2,045          505,279             523,678
      Equity investments in affiliated
      companies                                                   1,403,926           378,212           105,765              6,300            6,300       1,670,073         1,403,926
      Land and buildings                                              45,119              1,224                53            1,108            1,108           45,182              45,119
                 thereof: used by the Bank                              44,519             1,224                53            1,090             1,090           44,600             44,519

      Plant and office equipment                                      83,165            58,699             9,446           48,100            49,590           84,318              83,165
      Intangible fixed assets2)                                       10,199                  18               22            2,909            2,909             7,286             10,199
      Total                                                     23,763,210 11,662,482 12,530,811                           86,372            76,236 22,808,509 23,763,210

      1)   Accumulated depreciation on securities includes the general bad debt country provisions attributable thereto (cf. note 8).
      2)   The intangible fixed assets reported represent goodwill acquired within the scope of a business operation, which is being systematically depreciated over 10 years.




      Group
      in € thousands                                             Acquisition        Additions/        Disposals/         Accumu-         Deprecia-           Carrying            Carrying
                                                                  cost as at        Write-ups         Reclassifi-            lated            tion           amount              amount
                                                                                                         cations        deprecia-                               as at               as at
                                                                                                                        tion as at
                                                                        1 Jan.            2003              2003           31 Dec.             2003           31 Dec.             1 Jan.
                                                                         2003                                                2003                               2003               2003
      Securities                                                22,725,219 11,398,069 12,406,717                           27,313            14,284 21,689,258 22,336,360
      Equity investments in non-affiliated
      companies                                                      523,678            37,263           53,617              2,045            2,045          505,279             523,678
      Equity investments in affiliated
      companies                                                      752,307          293,701           119,509              6,300            6,300          920,199             752,307
      Land and buildings                                              63,670              1,244                53            4,337            1,521           60,524              60,854
                 thereof: used by the Group                             62,329             1,224                53            4,208             1,480           59,293             59,602

      Plant and office equipment                                     107,945            63,268           10,976            67,239            55,599           92,998              93,798
      Intangible fixed assets 1)                                     256,477                  18               22          15,223            15,223         241,250              256,477
      Total                                                     24,429,296 11,793,563 12,590,894                         122,457             94,972 23,509,508 24,023,474

      1)   The intangible fixed assets of the Group contain asset-side differences from first-time consolidation totalling EUR 246,278 thousand, which we are depreciating systematically
           over a period of 20 years.
                                                                                                                         155




                    Notes to Liabilities.

                    31 Liabilities to associated Savings Banks.

                          The item “liabilities to banks” includes liabilities to associated Savings Banks:

in € thousands                                                                             Bank                        Group
                                                                      31 Dec. 2003   1 Jan. 2003   31 Dec. 2003   1 Jan. 2003
                                                                        1,718,661     1,622,808      1,748,796     1,622,952



                     32 Affiliated companies.

                          Liabilities to affiliated companies are included in the balance sheet items below:

in € thousands                                                                             Bank                        Group
                                                                      31 Dec. 2003   1 Jan. 2003   31 Dec. 2003   1 Jan. 2003
1. Liabilities to banks                                                12,278,308    10,962,320          9,010       384,584
2. Liabilities to customers                                               877,126        42,883        155,831        41,312
3. Certificated liabilities
        b) bonds issued                                                    15,357        12,368               –          493



                     33 Non-affiliated companies.

                          Liabilities to non-affiliated companies in which an equity investment is held are included
                          in the following items:

in € thousands                                                                             Bank                        Group
                                                                      31 Dec. 2003   1 Jan. 2003   31 Dec. 2003   1 Jan. 2003
1. Liabilities to banks                                                   493,368     1,734,837        493,368     1,734,837
2. Liabilities to customers                                                 7,832        85,769          7,832        85,769
3. Certificated liabilities
        b) bonds issued                                                         –       114,468               –      114,468
Annual Accounts             156




                           34 Residual maturities.

                                The balance sheet items below are classified in accordance with their residual maturities
                                as follows:

      in € thousands                                                                           Bank                        Group
                                                                          31 Dec. 2003   1 Jan. 2003   31 Dec. 2003   1 Jan. 2003
      1. Liabilities to banks
              b) with agreed maturities or notice periods
                   – up to 3 months                                        11,917,303    26,363,044     15,129,944    28,667,230
                   – more than 3 months up to 1 year                        6,539,490     5,827,266      6,942,757     5,976,120
                   – more than 1 year up to 5 years                        17,466,416    15,341,435     10,413,942     9,296,664
                   – more than 5 years                                     11,159,357     9,935,438      7,190,295     7,718,940
      2. Liabilities to customers
              ab) savings deposits with agreed notice periods
                  of more than 3 months
                   – up to 3 months                                               514           742            514           742
                   – more than 3 months up to 1 year                            1,323         1,481           1,323        1,481
                   – more than 1 year up to 5 years                             2,255         2,598           2,255        2,598
                   – more than 5 years                                            117           108            117           108
              bb) other liabilities with agreed maturities
                  or notice periods
                   – up to 3 months                                        14,731,271    14,157,790     15,670,396    14,983,437
                   – more than 3 months up to 1 year                        1,232,451     1,341,589        604,103       683,658
                   – more than 1 year up to 5 years                         6,197,106     6,876,697      6,330,131     6,912,584
                   – more than 5 years                                     16,762,545    14,898,195     17,133,104    14,908,370
      3. Certificated liabilities
              a) bonds issued
                   – due in the following year                             10,515,817    12,896,971     11,737,955    14,208,138
              b) other certificated liabilities
                   – up to 3 months                                         5,414,108    10,011,215      5,414,108    10,011,215
                   – more than 3 months up to 1 year                        3,137,400     3,286,804      3,137,400     3,286,804
                   – more than 1 year up to 5 years                            79,155             –          79,155            –



                           35 Trust liabilities.

                                Trust liabilities are distributed among the following balance sheet items:

      in € thousands                                                                           Bank                        Group
                                                                          31 Dec. 2003   1 Jan. 2003   31 Dec. 2003   1 Jan. 2003
      1. Liabilities to banks                                                   2,998           992           2,998          992
      2. Liabilities to customers                                             374,325       338,843        374,325       338,843



                           36 Other liabilities.

                                The major components of this item are as follows:

      in € thousands                                                                           Bank                        Group
                                                                          31 Dec. 2003   1 Jan. 2003   31 Dec. 2003   1 Jan. 2003
      Security deposits for assumed debts                                   1,010,434       961,416      1,010,434       961,416
      Pro rata interest on subordinated debt, profit
      participation capital and silent partnership capital                    307,635       312,694        237,605       281,864
      Premiums received from written options
      and interest limitation agreements                                       97,769        81,536          97,769       81,536
                                                                                                                       157




                     37 Deferred income.


                        Deferred income includes:

in € thousands                                                                           Bank                        Group
                                                                    31 Dec. 2003   1 Jan. 2003   31 Dec. 2003   1 Jan. 2003
Discounts (claims)                                                      165,363       189,909        166,851       189,909
Premiums (bonds issued)                                                  13,057        14,791         13,663        14,791



                     38 Provisions for pensions and similar obligations.

                        Provisions for pensions and similar obligations are made up of the following items:

in € thousands                                                                           Bank                        Group
                                                                    31 Dec. 2003   1 Jan. 2003   31 Dec. 2003   1 Jan. 2003
Provisions for retirement payments                                      328,782       328,544        334,574       332,502
Provisions for early retirement payments                                 38,653         7,135         38,653         7,135


                        The increase in provisions for early retirement payments is almost exclusively attributable
                        to the early retirement arrangements made within the scope of the merger.


                     39 Other provisions.

                        The major components of other provisions are as follows:

in € thousands                                                                                          Bank         Group
Provisions concerning lending activities                                                             133,006       146,134
Provisions for personnel expenditure                                                                  56,116        58,570
Provisions for securities transactions and financial derivatives                                      10,710        14,410
Provisions for restructuring expenses                                                                 17,683        18,702



                     40 Special reserve item.

                        Based on the Tax Relief Act of 1999/2000/2002, the predecessor institutions effected addi-
                        tions to balance sheet assets pursuant to § 280 (1) of the German Commercial Code. Such
                        additions were allocated in part to the special reserve item in accordance with § 273 of
                        the German Commercial Code in conjunction with § 52 (16) of the German Income Tax
                        Act (EStG). The residual amount of EUR 521 thousand, which was not written back in the
                        preceding years and was taken over in the opening balance sheet, was released in full
                        through profit and loss in 2003. No further reserves exist.


                     41 Subordinated debt.

                        The carrying amounts of the subordinated debts have developed as follows:

in € thousands                                                                           Bank                        Group
                                                                    31 Dec. 2003   1 Jan. 2003   31 Dec. 2003   1 Jan. 2003
Carrying amounts                                                      2,756,376     2,952,683      2,841,224     3,027,305


                        The conditions for subordinated debts have been arranged to fundamentally fulfil the
                        requirements of § 10 (5a) of the German Banking Act on inclusion as regulatory capital.
                        The subordinated debts were issued as loans against borrowers’ notes as well as registered
                        or bearer bonds in CAD, DEM, EUR, GBP, JPY, LUF, NLG, PTE and USD. The original maturi-
                        ties range from eight years to 40 years. The interest rates range from 2.4 % p.a. to 8.6 % p. a.
                        No single item exceeds 10 % of the total subordinated debts. Subordinated debts in the
                        amount of EUR 277,302 thousand (EUR 312,317 thousand in the Group) will mature in less
Annual Accounts         158




                          than two years. Interest expenses from subordinated debts amounted to EUR 117,732
                          (previous year: 113,781) thousand in the Bank and EUR 121,481 (previous year: 117,940)
                          thousand in the Group.


                       42 Profit participation capital.

                          Profit participation capital was issued exclusively by HSH Nordbank AG. The claims of the
                          holders of the profit participation certificates to repayment of the capital rank below other
                          claims. The other conditions of the profit participation capital were also stipulated as regu-
                          latory capital pursuant to the requirements of § 10 (5) of the German Banking Act.

                          A total volume of EUR 1,438,787 thousand was recognized as regulatory capital pursuant
                          to § 10 (5) of the German Banking Act.

                          The following bearer participation certificates were issued:

      Year of issue                                                                Nominal amount    Interest rate      Maturity
                                                                                    in € thousands      in % p.a.
      1993                                                                                 51,129            6.25          2005
      1993                                                                                 34,257            6.25          2005
      1994                                                                                 76,694            6.25          2005
      1994                                                                                 65,957            6.25          2005
      1994                                                                                 51,129            6.15          2004
      1994                                                                                 76,694            6.25          2007


                          In addition, we issued 171 registered participation certificates with a total volume of
                          EUR 1,140,706 thousand, whose original maturities range from eight to 13 years. The inter-
                          est rates range from 5.1% p. a. to 7.6 % p.a.

                          Expenses for profit participation capital amounted to a total of EUR 76,919 thousand in the
                          fiscal year. No other profit participation certificates were issued in the fiscal year.


