Foresight - SaarLB · The Franco-German regional bank Die deutsch-französische Regionalbank

The Franco-German regional bankDie deutsch-französische Regionalbank

THROUGH PROXIMITYForesight

Corporate Report | 2011

CONTENTS

Foreword from the Board of Management ............................................................ 8

Group Management Report – Overview ................................................................ 11

SaarLB Group Management Report 2011 ..............................................................52

Statement of comprehensive income ..................................................................53

Consolidated balance sheet ................................................................................... 54

Schedule of changes in equity ...............................................................................56

Cash flow statement ............................................................................................... 57

Group Notes to the consolidated financial statements 2011 .............................58

Board of Administration ....................................................................................... 136

Board of Management ...........................................................................................137

Independent Auditors’ Report ..............................................................................144

Report of the Board of Administration ............................................................... 145

Organisational Chart for the Whole Bank .......................................................... 146

Shareholders ...........................................................................................................147

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If you know the people in the region, you are aware of what it means when someone takes time, listens and reflects on ideas. With us, this is how something new emerges from proximity. Economic foresight and human proximity are lived at SaarLB – through our corporate values that we use and implement in daily work. We stand for focused financial services, progress in the economic region and partnership at eye level.

CORPORATE REPORT 2011 | CONTENTS

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At a glance (IFRS)

1. BALANCE SHEET 31 DEC. 2011 EUR MILLION

31 DEC. 2010 EUR MILLION CHANGE IN %

Total assets 19,760 19,049 3.7

Business volumes 20,912 20,162 3.7

Loans and advances to banks 4,106 3,834 7.1

Loans and advances to customers 8,607 7,573 13.7

Assets held for trading 432 360 20.0

Investments* 6,531 7,330 -10.9

Liabilities to banks 8,008 7,692 4.1

Liabilities to customers 5,905 5,136 15.0

Securitised liabilities 4,329 4,749 -8.8

Liabilities held for trading 544 461 18.0

Shareholders’ equity 461 449 2.7

Liable capital in acc. with Sec. 10 KWG/Banking Act 976 977 -0.1

2. PROFIT AND LOSS ACCOUNT

Net interest and commission income** 133.8 120.3 11.2

Gains or losses on fair value measurement -16.2 7.3 -321.9

Administrative expenses 78.5 72.2 8.7

Earnings before taxes 18.2 31.3 -41.9

Consolidated net income/loss for the year 22.0 21.6 1.9

* Including security repurchase transactions and interests in entities valued at equity** Including shares of profits in associated companies accounted for using the equity method

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CORPORATE REPORT 2011 | AT A GLANCE (IFRS)

SaarLB successfully expanded its core bank business in 2011 and continued the positive development of the previous year. The bank’s results of operations continued to improve, particularly in the core business areas.

The new motto of “Foresight through proxim-ity” emphasises the identity of SaarLB and its role in the region. With the successful migra-tion of its central IT applications, the bank largely standardised its IT landscape and made it secure for the future.

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CORPORATE REPORT 2011 | THE BOARD OF MANAGEMENT

from left to right:

Frank Eloy Market 1 | Corporate Customers, Real Estate and Projects, Central Sales Management

Thomas Christian Buchbinder Corporate Development, Market 2 | Corporate Development, Savings Banks, Institutionals and High Net Worth Individuals, Treasury and Portfolio Management, LBS Market and Risk Office, Internal Audit

Werner Severin Bank Management/Operations | Overall Bank Management, Risk Office, Services, Compliance, Data Protection

The future isshaped by the past.

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The future is shaped by the past. In a way, this describes the background that informed how we redesigned the SaarLB brand in the past year.

The basis for this was our knowledge of the re-gion. In the 70 years of our existence, we have never lost sight of this – but we have intensi-fied it recently.

This can be seen in our new corporate design under the motto: “Foresight through proxim-ity.” We want to combine economic foresight with human proximity. New features of our bank’s corporate image include, among oth-ers, the logo and the golden-green “bank col-our.” The response to this new look was very positive, both from the general public and our customers.

Besides this modernisation of the corporate image, we also completed another very im-portant project internally in 2011: Our entire IT system was placed on a new technical platform and, at the same time, on a new software basis, with the total bank solution

OSPlus at the central savings bank computer centre FinanzInformatik. As a result, we meet the proper requirements both externally and internally to be in good shape for a successful future.

With regard to the economic framework condi-tions, the past financial year was noteworthy in many respects. An economic recovery, espe-cially in Germany, ensured full order books in industry. At the same time, there was a lot of movement on (global) financial markets, trig-gered primarily by the sovereign debt crisis in the southern European countries.

This “drifting apart” may seem surprising at first glance. But it simply shows that in the recent past capital markets and the real econ-omy have not been developing parallel. Ulti-mately, the real economy, which is defined by medium-sized business, has provided stabil-ity.

