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: email@example.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.