                       43 Fund for general banking risks.

                          We allocated additional financial resources of EUR 113,359 thousand to the fund for
                          general banking risks in the fiscal year. The fund thus developed as shown below:

      in € thousands                                                                         Bank                         Group
                                                                     31 Dec. 2003     1 Jan. 2003    31 Dec. 2003    1 Jan. 2003
                                                                         365,000          251,641        365,000        251,641



                       44 Subscribed capital.

                          Subscribed capital is made up of the share capital of HSH Nordbank AG and, pursuant to
                          § 25 (1) of the Ordinance Regarding Accounting for Banks, the silent partnership capital.
                          The share capital amounts to EUR 500,000 thousand and is divided into 50,000,000 no-par
                          registered shares with a theoretical par value of EUR 10.00 each. 5,000,000 of these shares
                          are preferred shares with no voting rights. On the balance sheet date, no authorized capi-
                          tal existed and no subscription rights to shares in HSH Nordbank AG were outstanding.
                                                                                                                                                                  159




                         45 Statement of changes in Group equity.

                               The statement of changes in Group equity reflects the development of Group equity and
                               the total Group’s results pursuant to German Accounting Standard No. 7. We have removed
                               irrelevant columns and rows from the sample statement included in German Accounting
                               Standard No. 7. Due to the new formation of HSH Nordbank in the fiscal year, we have dis-
                               pensed with stating the previous years’ figures.

                               None of the Group companies holds equity investments in HSH Nordbank AG (treasury
                               shares), which means that the actual equity of the parent company corresponds with the
                               amounts carried in the Group balance sheet. The issuance of shares in the fiscal year repre-
                               sents a procurement of silent partnership capital. The other changes essentially involve
                               foreign currency influences on silent partnership capital held in USD.

                               Pursuant to the profit appropriation proposal of the Managing Board and the Supervisory
                               Board, a dividend payment of EUR 65,000 thousand is to be made from the profit of HSH
                               Nordbank AG in the amount of EUR 230,000 thousand. The profit remaining with the sub-
                               sidiaries will be retained.

 in € millions                                                                                      Parent company                              Minority       Group
                                                                                                                                            shareholders       equity
                                          Subscribed            Capital              Group    Accumu-         Equity as        Minority           Equity
                                                    1)
                                            capital            reserves              equity       lated      shown on           capital
                                                                                    earned       other          Group
                                                                                                 Group         balance
                                                                                                results          sheet
 Balance as at 1 Jan. 2003                     4,606.2         1,164.3                   –         1.3        5,771.8                 3.9           3.9       5,775.7
 Issuance of shares                             500.0                  –                 –           –            500.0                 –             –         500.0
 Other changes                                  -48.5                  –                 –        -1.3            -49.8              –2.5          –2.5         -52.3
        Consolidated net income for the year          –                 –             259.4          –             259.4              2.5            2.5         261.9

 Total Group results                                 –                 –             259.4           –            259.4               2.5           2.5         261.9
 Balance as at 31 Dec. 2003                    5,057.7         1,164.3               259.4           –        6,481.4                 3.9           3.9       6,485.3

1)   Subscribed capital comprised the following on 31 Dec. 2003:
     – Share capital attributable to ordinary shares:    € 450.0 million
     – Share capital attributable to preferred shares:     € 50.0 million
     – Silent partnership capital:                     € 4,557.7 million




                         46 Regulatory capital.

                               The regulatory capital pursuant to the German Banking Act is made up of the following:

in € millions                                                                                                                Bank                           Regulatory
                                                                                                                                                                Group
                                                                                               31 Dec. 2003         1 Jan. 2003        31 Dec. 2003        1 Jan. 2003
Subscribed capital 1)                                                                                5,007.7               4,556.3            5,007.7         4,556.3
Capital reserves                                                                                     1,164.3               1,164.3            1,164.3         1,164.3
Difference arising from capital consolidation                                                                –                  –               -54.1           -41.3
Fund for general banking risks 2)                                                                         251.6             251.6               251.6           251.6
Intangible fixed assets                                                                                   -10.2             -10.2               -53.8           -11.9
Tier I capital                                                                                      6,413.4                5,962.0            6,315.7         5,919.0
Tier II capital 3)                                                                                   4,310.7               4,382.8            4,406.4         4,461.4
Equity investments in non-affiliated companies in
accordance with § 10 (6) sentence 1 No. 1 and
No. 4 of the German Banking Act                                                                           -44.9              -8.7               -44.9           -37.9
Regulatory capital                                                                                 10,679.2            10,336.1              10,677.2        10,342.5

1)
   Not including preferred shares pursuant to § 10 (2a) No. 2 of the Banking Act.
2) Not including amounts added as per 31 Dec. 2003, cf. note 43.
3) Including preferred shares pursuant to § 10 (2b) No. 2 of the Banking Act.
Annual Accounts                   160




                                47 Tier I capital ratio and solvency ratio.

                                     The Tier I capital ratio, which expresses the relationship between Tier I capital (cf. note 46)
                                     and the risk-weighted assets to be included, the solvency ratio, which results from the quo-
                                     tient of regulatory capital and risk-weighted assets plus the market price risk positions, and
                                     the corresponding BIS ratios have developed as follows:

      in %                                                                                                               Tier I                     Solvency
                                                                                                                 capital ratio                          ratio
                                                                                                  31 Dec. 2003   1 Jan. 2003      31 Dec. 2003   1 Jan. 2003
      Principle I ratios 1) of HSH Nordbank AG                                                            6.9              6.3           10.9           10.4
      Principle I ratios 1) of the regulatory Group                                                       6.6              6.0           10.6            9.7
      BIS ratios 1) of the regulatory Group                                                               6.3              5.6           10.2            9.4

      1)   Prior to approval of the annual accounts and the resolution on profit appropriation.




                                48 Statement of coverage.

                                     The mortgage bonds and public-sector bonds issued by the predecessor institutions and
                                     HSH Nordbank Hypo Aktiengesellschaft are covered as follows:

      in € thousands                                                                                                     Bank                         Group
                                                                                                  31 Dec. 2003   1 Jan. 2003      31 Dec. 2003   1 Jan. 2003
      Coverage for mortgage bonds
      Bearer bonds                                                                                  4,122,266     4,351,861         4,182,266     4,351,861
      Registered bonds                                                                              4,400,314     4,851,056         4,400,314     4,851,056
      Registered bonds used as collateral                                                             725,740        718,258          725,740       718,258
      Redeemed and terminated bonds                                                                         –             100               –           100
      Bonds to be covered                                                                           9,248,320     9,921,275         9,308,320     9,921,275
      Loans and advances to banks                                                                           –                –              –              –
      Loans and advances to customers                                                              11,888,025    12,163,465        11,956,230    12,163,465
      Securities issued by public-sector issuers/substitute cover                                           –        650,000                –       650,000
      Covering assets                                                                              11,888,025    12,813,465        11,956,230    12,813,465
      Surplus coverage                                                                              2,639,705     2,892,190         2,647,910     2,892,190


      Coverage for public-sector bonds
      Public-sector bearer bonds                                                                    8,037,065    10,612,881         8,452,028    10,612,881
      Registered public-sector bonds                                                               10,130,138    10,203,862        10,710,264    10,203,862
      Registered public-sector bonds used as collateral                                               189,718     1,432,521           189,718     1,432,521
      Redeemed and terminated bonds                                                                    26,604                –         26,604              –
      Bonds to be covered                                                                          18,383,525    22,249,264        19,378,614    22,249,264
      Loans and advances to banks                                                                   9,352,915    11,969,628        10,127,349    11,969,628
      Loans and advances to customers                                                              10,354,866    11,990,233        10,354,866    11,990,233
      Securities issued by public-sector issuers/substitute cover                                           –                –        216,903              –
      Covering assets                                                                              19,707,781    23,959,861        20,699,118    23,959,861
      Surplus coverage                                                                              1,324,256     1,710,597         1,320,504     1,710,597
                                                                                                                       161




                          Notes to the Statement of Income
                           49 Breakdown of income by geographical market.

                                Components of the statement of income of HSH Nordbank AG and the HSH Nordbank
                                Group are broken down by geographical market in the following:

Bank
in € thousands                                                            2003                                       20021)
                                       Germany       Rest of      Asia      USA    Germany       Rest of      Asia     USA
                                                     Europe                                      Europe
Interest income                       7,365,585   1,371,901    210,063   16,962   7,536,940   1,612,500    261,416      40
Current income from shares
and other non-fixed-income
securities, equity invest-
ments in non-affiliated and
affiliated companies                   163,421      31,683          –        –     245,132      25,338          –        –
Income from profit
pooling, profit transfer
and partial profit transfer
agreements                               5,515            –         –        –       2,052            –         –        –
Commission income                      161,432      65,793       4,904   14,353    175,506      58,249       5,408      43
Net income from trading
activities                              66,975        6,581       106     1,023     64,134        5,883       486        –
Other operating income                 115,191      15,843        584        –     125,890      16,662       2,309       –



Group
in € thousands                                                            2003                                       20021)
                                       Germany       Rest of      Asia      USA    Germany       Rest of      Asia     USA
                                                     Europe                                      Europe
Interest income                       7,371,505   1,788,658    210,055   16,729   7,527,264   2,054,322    261,416      40
Current income from shares
and other non-fixed-income
securities, equity invest-
ments in non-affiliated and
affiliated companies                   121,467        1,752         –        –     203,110          381         –        –
Income from profit
pooling, profit transfer
and partial profit transfer
agreements                               5,150            –         –        –       1,679            –         –        –
Commission income                      196,307      93,717       4,904   14,353    195,157      75,168       5,408      43
Net income from trading
activities                              66,975      15,115        106     1,023     64,135      14,083        486        –
Other operating income                 157,838       8,448        585        –     171,557       3,832       2,781       –

1)   Pro forma figures cf. note 5.
Annual Accounts              162




                            50 Other operating income.

                                 Other operating income mainly comprised the following items in the fiscal year:

      in € thousands                                                                                              Bank          Group
                                                                                                                  2003           2003
      Tax refunds                                                                                               61,099         65,050
      Refunds of expenses by third parties                                                                      24,923         25,360
      Rental income                                                                                              9,288          9,288
      Current income from computer services                                                                      4,734          4,734



                            51 Other operating expenses.

                                 Other operating expenses include restructuring expenses of EUR 21,191 (Group: 21,760)
                                 thousand, chiefly due to the merger.




                           Other Notes

                            52 Contingent liabilities.

                                 The majority of contingent liabilities are financial guarantees furnished in the scope of our
                                 lending activities, with the exception of the written credit default swaps that are shown
                                 separately below.

      in € thousands                                                                              Bank                          Group
                                                                            31 Dec. 2003    1 Jan. 2003    31 Dec. 2003    1 Jan. 2003
      Liabilities from guarantees and indemnity agreements                   25,118,361     23,041,276      14,149,377     13,999,922
         thereof: written credit default swaps                                  7,107,020      7,679,409       7,107,020      7,679,409




                            53 Other financial obligations.

                                 In addition to the contingent liabilities (cf. note 52) and other obligations reported below
                                 the balance sheet line, shareholder liabilities of EUR 335.4 million exist for outstanding
                                 payments on subscribed capital that have not yet been called in. With respect to the stake
                                 in Liquiditäts-Konsortialbank GmbH, Frankfurt am Main, there is an additional funding
                                 obligation and a limited contingent liability for the additional funding obligations of other
                                 shareholders.

                                 Further obligations result from long-term leasing agreements with companies outside the
                                 Group for land and buildings used for commercial purposes.