It is this group that SaarLB as a partner of its customers is committed to. Consequently, for example, we have collaborated with numer-

Ladies and Gentlemen,Business Partners,

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CORPORATE REPORT 2011 | FOREWORD

ous corporate customers for many genera-tions. And the payoff for this approach was impressively demonstrated in the past year.

The vast majority of our customers benefited from the economic recovery. There was either growth in incoming orders, in the level of in-vestment or utilisation or in equity capital resources. Beyond the naked economic fig-ures, this means: medium-sized business de-veloped into an anchor of stability in these not-always-simple economic times.

In this annual report, we would like to pre-sent four of our customers as examples. They show how one can build up a successful busi-ness from the visionary ideas of two found-ers. How constant innovation brings eco-nomic advantages. How successful one can be through bi-national work. Or how a market leader in the region and beyond can emerge from small beginnings.

Behind a successful strategy are always the people that implement it in reality. This ap-plies to our customers, but it also applies to SaarLB’s employees and their tremendous consulting performance and expertise in their respective industry. Here we would like to heartily thank them for their excellent work. Their performance makes it possible to show SaarLB’s business results in 2011.

Specifically, we have further expanded the di-rect customer business. Besides a stable cor-porate customer segment, the area of project

financing, among others, was very successful again. Particularly in the area of renewable energies, we see that the transition to renew-able energies has not only showed up in our minds, but also in the order books of compa-nies undertaking projects. At the end of 2011, the projects financed by SaarLB exceeded a volume of one billion euros. A significant trend in the direction of investments in physi-cal property can be seen in the growth in the area of real estate. And we want to further ex-pand the support of high net worth custom-ers with our newly formed “Wealth Manage-ment” team.

Furthermore, we are financing important in-frastructure projects and tourist investments in the region, such as the Bostalsee leisure park. Among others, in the financing of the leisure parks, we enjoy a very good collabo-ration with savings banks in the region. We want to further expand this collaboration. For example by providing consulting services to municipalities.

This does not hide the fact that the increas-ing tendency toward regulation will result in demands. We have no doubts that we will overcome this – in dialogue with our share-holders and supported by them.

Since we have the appropriate strategy, the extensive expertise of our employees and very successful customer relationships. And last but not least, the right partners whom we would like to thank again heartily.

Frank EloyWerner SeverinThomas Christian Buchbinder

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CORPORATE REPORT 2011 | GROUP MANAGEMENT REPORT

OVERVIEW

ECONOMIC ENVIRONMENT

The economic recovery in Germany also con-tinued in the second year after the global economic and financial market crisis. Gross domestic product rose in real terms by 3.0% in 2011 and was significantly above the amount in the euro zone (1.4%). Consequently, the pre-crisis level was passed again. Most of the economic growth came in the first half of the year. In the second half, the economic momen-tum slowed noticeably due in part to the un-certainties as a result of the sovereign debt crisis. In the fourth quarter, economic output actually even declined slightly. The drivers of growth came primarily from the domestic economy in the past year. On account of the strong economic recovery, capacity utilisation normalised. With this, there were again more investments to maintain and an expansion of production capacities. Private consumption, benefiting from the good labour market, also made a noticeable contribution to growth. Government consumption expenditures rose again, but not to the same extent as in the year before on account of the expiration of stimulus programmes. The performance of foreign trade continued to be dynamic, even if its share of growth was less than that of do-mestic demand. Thanks to the good economic development, Germany was able to reduce its government deficit spending to 1.0% of gross domestic product.

In 2011, the Saarland economy continued to grow. However, the positive sentiment dimmed noticeably in the second half of the year, as it did on the federal level. The engine of growth again consisted of industrial com-panies. In particular, the pillars of Saarland industry such as the metal industry, automo-bile production and machine building enjoyed substantial increases in orders and sales. This applies to both domestic and foreign busi-ness. The Saarland construction industry and craftsmen benefited from the general

economic recovery. Retail in Saarland also registered a marked revival. As a result of the good economic performance, the situation on the labour market also improved in step with the trend in Germany as a whole.

The economy in Rhineland-Palatinate was also in a very good state in the past year. The industrial sector again made a major contri-bution to this. In addition, the construction industry developed positively. Furthermore, retail and business service providers reported good business. The level of investment and employment in the Rhineland-Palatinate economy rose again in 2011.

The French economy completed 2011, after an initially positive start, with a growth rate of 1.7%. The business climate worsened substan-tially in the second half of the year, particular-ly in the sectors of services, retail and indus-try. The confidence of private households fell accordingly, so that consumption stagnated in the past months. The generally poor situa-tion on the French labour market reinforced these difficulties.