                            54 Letters of comfort.

                                 Except in the case of political risk, HSH Nordbank ensures that the following foreign affiliat-
                                 ed companies are able to meet their obligations: HSH Nordbank (Guernsey) Ltd., Guernsey;
                                 HSH Nordbank International S. A., Luxembourg; HSH N Finance B.V. i.L., Amsterdam. More-
                                 over, the Bank has declared its intention to provide HSH Nordbank Hypo Aktiengesellschaft,
                                 Hamburg, and PLUS BANK AG, Hamburg, which are included in the Group accounts, with
                                 unlimited funding to enable them to always be in a position to meet all of their financial
                                 obligations in a timely fashion.
                                                                                                                                              163




                       55 Notes to shareholdings.

                            In addition to the consolidated subsidiaries (cf. note 17), we have provided an overview of
                            our other major shareholdings below. We have compiled a complete listing of our share-
                            holdings pursuant to § 285 No. 11 and § 313 (4) of the German Commercial Code in a sepa-
                            rate schedule, which is held at the Local Courts of Hamburg and Kiel.

No. Name and registered office                                                                                    Share        Equity       Profit
                                                                                                              in capital         in €         in €
                                                                                                                      %    thousands    thousands
     1. Aegean Baltic Bank S. A., Kifissia                                                                       51.00        18,000             2)

     2. AGV Anlagen- und Grundstücksvermietungsgesellschaft mbH & Co. KG, Wiesbaden                              89.99             2)            2)

     3. AGV Anlagen-, Grundstücksvermietungs- und Geschäftsführungsgesellschaft mbH,
        Wiesbaden                                                                                                90.00             2)            2)

     4. DGAG Deutsche Grundvermögen GmbH, Kiel                                                                   37.97      156,086        11,441
     5. GEHAG GmbH, Berlin                                                                                       85.00        72,040     103,860
     6. Gudme Raaschou Asset Management Holding A/S, Copenhagen                                                 100.00         4,171          816
     7. Gudme Raaschou Bankaktieselskab A/S, Copenhagen                                                         100.00        12,190          511
     8. HGA Beteiligungs AG, Hamburg                                                                            100.00      106,324        10,350
     9. HGA Capital Grundbesitz und Anlage GmbH, Hamburg                                                        100.00         2,076          1), 2)

10. HGA Management Investor und Anlage GmbH, Hamburg                                                            100.00           500          1), 2)

11. HSH N Corporate Finance GmbH, Hamburg                                                                       100.00         6,102        1,052
12. HSH N Immobilien Development GmbH, Hamburg                                                                  100.00           500          1), 2)

13. HSH N Immobilien Holding GmbH, Hamburg                                                                      100.00         6,584          177
14. HSH N Invest GmbH, Kiel                                                                                     100,00             2)            2)

15. HSH N Kapital GmbH, Kiel                                                                                    100.00             2)            2)

16. HSH N Nordic Finance AB, Stockholm                                                                          100.00             2)            2)

17. Lamatos GmbH, Hamburg                                                                                       100.00         2,387       16,937
18. LB Immo Invest GmbH, Hamburg                                                                                 50.00         5,002          1), 2)

19. PCA Corporate Finance Oy, Helsinki                                                                           65.07         3,174          339
20. Timene Beteiligungsgesellschaft GmbH & Co. KG, Hamburg                                                      100.00             3)            3)

21. W. Jacobsen Aktiengesellschaft, Kiel                                                                         92.51         9,902        1,124

1) A controlling and profit transfer agreement has been concluded with the company.
2) Not published in accordance with § 286 (3) sentence 1 and § 313 (2) No. 4 of the German Commercial Code.
3) Company newly formed, no information available as yet.




HSH Nordbank AG is a partner with unlimited liability in the following company (§ 285 No. 11a of the German Commercial Code):
GLB GmbH & Co. OHG, Frankfurt am Main


In addition, the Bank has the following shareholdings in accordance with § 340a (4) No. 2 of the German Commercial Code:
Bürgschaftsbank Schleswig-Holstein GmbH, Kiel
Bürgschaftsgemeinschaft Hamburg GmbH, Hamburg
Deutsche Real Estate Aktiengesellschaft, Berlin
FinanzIT GmbH, Hannover



                       56 Related party disclosures.

                            We qualify as related legal persons for the companies specified in the list of shareholdings
                            (cf. notes 12 and 55). Given that in connection with the consolidation, we have eliminated
                            transactions with related companies included in the Group accounts, we have not stated
                            them separately pursuant to German Accounting Standard No. 11.13. We have reported
                            on the remaining transactions with related companies in notes 20, 21, 32, and 33 to the
                            accounts. We always conclude transactions with related companies under fair market
                            conditions.

                            Related natural persons are limited to the members of the corporate bodies of HSH Nord-
                            bank AG. The relevant information can be found in notes 63, 67, and 68 to the accounts.
Annual Accounts           164




                         57 Group cash flow statement.

                             The cash flow statement indicates the changes in the Group’s financial resources and cash
                             flows. The flow of cash is broken down into operating activities, investment activities and
                             financing activities and is shown in close conformity with German Accounting Standard
                             No. 2-10 (“Cash Flow Statement of Financial Institutions”). The composition of financial
                             resources corresponds with the balance sheet item “cash reserves”. We have not included
                             comparative figures, given that their calculation would have caused undue cost or effort.

      in € millions                                                                                                 2003
       1. Net income for the period                                                                                 261.9
          Reconciliation:
       2. Write-downs, value adjustments and appreciation on loans and advances,
          tangible and financial fixed assets                                                                       659.5
          Write-downs on tangible and financial fixed assets, allocations to value adjustments         894.7
          Write-ups on tangible and financial fixed assets, reversal of value adjustments             -235.2
       3. Changes in provisions                                                                                     136.0
       4. Other non-cash expenses/income                                                                             -0.5
       5. Profit/loss from the disposal of tangible and financial fixed assets                                      -72.6
          Losses                                                                                       117.7
          Profits                                                                                     -190.3
       6. Other adjustments                                                                                      -1,118.0
       7. Subtotal                                                                                                 -133.7
       8. Changes in loans and advances                                                                           8,121.1
          a) to banks                                                                                8,452.9
          b) to customers                                                                             -331.7
       9. Changes in securities (excl. financial fixed assets)                                                   -4,063.3
      10. Changes in other assets from operating activities                                                        -459.6
      11. Changes in liabilities                                                                                 -5,348.5
          a) to banks                                                                               -7,921.1
          b) to customers                                                                            2,572.6
      12. Changes in certificated liabilities                                                                    -5,289.1
      13. Changes in other liabilities from operating activities                                                    270.6
      14. Interest and dividends received                                                                         9,515.3
      15. Interest paid                                                                                          -8,016.2
      16. Income tax paid                                                                                          -117.8
      17. Cash flow from operating activities                                                                    -5,521.1
      18. Inflow from the disposal of                                                                            28,736.9
          a) financial fixed assets                                                                 28,632.8
          b) tangible fixed assets                                                                     104.1
      19. Outflow for investments in                                                                            -23,274.8
          a) financial fixed assets                                                                -23,114.7
          b) tangible fixed assets                                                                    -160.1
      20. Cash flow from investment activities                                                                    5,462.1
      21. Inflow from equity contributions                                                                          500.0
      22. Distributions from equity                                                                                -316.9
          a) dividends paid                                                                              0.0
          b) partial profit transfer                                                                  -316.9
      23. Changes in funds from other capital                                                                      -142.4
      24. Cash flow from financing activities                                                                        40.7
      25.   Financial resources at the beginning of the period                                                      356.5
      26.   Cash flow from operating activities                                                                  -5,521.1
      27.   Cash flow from investment activities                                                                  5,462.1
      28.   Cash flow from financing activities                                                                      40.7
      29.   Changes in financial resources due to consolidation                                                       1.5
      30. Financial resources at the end of the period                                                              339.7
                                                                                              165




58 Group segment report.

  The Group segment report presents the segments as independent companies with their
  own profit and cost responsibility. The segment results are based on internal controlling
  data and the external data from the 2003 annual accounts. The segment report was pre-
  pared in accordance with German Accounting Standard No. 3-10 (“Segment Reporting of
  Financial Institutions”). We did not include comparative figures, given that their calcula-
  tion would have caused undue cost or effort.

  1. Segmentation by business (primary reporting format).

    We have created the following segments for the primary reporting format:

    • Shipping clients
      This segment encompasses business with shipping clients, including the correspond-
      ing client business of our branches in the US and in Asia as well as of our subsidiary in
      Luxembourg, HSH Nordbank International S. A.

    • Real estate clients
      The “real estate clients” segment involves business with real estate clients, including the
      corresponding client business of our branches in Scandinavia, Great Britain, and Asia.

    • Corporate clients
      The corporate client business of the entire Group is consolidated in this segment. It
      thus also includes the corresponding client business of our branch and subsidiary in
      Luxembourg as well as the branches in Scandinavia, Great Britain, Asia, and the US.

    • Special corporate and institutional clients
      This segment comprises business with transport clients, which operate chiefly in the
      areas of aircraft, railways and infrastructure, as well as the business with leasing
      clients, savings banks and banks, including the corresponding client business of our
      branch and subsidiary in Luxembourg as well as the branches in Great Britain, Scan-
      dinavia, Asia, and the US.

    • Private clients
      This segment involves the business with private clients, including the corresponding
      client business of the branches in Asia.

    • Financial markets
      This segment contains Group-wide trading and refinancing activities as well as port-
      folio management and liquidity management.

    • Other/consolidation
      In this category, we report the business of subsidiaries that cannot be assigned to the
      segments, central expenses and income and the results of the consolidation.

  Income and expenses were generally assigned to the segments in accordance with the
  principle of causation. Net interest income has been calculated in accordance with the
  market interest rate method; the net income from trading activities of the “financial
  markets” segment was measured at market prices. Risk provisions reflect the values shown
  in the statement of income and have been assigned to the segments in which they origi-
  nated.

  Risk positions and the resulting regulatory capital requirements are stated in accordance
  with banking supervisory regulations. The amounts reported represent annual averages. In
  the process, a ratio of 10 % for regulatory capital and 6 % for tier I capital was assumed. The
  return on tier I capital is the ratio of operating profit after risk provisioning to the average
  tier I capital employed. The cost-income ratio equals the ratio between administrative
  expenses and net income (net interest income, net commission income, net income from
  trading and the balance of other operating income and expenses). The reported return on
  equity equals the quotient of net income before taxes, plus allocations to the fund for
  general banking risks in accordance with § 340g of the German Commercial Code, and the
  average on-balance-sheet equity less profit and plus the fund for general banking risks in
  accordance with § 340g of the German Commercial Code.
Annual Accounts            166




                                 The segment assets comprise the balance sheet assets of the respective segment on the
                                 reporting date.



      in € millions                      Shipping          Real    Corporate          Special    Private   Financial       Other/       Group
                                           clients      estate        clients      corporate     clients    markets    consolida-
                                                        clients                           and                                 tion
                                                                                institutional
                                                                                       clients
        Net interest income                 194.8       205.0         218.4            190.9       45.9       341.1        303.0       1,499.1
      + Net commission income                61.1        44.5          65.7             85.0       14.9       -20.6        -27.3         223.3
      + Net income from trading                 –           –             –                –          –       177.3        -94.1          83.2
      + Balance of other
        operating
        income/expenses                         –              –           –                –         –           –          88.7         88.7
      = Total income                        255.9       249.5         284.1            275.9       60.8       497.8        270.3       1,894.3
      - Personnel expenses                   11.5        17.0          27.3             19.0       16.0        41.5        215.4         347.7
      - Other administrative expenses        15.2        19.2          26.5             33.0       13.9        46.9        229.8         384.5
      = Operating profit
        before risk provisions
        and valuation                       229.2       213.3         230.3            223.9       30.9       409.4       -174.9       1,162.1
      - Risk provisions
        and valuation                        -1.1       119.9           53.3            92.7       -1.0        58.8        256.8        579.4
      = Operating profit
        after risk provisions
        and valuation                       230.3         93.4        177.0            131.2       31.9       350.6       -431.7        582.7

      in € millions
      Average risk positions            17,832.3     17,477.4      15,764.6        15,021.1      2,726.2   22,654.6     11,805.8     103,282.0
      Average employed
      regulatory capital                 1,783.2      1,747.7       1,576.5         1,502.1       272.6     2,265.5      1,180.6      10,328.2
      Average employed
      tier I capital                     1,069.9      1,048.6         945.9            901.3      163.6     1,359.3        708.3       6,196.9

      in %
      Return on tier I capital               21.5          8.9          18.7            14.5       19.5        25.8                        9.4
      Cost-income ratio                      10.4         14.5          18.9            18.9       49.2        17.8             –         38.7
      Return on equity                          –            –             –               –          –           –             –         11.0

      in € millions
      Segment assets                    17,482.3     25,315.8      16,015.6        68,942.3      3,238.4   35,991.6      4,673.8     171,659.8



                                 2. Segmentation by geographical market (secondary reporting format).

                                   We have formed the segments Germany, rest of Europe, Asia and USA for the secondary
                                   reporting format. The geographical breakdown is based on the domicile of the respective
                                   Group company or branch. The definitions of the reporting variables correspond to those
                                   of the primary reporting format.

      in € millions                                                Germany            Rest of       Asia        USA        Other/       Group
                                                                                      Europe                           consolida-
                                                                                                                              tion
      Operating profit before risk provisions and valuation           940.9            286.3       27.6        12.2       -104.9       1,162.1
      - Risk provisions and valuation                                 504.2             73.8        0.7        -1.1          1.8         579.4
      = Operating profit after risk provisions and valuation          436.7            212.5       26.9        13.3       -106.7        582.7

      in € millions
      Risk positions                                               73,747.8        21,777.6      5,395.0    1,080.2      1,281.4     103,282.0
      Average employed regulatory capital                           7,374.8         2,177.8        539.5      108.0        128.1      10,328.2

      in %
      Cost-income ratio                                                 41.1            19.6       28.5        59.5             –         38.7
                                                                                                                 167




                  59 Deferred taxes.

                      For the individual accounts of HSH Nordbank AG, we have calculated deferred tax assets of
                      EUR 117,895 thousand pursuant to § 274 of the German Commercial Code (cf. also note 16).
                      The deferred tax liabilities of EUR 24,689 thousand were netted against the deferred tax
                      assets.

                      We report deferred taxes in the Group accounts pursuant to German Accounting Standard
                      No. 10. The taxes on income shown in item No. 20 of the Group statement of income are
                      composed of the following:

in € thousands                                                                                                  2003
Actual taxes on income                                                                                      107,837
       thereof: attributable to ordinary income                                               107,837
Result from tax accruals and deferrals                                                                     -103,912
       thereof: attributable to ordinary income                                              -103,912
Taxes on income                                                                                                 3,925


                      In the fiscal year under review, deferred taxes of EUR 23,709 thousand were allocated to
                      equity pursuant to German Accounting Standard No. 10 without effect on profit. The
                      expected tax expenditure may be reconciled with the reported tax expenditure as follows,
                      taking into account the tax rates applicable in Germany. In doing so, we have assumed
                      taxes on Group income at a rate of 41.24 %.

in € thousands                                                                                                  2003
Net income for the Group before taxes                                                                       265,780
Expected taxes on income                                                                                    109,608
Tax effects:
Taxes due to non-deductible expenses                                                                        159,573
Tax reduction due to tax-free income                                                                       -203,464
Taxes for previous years                                                                                     42,815
Value adjustments not allowed for tax purposes                                                              -45,373
Effects of losses carried forward                                                                           -37,698
Tax rate variations                                                                                         -16,828
Tax rate changes                                                                                             -3,073
Other effects                                                                                                -1,635
Taxes on income                                                                                                 3,925


                      For the purpose of calculating the effects of deferred taxes, the corporate tax rate of 25%
                      applicable in Germany in 2004, plus the solidarity surcharge of 1.375% as well as an effec-
                      tive trade tax rate of 18.44% was used for the domestic companies. Due to the solidarity
                      surcharge for flood victims, the corporate tax rate applicable in 2003 amounted to 26.5%.

                      The deferred tax assets reported in asset item No. 14 of the Group balance sheet can be
                      allocated to the following items:

in € thousands                                                                                          31 Dec. 2003
Asset items:
Tax losses carried forward                                                                                    5,051
Loans and advances to customers                                                                              43,843
Securities                                                                                                    5,726
Tangible fixed assets                                                                                           168
Other assets                                                                                                    745
Liability items:
Provisions                                                                                                   21,093
Fund for general banking risks (§ 340g of the German Commercial Code)                                        45,613
Other liabilities                                                                                               706
Deferred taxes                                                                                              122,945
Annual Accounts           168




                            The deferred tax liabilities reported in liability item No. 7c) of the Group balance sheet
                            were created for the following asset items:

      in € thousands                                                                                                 31 Dec. 2003
      Securities                                                                                                          15,576
      Equity investments in non-affiliated and affiliated companies                                                       25,992
      Intangible fixed assets                                                                                              2,186
      Tangible fixed assets                                                                                                5,484
      Other assets                                                                                                            52
      Deferred taxes                                                                                                      49,290



                         60 Notes to foreign currencies.

                            The assets and liabilities carried in foreign currencies are classified as follows into main
                            currencies and other currencies as at the reporting date:

                                                                                            Bank                           Group
      Assets                                                            in € thousands        %     in € thousands             %
      USD                                                                  30,001,257       59.8       30,933,184           59.0
      GBP                                                                   5,430,548       10.8        6,245,650           11.9
      CHF                                                                   4,505,281        9.0        4,653,639            8.9
      JPY                                                                   3,555,184        7.1        3,738,876            7.1
      Other currencies                                                      6,677,178       13.3        6,891,705           13.1
      Total                                                                50,169,448      100.0       52,463,054          100.0


                                                                                            Bank                           Group
      Liabilities                                                       in € thousands        %     in € thousands             %
      USD                                                                  22,510,115       50.4       24,583,285           52.3
      GBP                                                                   7,408,453       16.6        7,225,062           15.4
      CHF                                                                   4,590,490       10.3        4,738,818           10.1
      JPY                                                                   3,675,627        8.2        3,826,045            8.1
      Other currencies                                                      6,451,341       14.5        6,670,793           14.2
      Total                                                                44,636,026      100.0       47,044,003          100.0



                         61 Disclosures on derivative financial instruments.

                            In the following, we present HSH Nordbank Group’s business in the area of derivative
                            financial instruments. We have not included a corresponding portrayal for the Bank, given
                            that the differences are not significant.

                            The following forward transactions had not yet been settled as at the balance sheet date.
                            They are differentiated according to type as follows:

                            Foreign currency-related forward transactions.
                            • Forward exchange transactions/trading transactions
                            • Forex swap deals/hedging transactions
                            • Interest rate currency swaps/trading transactions
                            • Interest rate currency swaps/hedging transactions
                            • Currency options/trading transactions
                            • Written currency options/trading transactions

                            Interest-related forward transactions.
                            • Interest rate swaps/trading transactions
                            • Interest rate swaps/hedging transactions
                            • Forward transactions with fixed-income securities/trading transactions
                            • Forward transactions with fixed-income securities/hedging transactions
                            • Forward rate agreements/trading transactions
                            • Forward rate agreements/hedging transactions
                            • Written interest rate options/trading transactions
                            • Written interest rate options/hedging transactions
                            • Interest rate options/trading transactions
                                                                                            169




• Interest rate options/hedging transactions
• Interest limitation agreements/trading transactions
• Interest limitation agreements/hedging transactions

Other forward transactions.
• Index forward transactions/hedging transactions
• Stock swap transactions/hedging transactions
• Written share options/trading transactions
• Written share options/hedging transactions
• Purchased share options/hedging transactions
• Written index options/trading transactions
• Written index options/hedging transactions
• Purchased index options/trading transactions
• Purchased index options/hedging transactions
• Index-related swap transactions/hedging transactions

Credit derivatives.
• Credit default swaps/hedging transactions
• Total return swaps/hedging transactions

In the fiscal year 2003, we also used derivative financial instruments to an increasingly
large extent for the purpose of efficient risk hedging and taking advantage of market
opportunities as well as for meeting the special financing requirements of our clients. On
the reporting date, the nominal volume of off-balance sheet transactions amounted to EUR
349,930 million, corresponding to approximately 200% of the balance sheet total. Of this
volume, approximately 39% falls to trading transactions. We conduct our derivatives
business exclusively with counterparties of impeccable credit standing. Thus over 88% of
the total nominal volume involves financial institutions domiciled in an OECD country.
The credit risk equivalent of the transactions is calculated in accordance with the market
valuation method.

Replacement costs are also presented within the context of the extended risk portrayal.
Replacement costs are defined as the potential expenditure that would be incurred in con-
nection with concluding replacement transactions required to restore the position follow-
ing a counterparty default. Replacement costs affect the contracts with positive market
values; no netting against contracts with negative market values was undertaken.

Along with the nominal amounts of the contracts, which have been classified into interest-
rate risks, currency risks and other price risks, the following tables also show the maturity
structure, the breakdown by counterparty and information on trading transactions with
derivative financial instruments.

Credit derivatives for hedging against credit risks were also established along with the de-
rivative transactions shown in the tables. These credit derivatives are allocated exclusively
to the investment portfolio. The volume for which the Group acted as guarantee (buyer) or
guarantor (seller) for credit default swaps amounted to EUR 2,325 million and EUR 7,130
million, respectively, as at the reporting date. The volume of credit derivatives for which the
Group acted as guarantor (seller) for total return swaps was EUR 64 million as at the repor-
ting date.
Annual Accounts              170




                               1. Disclosures on volumes.

                                   1.1 Interest rate risks.

      in € millions                                                        Nominal                  Credit risk             Replacement
                                                                           amounts                 equivalents                     costs
                                                                  2003         2002        2003          2002       2003           2002
      Interest rate swaps                                     209,626.3   196,410.0      1,306.6      1,231.8     4,345.9       4,468.0
      FRAs                                                      3,845.0    10,092.8          1.8          2.3         3.0           9.6
      Interest rate options
      – long positions                                             52.3       413.2        18.5            6.0      65.1           26.1
      – short positions                                           169.0       222.7           –              –         –              –
      Caps, floors                                              4,990.1     2,749.4        20.8            8.7      49.0           23.1
      Stock market transactions                                 6,379.0     2,022.0           –              –         –              –
      Other interest rate forward transactions                 70,368.4     2,663.5        22.5            2.0      76.3            1.1
      Total interest rate risks                               295,430.1   214,573.6      1,370.2      1,250.8     4,539.3       4,527.8



                                   1.2 Currency risks.

      in € millions                                                        Nominal                  Credit risk             Replacement
                                                                           amounts                 equivalents                     costs
                                                                  2003         2002        2003          2002       2003           2002
      Forward exchange transactions                            37,953.2    48,652.9       442.6         389.3     1,511.9       1,339.9
      Interest rate currency swaps and currency swaps           9,721.4     8,210.9       178.0         153.5       325.9         274.7
      Currency options
      – long positions                                          2,052.4     2,846.8         39.5          35.9     101.5          108.3
      – short positions                                         2,000.6     2,612.7            –             –         –              –
      Stock market contracts                                          –           –            –             –         –              –
      Other currency-related forward transactions                     –           –            –             –         –              –
      Total currency risks                                     51,727.6    62,323.2       660.1         578.7     1,939.3       1,723.0




                                   1.3 Share and other price risks.

      in € millions                                                        Nominal                  Credit risk             Replacement
                                                                           amounts                 equivalents                     costs
                                                                  2003         2002        2003          2002       2003           2002
      Stock futures transactions                                      –          4.7          –            0.5         –            2.1
      Stock options
      – long positions                                             12.2       104.9          0.4           6.0       0.4            4.0
      – short positions                                               –        92.2            –             –         –              –
      Stock market contracts                                      340.4         3.0            –             –         –              –
      Other forward transactions                                2,419.4     2,679.9         68.5          52.1     111.2           26.8
      Total share and other price risks                         2,772.0     2,884.7        68.9           58.6     111.6           32.9




                               2. Breakdown by maturity.

      in € millions                                                          Interest                 Currency               Share and
                                                                           rate risks                     risks        other price risks
                                                                  2003         2002        2003          2002       2003           2002
      Residual maturities
      – up to 3 months                                         87,113.6    47,702.0     29,507.3     40,411.5       407.2         207.4
      – up to 1 year                                           53,957.4    46,162.8     14,068.2     14,332.8       482.8         478.2
      – up to 5 years                                          79,560.5    58,603.8      6,123.4      5,009.1     1,366.2       1,995.1
      – more than 5 years                                      74,798.6    59,105.1      2,028.7      2,569.9       515.8         204.0
      Total                                                   295,430.1   211,573.6     51,727.6     62,323.2     2,772.0       2,884.7
                                                                                                                                    171




                               3. Breakdown by counterparty.

in € millions                                                               Nominal               Credit risk               Replacement
                                                                            amounts              equivalents                       costs
                                                                   2003        2002      2003          2002         2003           2002
OECD banks                                                    309,165.8    258,077.9   1,586.6      1,577.7      5,905.8        4,689.0
Non-OECD banks                                                  2,013.5        785.8      27.2          6.2         43.1            7.9
Non-banks 1)                                                   36,600.4     19,023.7     485.6        303.9        641.4          352.0
Public authorities                                              2,150.0      1,894.0         –            –            –              –
Total                                                         349,929.7    279,781.5   2,099.4      1,887.8      6,590.3        5,049.0
1)   Including stock market contracts.



                               4. Trading transactions.

in € millions                                                               Nominal               Credit risk               Replacement
                                                                            amounts              equivalents                       costs
                                                                   2003        2002      2003          2002         2003           2002
Interest rate contracts                                       125,729.9     96,805.2    646.3         523.7      2,014.2        1,808.5
Currency contracts                                             11,521.1     14,744.5    161.4         146.2        345.7          442.9
Stock contracts                                                   334.3         11.6        –           0.5            –            2.1
Total                                                         137,585.3    111,561.3    807.7         670.4      2,359.9        2,253.5



                          62 Number of employees.

                               We have calculated the number of employees based on the quarterly levels on a per capita
                               basis.

                                                          Annual average       Bank                        Annual average         Group
                                                                   2003        2002                                 2003           2002
                                          Male     Female          Total       Total     Male        Female         Total          Total
Full-time employees                      1,833      1,242         3,075       3,317     2,192         1,468        3,660          3,766
Part-time employees                         68        309           377         309        82           386          468            363
                                         1,901      1,551         3,452       3,626     2,274         1,854        4,128          4,129
Trainees                                    64         77           141         152        64            77          141            152
Total                                    1,965      1,628         3,593       3,778     2,338         1,931        4,269          4,281



                          63 Remuneration paid to the members of the Board of Managing Directors and the
                             Supervisory Board.

                               The total remuneration paid to the Board of Managing Directors was EUR 3,643 thousand
                               in the fiscal year 2003, including EUR 1,390 thousand for variable components. As at De-
                               cember 31, 2003, a total of EUR 24,733 thousand had been set aside for pension obligations
                               to former members of the Board of Managing Directors or their surviving dependents;
                               current payments amounted to EUR 3,778 thousand. The Supervisory Board members of
                               the predecessor institutions received remuneration and expenses allowances of EUR 416
                               thousand for the period from January 1, 2003 to June 1, 2003. No payments were made to
                               the Supervisory Board members of HSH Nordbank AG in the fiscal year. Advances, loans,
                               and other contingent liabilities as at December 31, 2003 amounted to EUR 4,591 thousand
                               for members of the Board of Managing Directors and EUR 1,804 thousand for members of
                               the Supervisory Board.
Annual Accounts    172




                  64 Mandates on other supervisory bodies.

                     On the balance sheet date, the following mandates were held on supervisory bodies of
                     major corporations or financial institutions (§ 340a Section 4 No. 1 of the German Com-
                     mercial Code (HGB) in conjunction with § 267 Para 3 of the Commercial Code or § 340a
                     Section 1 of the Commercial Code).


                     1. Members of the Board of Managing Directors.


                     Alexander Stuhlmann
                           DekaBank Deutsche Girozentrale, Frankfurt/Main, Berlin
                           Member of the Administrative Board
                           HGV Hamburger Gesellschaft für Vermögens-
                           und Beteiligungsverwaltung mbH, Hamburg
                           Member of the Supervisory Board
                           HSH Nordbank International S. A., Luxembourg
                           Member of the Administrative Board
                           LBS Bausparkasse Hamburg Aktiengesellschaft, Hamburg
                           Member of the Supervisory Board


                     Hans Berger
                           DekaBank Deutsche Girozentrale, Frankfurt/Main, Berlin
                           Member of the Administrative Board
                           Deka Investment GmbH, Frankfurt/Main
                           Member of the Supervisory Board (until December 31, 2003)
                           FinanzIT GmbH, Hanover
                           Member of the Supervisory Board
                           HSH Nordbank International S. A., Luxembourg
                           Member of the Administrative Board
                           Nordex AG, Norderstedt
                           Member of the Supervisory Board
                           PLUS BANK AG, Hamburg
                           Member of the Supervisory Board
                           SIZ Informatik – Zentrum der Sparkassenorganisation GmbH, Bonn
                           Deputy Chairman of the Supervisory Board


                     Peter Rieck
                           B & L Immobilien AG, Hamburg
                           Member of the Supervisory Board (until December 31, 2003)
                           DEKA Immobilien Investment GmbH, Frankfurt/Main
                           Member of the Supervisory Board
                           Deutsche Real Estate Aktiengesellschaft, Berlin
                           Deputy Chairman of the Supervisory Board
                           HSH Nordbank Hypo AG, Hamburg
                           Chairman of the Supervisory Board
                           LB Immo Invest GmbH, Hamburg
                           Chairman of the Supervisory Board
                           PLUS BANK AG, Hamburg
                           Chairman of the Supervisory Board
                           WestInvest Gesellschaft für Investmentfonds mbH, Düsseldorf
                           Member of the Supervisory Board (until December 31, 2003)
                                                              173




Franz S. Waas, Ph.D.
     Deka Investment GmbH, Frankfurt/Main
     Member of the Supervisory Board (from January 1, 2004)
     Gudme Raaschou Bankaktieselskab A/S, Copenhagen
     Member of the Board of Directors
     HSH Nordbank Hypo AG, Hamburg
     Deputy Chairman of the Supervisory Board
     HSH Nordbank International S. A., Luxembourg
     Chairman of the Administrative Board


Hartmut Strauß
     Hamburgische Wohnungsbaukreditanstalt, Hamburg
     Member of the Administrative Board


Ulrich W. Ellerbeck
     Gudme Raaschou Bankaktieselskab A/S, Copenhagen
     Chairman of the Board of Directors
     HAW Hamburger Aluminium Werke GmbH, Hamburg
     Member of the Supervisory Board
     HSH Nordbank International S. A., Luxembourg
     Member of the Administrative Board (from July 7, 2003)


2. Employees.


Walter Groll
     HSH Nordbank Hypo AG, Hamburg
     Member of the Supervisory Board
     LB Immo Invest GmbH, Hamburg
     Member of the Supervisory Board


Heinrich Haverkampf
     HSH Nordbank Hypo AG, Hamburg
     Member of the Supervisory Board


Reinhard Mix
     Bürgschaftsbank Schleswig-Holstein GmbH
     Member of the Supervisory Board


Dr. Reinhard Schmid
     HSH Nordbank Hypo AG, Hamburg
     Member of the Supervisory Board
     PLUS BANK AG, Hamburg
     Member of the Supervisory Board


Bernhard Visker
     HSH Nordbank Hypo AG, Hamburg
     Member of the Supervisory Board
     SpriAG Sprinkenhof AG, Hamburg
     Member of the Supervisory Board
Annual Accounts    174




                  65 Executive bodies of the former Hamburgische Landesbank – Girozentrale –.
                     from January 1, 2003 to June 1, 2003



                     1. Board of Managing Directors.


                     Alexander Stuhlmann
                           Chairman

                     Peter Rieck
                           Deputy Chairman

                     Ulf Gänger

                     Hartmut Strauß



                     2. Supervisory Board.


                     Dr. Wolfgang Peiner
                           Senator, Head of the Ministry of Finance of the Free and Hanseatic City of Hamburg
                           Chairman

                     Hans Berger
                           Chairman of the Board of Managing Directors of the former Landesbank
                           Schleswig-Holstein Girozentrale
                           Deputy Chairman

                     Horst Baecker
                           Staff member of the former Hamburgische Landesbank – Girozentrale –

                     Olaf Behm
                           Staff member of the former Hamburgische Landesbank – Girozentrale –

                     Dr. Werner Bohl
                           Auditor, attorney-at-law

                     Margitta Dauck
                           Staff member of the former Hamburgische Landesbank – Girozentrale –

                     Olaf Cord Dielewicz
                           President of the Savings Banks Association for Schleswig-Holstein

                     Heinrich Haasis
                           President of the Savings Banks Association of Baden-Württemberg

                     Jens Heiser
                           Executive member of the Board of Managing Directors of Baugenossenschaft
                           Dennerstraße-Selbsthilfe eG

                     Dr. Robert Heller
                           State councillor, Ministry of Finance of the Free and Hanseatic City of Hamburg

                     Dr. Thomas Kabisch
                           Chairman of the Executive Board of MEAG MUNICH ERGO AssetManagement
                           Gesellschaft mbH

                     Jutta Langmack
                           Staff member of the former Hamburgische Landesbank – Girozentrale –
                                                                                        175




Dr. Werner Marnette
      Chairman of the Board of Managing Directors of Norddeutsche Affinerie AG

Claus Möller
      Minister (retired) of the State of Schleswig-Holstein

Alexander Otto
      Chairman of the Executive Board of ECE Projektmanagement GmbH & Co. KG

Dieter Pfisterer
      Member of the Board of Managing Directors of the former Landesbank
      Schleswig-Holstein Girozentrale

Dr. Wolf-Albrecht Prautzsch
      Deputy Chairman of the Board of Managing Directors (retired) of the former
      Westdeutsche Landesbank Girozentrale

Susanne Rüschmann
      Staff member of the former Hamburgische Landesbank – Girozentrale –

Dr. Klaus Schmid-Burgk
      Staff member of the former Hamburgische Landesbank – Girozentrale –

Dr. Stefan Schulz
      State councillor, Ministry of Construction and Transport of the Free and
      Hanseatic City of Hamburg

Hans-Joachim Schwandt
      Staff member of the former Hamburgische Landesbank – Girozentrale –

Bernd Steingraeber
      Staff member of the former Hamburgische Landesbank – Girozentrale –

Gunnar Uldall
      Senator, Head of the Ministry of Economics and Employment of the Free and
      Hanseatic City of Hamburg

Carola Zehle
      Managing Director of Carl Tiedemann (GmbH & Co.)



3. Shareholders’ Assembly.


Hans Berger
      Chairman of the Board of Managing Directors of the former Landesbank
      Schleswig-Holstein Girozentrale
      Chairman

Dr. Wolfgang Peiner
      Senator, Head of the Ministry of Finance of the Free and Hanseatic City of Hamburg
      Deputy Chairman

Dr. Robert Heller
      State councillor, Ministry of Finance of the Free and Hanseatic City of Hamburg

Dr. Rainer Klemmt-Nissen
      Executive Director of Government, Ministry of Finance of the Free and Hanseatic
      City of Hamburg

Claus Möller
      Minister (retired) of the State of Schleswig-Holstein
Annual Accounts    176




                     Dieter Pfisterer
                           Member of the Board of Managing Directors of the former Landesbank
                           Schleswig-Holstein Girozentrale

                     Dr. Wolf-Albrecht Prautzsch
                           Deputy Chairman of the Board of Managing Directors (retired) of the former
                           Westdeutsche Landesbank Girozentrale

                     Dr. Andreas Reuß
                           Managing Director of HGV Hamburger Gesellschaft für Vermögens- und
                           Beteiligungsverwaltung mbH

                     Guest:
                     Olaf Cord Dielewicz
                           President of the Savings Banks Association for Schleswig-Holstein



                  66 Executive bodies of the former Landesbank Schleswig-Holstein Girozentrale.
                     from January 1, 2003 to June 1, 2003



                     1. Board of Managing Directors.


                     Hans Berger
                           Chairman

                     Ulrich W. Ellerbeck
                     Dieter Pfisterer
                     Franz S. Waas, Ph.D.



                     2. Administrative Board.


                     Heide Simonis
                           Minister-President of the State of Schleswig-Holstein
                           Chairwoman

                     Jürgen Sengera
                           Chairman of the Board of Managing Directors (retired) of WestLB AG
                           First Deputy Chairman

                     Olaf Cord Dielewicz
                           President of the Savings Banks Association for Schleswig-Holstein
                           Second Deputy Chairman

                     Heinrich Haasis
                           President of the Savings Banks Association of Baden-Württemberg
                           Third Deputy Chairman

                     Günther Anders
                           Chairman of the Board of Managing Directors (retired) of Sparkasse
                           Schleswig-Flensburg

                     Astrid Balduin
                           Staff member of the former Landesbank Schleswig-Holstein Girozentrale

                     Peter Deutschland
                           Chairman of the DGB, Nord
                                                                                     177




Uwe Döring
     State Secretary, Ministry of Finance of the State of Schleswig-Holstein

Theo Dräger
     Chairman of the Board of Managing Directors of Drägerwerk AG

Waltraut Fuhrmann
     Staff member of the former Landesbank Schleswig-Holstein Girozentrale
     (until March 31, 2003)

Norbert Gansel
     Mayor (retired) of the City of Kiel

Helmut Gründel
     Staff member of the former Landesbank Schleswig-Holstein Girozentrale
     (from April 1, 2003)

Dietmar Höret
     Staff member of the former Landesbank Schleswig-Holstein Girozentrale

Jörg-Dietrich Kamischke
     Chief administrative officer of the district of Schleswig-Flensburg

Dr. Elisabeth Keßeböhmer
     Staff member of the former Landesbank Schleswig-Holstein Girozentrale

Hans-Peter Krämer
     Chairman of the Board of Managing Directors of Kreissparkasse Köln

Knuth Lausen
     Staff member of the former Landesbank Schleswig-Holstein Girozentrale

Dr. Hans Lukas
     Chairman of the Board of Managing Directors of Sparkasse Stormarn

Rieka Meetz-Schawaller
     Staff member of the former Landesbank Schleswig-Holstein Girozentrale

Claus Möller
     Minister (retired) of the State of Schleswig-Holstein
     (until March 31, 2003)

Dr. Wolfgang Peiner
     Senator, Head of the Ministry of Finance of the Free and Hanseatic City of Hamburg

Dr. Wolf-Albrecht Prautzsch
     Deputy Chairman of the Board of Managing Directors (retired) of the former
     Westdeutsche Landesbank Girozentrale

Karl-Heinz Ravn
     Staff member of the former Landesbank Schleswig-Holstein Girozentrale

Michael Rocca
     State Secretary, Ministry of Economic Affairs, Employment and Transport

Erwin Rückemann
     Chairman of the Board of Managing Directors of Sparkasse Neumünster

Wolfgang Sander
     Staff member of the former Landesbank Schleswig-Holstein Girozentrale

Hans Dietmar Sauer
     Chairman of the Board of Managing Directors of Landesbank Baden-Württemberg
Annual Accounts   178




                    Michael Schmalz
                          Staff member of the former Landesbank Schleswig-Holstein Girozentrale

                    Dr. Ralf Stegner
                          Minister of Finance of the State of Schleswig-Holstein
                          (from April 1, 2003)

                    Dr. Fritz Süverkrüp
                          President of the Kiel Chamber of Commerce and Industry

                    Jorma Juhani Vaajoki
                          Managing shareholder of Proxim Oy Ltd., Finland

                    Gaby Woelk
                          Staff member of the former Landesbank Schleswig-Holstein Girozentrale



                    3. Guarantors’ Assembly.


                    Heide Simonis
                          Minister-President of the State of Schleswig-Holstein
                          Chairwoman

                    Jürgen Sengera
                          Chairman of the Board of Managing Directors (retired) of WestLB AG
                          First Deputy Chairman

                    Olaf Cord Dielewicz
                          President of the Savings Banks Association for Schleswig-Holstein
                          Second Deputy Chairman

                    Heinrich Haasis
                          President of the Savings Banks Association of Baden-Württemberg
                          Third Deputy Chairman

                    Dr. Karlheinz Bentele
                          Chairman of the Board of Managing Directors of the Rhineland Savings Banks
                          Association

                    Jörg-Dietrich Kamischke
                          Chief administrative officer of the district of Schleswig-Flensburg

                    Dr. Hans Lukas
                          Chairman of the Board of Managing Directors of Sparkasse Stormarn

                    Claus Möller
                          Minister (retired) of the State of Schleswig-Holstein
                          (until March 31, 2003)

                    Dr. Wolf-Albrecht Prautzsch
                          Deputy Chairman of the Board of Managing Directors (retired) of the former
                          Westdeutsche Landesbank Girozentrale

                    Michael Rocca
                          State Secretary, Ministry of Economic Affairs, Employment and Transport
                          (until March 31, 2003)

                    Hans Dietmar Sauer
                          Chairman of the Board of Managing Directors of Landesbank Baden-Württemberg

                    Dr. Ralf Stegner
                          Minister of Finance of the State of Schleswig-Holstein
                          (from April 1, 2003)
                                                                                          179




67 The Supervisory Board of HSH Nordbank AG.



  1. Members.


  Heide Simonis, Kiel
        Minister-President of the State of Schleswig-Holstein
        Chairwoman

  Astrid Balduin, Kiel
        Staff member of HSH Nordbank AG
        Deputy Chairwoman (from August 18, 2003)
        (from August 14, 2003)

  Dr. Wolfgang Peiner, Hamburg
        Senator, Head of the Ministry of Finance of the Free and Hanseatic City of Hamburg
        Deputy Chairman (until August 18, 2003)

  Olaf Behm, Hamburg
        Staff member of HSH Nordbank AG
        (from August 14, 2003)

  Berthold Bose, Hamburg
        Head of financial services sector at ver.di – regional district of Hamburg
        (from August 14, 2003)

  Margitta Dauck, Dassendorf
        Staff member of HSH Nordbank AG
        (from August 14, 2003 to December 31, 2003)

  Peter Deutschland, Hamburg
        Chairman of the DGB, Nord
        (from August 14, 2003)

  Olaf Cord Dielewicz, Flensburg
        President of the Savings Banks Association for Schleswig-Holstein

  Prof. Dr. Hans-Heinrich Driftmann, Elmshorn
        Managing shareholder of Peter Kölln KGaA
        (from August 6, 2003)

  Annette Falkenberg, Kiel
        Trade union secretary, financial services sector at ver.di – district of Kiel
        (from August 14, 2003)

  Dr. Thomas Fischer, Düsseldorf
        Chairman of the Board of Managing Directors of WestLB AG
        (from February 2, 2004)

  Dr. Elisabeth Keßeböhmer, Kiel
        Staff member of the HSH Nordbank AG
        (from August 14, 2003)

  Dr. Rainer Klemmt-Nissen, Hamburg
        Executive Director of Government, Ministry of Finance of the Free and Hanseatic
        City of Hamburg
        (until August 6, 2003)

  Hans-Peter Krämer, Brühl
        Chairman of the Board of Managing Directors of Kreissparkasse Köln
        (from August 6, 2003)
Annual Accounts   180




                   Jutta Langmack, Hamburg
                        Staff member of HSH Nordbank AG
                        (from February 2, 2004)

                   Dr. Hans Lukas, Bad Oldesloe
                        Chairman of the Board of Managing Directors of Sparkasse Stormarn

                   Alexander Otto, Hamburg
                        Chairman of the Executive Board of ECE Projektmanagement GmbH & Co. KG

                   Dr. Manfred Puffer, Meerbusch
                        Member of the Board of Managing Directors of WestLB AG
                        (until August 6, 2003)

                   Dr. Johannes Ringel, Meerbusch
                        Chairman of the Board of Managing Directors (retired) of WestLB AG
                        (from August 6, 2003 to December 31, 2003)

                   Michael Schmalz, Kiel
                        Staff member of HSH Nordbank AG
                        (from August 14, 2003)

                   Hans-Joachim Schwandt, Reinbek
                        Staff member of HSH Nordbank AG
                        (from August 14, 2003)

                   Jürgen Sengera, Kaarst
                        Chairman of the Board of Managing Directors (retired) of WestLB AG
                        (until August 6, 2003)

                   Dr. Ralf Stegner, Bordesholm
                        Minister of Finance of the State of Schleswig-Holstein

                   Bernd Steingraeber, Oldershausen
                        Staff member of HSH Nordbank AG
                        (from August 14, 2003)

                   Gunnar Uldall, Hamburg
                        Senator, Head of the Ministry of Economics and Employment of the Free
                        and Hanseatic City of Hamburg



                   2. Committees.


                   2.1 Members of the Risk Committee.


                   Dr. Johannes Ringel
                        Chairman
                        (until December 31, 2003)

                   Hans-Peter Krämer
                        Chairman
                        (from January 1, 2004)

                   Olaf Cord Dielewicz
                        Deputy Chairman
                                          181




Astrid Balduin
Olaf Behm
Dr. Elisabeth Keßeböhmer
Dr. Wolfgang Peiner, Senator
Bernd Steingraeber
Dr. Ralf Stegner, Minister



2.2 Members of the Audit Committee.


Dr. Johannes Ringel
      Chairman
      (until December 31, 2003)

Hans-Peter Krämer
      Chairman
      (from January 1, 2004)

Olaf Cord Dielewicz
      Deputy Chairman

Astrid Balduin
Olaf Behm
      (from January 1, 2004)

Margitta Dauck
      (until December 31, 2003)

Dr. Wolfgang Peiner, Senator
Michael Schmalz
Hans-Joachim Schwandt
Dr. Ralf Stegner, Minister



2.3 Members of the Executive Committee.


Heide Simonis, Minister-President
      Chairwoman

Dr. Wolfgang Peiner, Senator
      Deputy Chairman

Olaf Cord Dielewicz
Dr. Thomas Fischer
      (from February 12, 2004)

Dr. Johannes Ringel
      (until December 31, 2003)

Michael Schmalz
Hans-Joachim Schwandt
Annual Accounts   182




                   2.4 Members of the Mediation Committee.


                   Dr. Wolfgang Peiner, Senator
                          Chairman

                   Heide Simonis, Minister-President
                   Astrid Balduin
                   Olaf Behm


                   68 Members of the Board of Managing Directors of HSH Nordbank AG.

                   Alexander Stuhlmann
                          Chairman
                          Responsible for the following Centers of Competence:
                          Communications/Investor Relations, Human Resources,
                          Private and Business Clients, Legal and Board Advisory Services
                          1948

                   Hans Berger
                          Deputy Chairman
                          Responsible for the following Centers of Competence:
                          IT/Organization, Audit Department, Shipping and
                          Savings Banks/Public Sector Customers
                          1950

                   Peter Rieck
                          Responsible for the following Centers of Competence:
                          Participations/Research, Real Estate, Lease Finance as well as Transportation
                          1952

                   Franz S. Waas, Ph. D.
                          Responsible for the following Centers of Competence:
                          Asset Liability Management, Capital Markets as well as
                          Portfolio Management and Investments
                          1960

                   Hartmut Strauß
                          Responsible for the following Centers of Competence:
                          Controlling/Finance, Credit Risk Management,
                          Services, Taxes as well as Transaction Services
                          1949

                   Ulrich W. Ellerbeck
                          Responsible for the following Centers of Competence:
                          Financial Institutions/Global Trade Finance as well as Corporates
                          and Structured Finance
                          1952


                   Hamburg/Kiel, March 12, 2004




                                           Stuhlmann                         Berger




                        Rieck                  Waas              Strauß                       Ellerbeck
                                                                                              183




Auditor’s Certificate.

We have audited the annual financial statements including the accounts of HSH Nordbank AG,
Hamburg/Kiel, along with the Group financial statements prepared by the latter and its report
on the situation of the Bank and the Group for the financial year ended December 31, 2003.
According to German commercial law, the legal representative of the Bank is responsible for
preparing and compiling the records in question. Our task is to provide an assessment, on the
basis of the audit we have performed, of the annual financial statements and the accounting as
well as of the Group financial statements prepared by the Bank and of the management report
and the Group management report.

We conducted our audit in accordance with § 317 of the German Commercial Code, taking
account of the generally accepted auditing principles prevailing in Germany, as laid down by
the Institut der Wirtschaftsprüfer (IDW, auditors’ association). These standards require that we
plan and perform the audit to obtain reasonable assurance as to whether the financial state-
ments are free of material misstatements or violations impacting on the impression conveyed
by the presentation of the financial statements in line with generally accepted accounting prin-
ciples applicable in Germany and of the management report relating to the asset, financial and
earnings situation. In organizing the audit processes, knowledge of the Bank’s field of activities
and its business and legal environment as well as expectations of possible errors were taken
into account. Within the scope of the audit, the effectiveness of the internal control system as
well as vouchers generated in the process of accounting, the annual and Group financial state-
ments and the management report and the Group management report were largely analyzed
on the basis of samples taken. The scope of the audit also included assessing the accounting
principles used and significant estimates by the legal representatives, as well as evaluating
the overall presentation of the annual and Group financial statements and the management
report and the Group management report. We are confident that our audit provides a suffi-
ciently sound basis on which to form our opinion.

Our audit gave rise to no objections.

In our opinion, the financial statements in line with the generally accepted accounting princi-
ples prevailing in Germany give a true and fair view of the Bank’s asset, financial and earnings
situation. The management report and the Group management report give a true and fair over-
all view of the Bank’s situation and that of the Group and appropriately represents the risks
that lie ahead in future developments.


Hamburg, March 26, 2004


                              BDO Deutsche Warentreuhand
                                   Aktiengesellschaft
                             Wirtschaftsprüfungsgesellschaft




                  Rohardt                                   Erlemann
            German Public Auditor                      German Public Auditor
Additional Information   184




                         Glossary

                         Anstaltslast (Maintenance obligation)

                         Obligation on the owners of a bank in the legal form of an institution under public law
                         to maintain its solvency and to enable it to meet its financial obligations at any time.
                         The Brussels Agreement of July 17, 2001 determined that Anstaltslast should phase out on
                         July 18, 2005. This transitional arrangement defined in the Agreement is also applicable
                         to HSH Nordbank. The states of Hamburg and Schleswig-Holstein determined in the State
                         Treaty governing the merger that Anstaltslast applies in identical terms to HSH Nordbank
                         as it did toward the predecessor banks, Hamburgische Landesbank and Landesbank Schles-
                         wig-Holstein.


                         Asset-Backed-Securitization (ABS)

                         A term used for packaging loans and advances into securities. To this end, selected balance
                         sheet assets are pooled and sold to a special purpose company. The special purpose company
                         funds the acquired pool by issuing marketable securities collateralized by the transferred
                         assets. The purpose of such a transaction is, for example, to reduce a bank’s regulatory
                         capital requirements.


                         Basle I/Basle II

                         Basle I comprises the international regulatory standards on capital adequacy as applied to
                         banking activities. These standards, first published in 1988, are currently being revised by
                         the Basle Committee. Central to the new regulations is the abolition of the flat-rate capital
                         adequacy standard prevailing up to now, in favor of a standard that reflects the actual
                         risks of the banking activities concerned. Promulgation of the new agreement on capital
                         adequacy (Basle II) is planned for mid 2004, with the standards coming into effect as from
                         end 2006.


                         Core capital ratio

                         The core capital ratio expresses the relationship between a bank’s core capital and its
                         ➞ Risk-weighted assets.


                         Cost income ratio (CIR)

                         CIR is the ratio between administrative expenses and net operating income (net interest
                         income, net commission income, net income from trading and the balance of other operat-
                         ing income and expenses before risk provisions) in a specified period. CIR provides a quan-
                         titative measure of the efficiency of an enterprise. The smaller the CIR, the more efficient
                         the bank’s business operations.


                         Credit derivatives

                         Credit derivatives are financial instruments used to transfer credit risks to third parties
                         acting as guarantors (the so-called protection sellers). The original lender-borrower relation-
                         ship of the guarantee (the party selling credit risks, the so-called protection buyer) is neither
                         changed nor reestablished by this transaction. Credit derivatives are traded on the basis of
                         standardized master agreements and are subject to an ongoing valuation at market prices.
                                                                                            185




Credit standing

Credit standing is a measure of the default risk of a borrower, or of the creditworthiness of
a bond issuer. The lower the credit standing, the higher the loss exposure associated with a
loan or an investment in bonds.


Cross selling

In addition to the products they are already using, existing customers are offered further
products in line with their requirements. The goal is to systematically utilize existing cus-
tomer potential and to extend the value of the customer relationships.


Derivatives

Derivatives are financial instruments derived from original investment instruments (for
example currencies, shares, bonds). Derivatives comprise, for example, options, swaps and
futures. Their value depends primarily on the exchange rates and prices of the underlying
instruments, as well as price expectations and volatilities. Derivatives are used, for example,
as a risk management tool, or to take advantage of market opportunities.


Forward transactions and options

In forward transactions and options – as opposed to spot transactions – conclusion of the
contract and settlement/delivery do not coincide. The contractual agreement is to buy/sell
a specified amount of a financial instrument, at a specified price, at a stipulated future
date. A distinction is made between unconditional forward transactions such as futures
(= standardized forward contracts listed on an exchange) and contingent options evidencing
a right, but no obligation on the holder of the contract to exercise that right.


Gewährträgerhaftung (Guarantee obligation)

Under Gewährträgerhaftung, the owners of a bank in the legal form of an institution under
public law have joint and several unlimited liability for the obligations of the bank in the
event that creditors cannot be satisfied out of the assets of the bank. The Brussels Agree-
ment of July 17, 2001 determined that Gewährträgerhaftung should remain for all liabilities
entered into up until July 18, 2001, irrespective of their maturities, and therefore without
temporal limit. Obligations incurred after this date but prior to July 18, 2005 are covered
by Gewährträgerhaftung, if their maturity does not exceed December 31, 2015. This tran-
sitional ruling, as defined by the Agreement, also applies to HSH Nordbank. The Free and
Hanseatic City of Hamburg and the State of Schleswig-Holstein determined in the State
Treaty governing the merger that Gewährträgerhaftung applies to exactly the same extent
to HSH Nordbank as it did toward the public sector predecessor banks, Hamburgische
Landesbank and Landesbank Schleswig-Holstein.


Hedging

Hedging specifies a strategy to limit price or interest rate risks by concluding transactions
with compensatory effects to existing or future positions.
Additional Information   186




                         MaH (Minimum standards for trading activities of credit institutions)

                         The MaH standards impose requirements on banks to ensure their solvency. Key elements
                         are the overall responsibility of all managing directors for the proper organization and
                         supervision of trading activities, standards for risk controlling and risk management, and
                         the functional separation of the divisions involved in trading, settlement and controlling,
                         accounting and supervision. Trading must also be separated organizationally from the
                         other divisions.


                         MaK (Minimum standards for lending activities of credit institutions)

                         The MaK standards impose requirements on banks for the limitation of credit risks. They
                         comprise a framework of conditions for organizing and structuring lending activities,
                         aiming at developing risk awareness inside credit institutions and enhancing transparency.
                         Key stipulations concern the predefinition of a credit risk strategy, the separation of specific
                         functions, clearly defined lending processes, the appropriate monitoring of risks and prop-
                         erly functioning reporting procedures.


                         Netting

                         Netting denotes the offsetting of corresponding claims and liabilities. A legally binding
                         netting agreement will reduce the gross counterparty default risk arising from a bank’s
                         transactions with the same counterparty to a net exposure.


                         RaRoC (Risk-adjusted Return on Capital)

                         The RaRoC ratio relates risk-adjusted income to equity capital employed. Risk-adjusted in-
                         come is calculated as operating income less costs – where costs include not only personnel
                         and operating costs, but also standard risk costs, as well as equity costs resulting from risk.


                         Rating

                         Internal rating is the detailed evaluation of the risk constituted by a borrower, or of an
                         individual risk position of that borrower. External ratings are assessments of the credit-
                         worthiness of a security (issue ratings), or of a debtor (issuer ratings), by independent rating
                         agencies (for example Standard & Poor’s, Moody’s, Fitch). Rating agencies and capital mar-
                         kets rely for their assessments of creditworthiness on a number of economic indicators,
                         among them the adequacy and structure of capitalization, as well as return on equity (RoE),
                         but also the cost-income ratio. Soft factors such as business model and environment, owner-
                         ship structure and support, general management, risk profile, risk management, value of
                         customer relations and selling power are also taken into account.


                         Risk-weighted assets

                         According to the German Banking Act (KWG), risk-weighted assets comprise balance sheet
                         assets as well as off-balance-sheet transactions (including swaps, forward transactions and
                         options). The ratio of regulatory capital (mainly core and supplementary capital) to risk-
                         weighted assets must not fall below 8 %. Weighting factors vary from 0 to 100 % depending
                         on the grade of risk carried by the asset.


                         RoE (Return on Equity)

                         RoE is the ratio of results (net income before taxes) in relation to the equity employed,
                         expressing the profitability of an enterprise.
                                                                                           187




Syndicated loans

Term for large loans arranged by a consortium of banks. Syndication (the formation of a
consortium of banks) results in a spreading of credit risk across the banks concerned.


VaR (Value at Risk)

VaR is a method of quantifying market price, credit and default risks. On the basis of an
estimated probability distribution, a potential loss ceiling is determined that will not, with
a given probability (for example 99 %), be exceeded within a specified period (for example
ten days). This method enables the bank to determine adequate risk provisions covering
the potential losses calculated.
Additional Information   188




                         Addresses

                         Germany
                         Head Offices                           HGA Capital Grundbesitz und
                                                                Anlage GmbH
                         HSH Nordbank AG                        Rosenstraße 11
                         Gerhart-Hauptmann-Platz 50             20095 Hamburg
                         20095 Hamburg                          Phone: +49-40-33 33-11105
                         Phone: +49-40-33 33-0                  Fax: +49-40-33 33-342 21
                         Fax: +49-40-33 33-342 22
                         Internet: www.hsh-nordbank.com         HGA Management Investor und
                                                                Anlage GmbH
                         HSH Nordbank AG                        Rosenstraße 11
                         Martensdamm 6                          20095 Hamburg
                         24103 Kiel                             Phone: +49-40-33 33-110 66
                         Phone: +49-431-900-01                  Fax: +49-40-33 33-342 30
                         Fax: +49-431-900-341 24
                         Internet: www.hsh-nordbank.com         HSH N Corporate Finance GmbH
                                                                Zürich-Haus
                                                                Domstraße 17–19
                         Branches                               20095 Hamburg
                                                                Phone: +49-40-30 38 56 56-00
                         HSH Nordbank AG Niederlassung Berlin   Fax: +49-40-30 38 56 56-49
                         Mohrenstraße 42
                         10117 Berlin                           HSH N Immobilien Holding GmbH
                         Phone: +49-30-20 39-72 17              Burchardstraße 14
                         Fax: +49-30-20 39-72 22                20095 Hamburg
                         Internet: www.hsh-nordbank.com         Phone: +49-40-33 33-125 78
                                                                Fax: +49-40-33 33-245 05
                         HSH Nordbank AG Niederlassung Lübeck
                         Breite Straße 36–40                    HSH N Immobilien Development GmbH
                         23552 Lübeck                           Gerhart-Hauptmann-Platz 50
                         Phone: +49-451-70 35-0                 20095 Hamburg
                         Fax: +49-451-70 35-5119                Phone: +49-40-33 33-125 78
                         Internet: www.hsh-nordbank.com         Fax: +49-40-33 33-245 05

                                                                HSH N Invest GmbH
                         Subsidiaries and Participations        Gartenstraße 9
                                                                24103 Kiel
                         AGV Anlagen- und Grundstücks-          Phone: +49-431-900-113 18
                         vermietungsgesellschaft mbH & Co. KG   Fax: +49-431-900-34159
                         Eleonorenstraße 64
                         55252 Wiesbaden                        HSH N Kapital GmbH
                         Phone: +49-611-99191-0                 Gartenstraße 9
                         Fax: +49-611-99191-33                  24103 Kiel
                                                                Phone: +49-431-900-113 18
                         DGAG Deutsche Grundvermögen GmbH       Fax: +49-431-900-341 59
                         Fabrikstraße 7
                         24103 Kiel                             HSH Nordbank Hypo AG
                         Phone: +49-431-97 96-355               Rosenstraße 8
                                                                20095 Hamburg
                         GEHAG GmbH                             Phone: +49-40-30 30 66-0
                         Mecklenburgische Straße 57             Fax: +49-40-30 30 66-90
                         14197 Berlin
                                                                LB Immo Invest GmbH
                         HGA Beteiligungs AG                    Mönckebergstraße 11
                         Rosenstraße 11                         20095 Hamburg
                         20095 Hamburg                          Phone: +49-40-33 33-44 11
                         Phone: +49-40-33 33-44 11              Fax: +49-40-33 33-44 17
                         Fax: +49-40-33 33-44 17
                                                                               189




PLUS BANK AG                             HSH Nordbank AG
Burchardstraße 14                        Representative Office Riga
20095 Hamburg                            Krisjana Valdemara Street 21
Phone: +49-40-2100-3                     1010 Riga
Fax: +49-40-21 00-50 00                  Latvia
                                         Phone: +371-7 2174 24
W. Jacobsen Aktiengesellschaft           Fax: +371-7 2172 24
Alter Markt 1–2
24103 Kiel                               HSH Nordbank AG
Phone: +49-431-900-127 69                Representative Office Tallinn
                                         2, Roosikrantsi
                                         10119 Tallinn
International                            Estonia
                                         Phone: +372-611 06 70
North Eastern Europe                     Fax: +372-611 06 71

HSH Nordbank AG Copenhagen Branch        Gudme Raaschou
Kalvebod Brygge 39-41                    Asset Management Holding A/S
1560 Copenhagen V                        39 – 41, Kalvebod Brygge
Denmark                                  1560 Copenhagen V
Phone: +45-33 44-99 00                   Denmark
Fax: +45-33 44-99 99                     Phone: +45-33 44 90 00
Internet: www.hsh-nordbank.dk            Fax: +45-33 44 90 01
                                         Internet: www.gudme-invest.dk
HSH Nordbank AG Helsinki Branch
Eteläranta 12, P.O. Box 216              Gudme Raaschou Bankaktieselskab A/S
00130 Helsinki                           39 – 41, Kalvebod Brygge
Finland                                  1560 Copenhagen V
Phone: +358-9-6133-46 00                 Denmark
Fax: +358-9-6133-46 20                   Phone: +45-33 44 90 00
Internet: www.hsh-nordbank.fi            Fax: +45-33 44 90 01
                                         Internet: www.gr.dk
HSH N Bank AG Tyskland, Filial Sverige
Kungsträdsgårdsgatan 10, Box 1721        PCA Corporate Finance Oy
11187 Stockholm                          Eteläranta 12
Sweden                                   00130 Helsinki
Phone: +46-8-54 50-10 70                 Finland
Fax: +46-8-54 50-10 89                   Phone: +358-9 6133 44 00
Internet: www.hsh-nordbank.se            Fax: +358-9 6133 44 55
                                         Internet: www.pca.fi
HSH Nordbank AG
Representative Office Oslo
Klingenberggaten 5, 9th Floor            Western Europe
Postboks 1803 Vika
0123 Oslo                                HSH Nordbank AG London Branch
Norway                                   Moorgate Hall 155, Moorgate
Phone: +47-220157 70                     London EC2M6UJ
Fax: +47-220157 79                       UK
                                         Phone: +44-207 9 72 92 92
HSH Nordbank AG                          Fax: +44-207 9 72 92 90
Representative Office Poland             Internet: www.hsh-nordbank.com
Warsaw Financial Centre, 30th Floor
Ul.Emilii Plater 53, 00113 Warsaw        HSH Nordbank AG Luxembourg Branch
Poland                                   2 rue Jean Monnet
Phone: +48-22-456 10 60                  2180 Luxembourg
Fax: +48-22-456 10 69                    Luxembourg
                                         Phone: +352-42 4141 37
                                         Fax: +352-42 4141 330
                                         Internet: www.hsh-nordbank-int.com
Additional Information   190




                         HSH Nordbank AG Dutch Real Estate Office   Asia
                         c/o Abbey Business Centre
                         Kantoorgebouw Busitel 1, Orlyplein 85      HSH Nordbank AG Hong Kong Branch
                         1043 DS Amsterdam                          Cheung Kong Centre, 26th Floor
                         Netherlands                                2, Queen’s Road
                         Phone: +31-20 403 74 90                    Hong Kong
                         Fax: +31-20 403 74 91                      PR China
                                                                    Phone: +852-28 43 26 88
                         HSH N Finance (Guernsey) Ltd.              Fax: +852-28 45 9018
                         Arnold House, St. Julian’s Avenue          Internet: www.hsh-nordbank.com
                         St. Peter Port, Guernsey GY1 3DA
                         Channel Islands (via UK)                   HSH Nordbank AG Singapore Branch
                         Phone: +49-431 900 254 00                  #32-03 Centennial Tower
                         Fax: +49-431 900 6 454 00                  3 Temasek Avenue, Singapore 039190
                         Internet: www.hsh-nordbank.com             Phone: +65-65 50 90 00
                                                                    Fax: +65-65 50 90 05
                         HSH Nordbank (Guernsey) Ltd.               Internet: www.hsh-nordbank.com
                         Elizabeth House, Les Ruettes Brayes
                         St. Peter Port, Guernsey GY 1 1EW          HSH Nordbank AG
                         Channel Islands (via UK)                   Representative Office Hanoi
                         Phone: +44-14 817192 00                    Hanoi Central Office Building
                         Fax: +44-14 8172 99 77                     Suite 4-03, 4th Floor
                         Internet: www.hsh-nordbank.com             44B Ly Thuong Kiet Street,
                                                                    Hoan Kiem District
                         HSH Nordbank International S. A.           Hanoi
                         2 rue Jean Monnet                          Vietnam
                         2180 Luxembourg                            Phone: +844-9 34 49 81
                         Luxembourg                                 Fax: +844-9 34 49 82
                         Phone: +352-42 4141-1
                         Fax: +352-42 4196/97                       HSH Nordbank AG
                         Internet: www.hsh-nordbank-int.com         Representative Office Shanghai
                                                                    29/F China Insurance Bld.
                                                                    166, Lu Jia Zui East Road
                         North America                              Pudong
                                                                    Shanghai
                         HSH Nordbank AG New York Branch            PR China
                         590 Madison Avenue, 28th floor             Phone: +86-2168 41 93 21
                         New York, NY 10022-2540                    Fax: +86-2168 41 94 37
                         USA
                         Phone: +1-212-407 60 00
                         Fax: +1-212-407 60 33
                         Internet: www.hsh-nordbank.com

                         HSH Nordbank Cayman Islands Branch
                         590 Madison Avenue, 28th floor
                         New York, NY 10022-2540
                         USA
                         Phone: +1-212-407 60 00
                         Fax: +1-212-407 60 33
                         Internet: www.hsh-nordbank.com
191
Additional Information     192




         Publication Information

         Published by
         HSH Nordbank AG

         Gerhart-Hauptmann-Platz 50
         20095 Hamburg
         Phone: +49 40-33 33-0
         Fax: +49 40-33 33-342 22
         Internet: www.hsh-nordbank.com

         Martensdamm 6
         24103 Kiel
         Phone: +49 431-900-01
         Fax: +49 431-900-341 24
         Internet: www.hsh-nordbank.com

         Communications/Investor Relations
         Dr. Konrad Kentmann
         Phone: +49 40-33 33-108 97
         Fax: +49 40-33 33-343 38
         E-Mail: konrad.kentmann@hsh-nordbank.com

         The Annual Report on the Internet
         www.hsh-nordbank.com/InvestorRelations

         Consulting for Concept, Text, Design, Realization
         Citigate SEA GmbH & Co. KG, Düsseldorf

         Photography
         Jürgen Herschelmann, Rüdiger Niemz,
         Bernd Timme, Jens Wunderlich


         The Annual Report is also published in German.

				
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