With anticipated growth of around 1.3% in 2011, Lorraine’s development was fundamen-tally positive, commensurate with the devel-opment in the country as a whole. Small and medium-sized enterprises were able to gener-ate good growth rates so that investment ac-tivity increased as a result. The industrial sec-tor also performed on the level of the national economy thanks to a slight increase in export activities.

Despite the significant slowing of the small and medium-sized business activities in Al-sace in the second half of the year, the slight-ly positive trend over the entirety of 2011 was confirmed. Consequently, an increase of roughly 0.9% in gross domestic product is an-ticipated. Business sales rose in comparison to 2010, particularly due to the increases in exports, in the electrical industry and cargo industry. Investment activities increased only slightly on the other hand.

Group Management Report

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BANK INDUSTRY

The risks for the German financial system have increased significantly with the spreading of the sovereign debt crisis. In the second half of 2011, some measures were taken on the Euro-pean level, but the confidence of capital mar-kets fell in countries such as Ireland, Portugal, Italy and Spain. All measures were directed at the prevention of possible contagion, which relates in particular to aid for Greece. At the beginning of 2012, Europe – the European Cen-tral Bank and the EU Commission – together with the IMF agreed to another aid package for highly indebted Greece. These measures were only made possible by the high partici-pation of the private sector.

As a result of the crisis in the euro zone, the euro came under pressure on foreign ex-change markets. Against the USD, it appre-ciated temporarily in the first few months of the year, but had fallen by 3% at the end of year. European stock markets were also hurt by the next escalation of the European sovereign debt crisis. The CDAX, for example, fell 17% in the course of the year. As a result of the uncertainty, the preference for liquid, first-class assets and bond returns increased even more in the euro zone. Consequently, the returns on German government bonds fell due to their safe haven status, while the refi-nancing costs for Greece became significantly more expensive due to high credit spreads. In order to gain control of the situation, the ECB reduced the base interest rate in two steps to the historically low level of 1% after it had been raised previously, also in two steps.

Despite the dimming economic prospects and the difficult market environment, German banks strengthened their risk-bearing capac-ity. As a result of the EU stress tests, signifi-cant measures were taken in part to strength-en equity. The banks are being confronted with increasingly high capital requirements. While the recommendations of the Basel committee in the form of Basel III will initially be implemented on the European level in the

summer, the European bank supervisory au-thority EBA has already laid down substan-tially higher capital requirements and goes significantly beyond the requirements of Ba-sel III. Additionally, the liquidity requirements are also considered a significant part of the re-formed policies.

SAARLB

SaarLB is the Franco-German regional bank and the parent company of the SaarLB Group. It specialises in the SME segment and in fi-nancing commercial real estate, focusing on customers in its home market of Saarland, the adjoining state of Rhineland-Palatinate and Eastern France, particularly the neigh-bouring Alsace-Lorraine region, where it is rep-resented as SaarLB France through its Metz branch and the sales offices in Strasbourg and Paris. Furthermore, the business activities include the financing of projects in the area of renewable energies, advisory services for high net worth individuals and institutional investors as well as the financing of primar-ily public-sector bodies in the region. Landes-bausparkasse Saar, part of the SaarLB Group, finances residential real estate through its home loan savings business. SaarLB’s Luxem-bourg branch was closed on 31 December 2011 and social-contract agreements were reached with the employees. The investments made in the past (until 2008) in international cor-porations and banks as well as exposure to in-ternational commercial real-estate financing are no longer included as part of the SaarLB Group’s core business. The systematic reduc-tion of these portfolios, which began in previ-ous years as part of active portfolio manage-ment, was continued in 2011.

As a member of the Saarland Sparkassen-Fi-nanzgruppe, SaarLB and Landesbausparkasse Saar are heavily involved in the syndication business and as an arranger with the region’s savings banks. SaarLB is also a centre of excel-lence, particularly for project financing, corpo-rate financing, foreign commercial business

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and interest and currency management.

SaarLB is the largest bank in Saarland and feels a particular obligation to the region. This is seen in the promotion of science and culture through the awarding of the SaarLB science prize and countless permanent loans to the Saarland museum.

The number of members on the Board of Man-agement fell from 4 to 3 in the middle of the year. The vacant position as a result of Mr. Müsch reaching retirement age has not been reoccupied so that the Board of Manage-ment’s responsibilities were rearranged. As a regional employer, SaarLB offered attractive jobs to an average of 497 employees in 2011 (2010: 498) and traineeships for 17 people em-barking on their careers (2010: 18). The employ-ees are a key factor behind the Group’s busi-ness success. SaarLB pays special attention to continually improving their qualifications, particularly with regard to the systematic de-velopment of their French language abilities and expanding their knowledge of business practices and legal standards in France.

In the reporting year, SaarLB largely standard-ised its IT landscape and completed a change to OSPlus as the central IT application in col-laboration with FinanzInformatik. The migra-tion took place as planned on the weekend of 10/11 September 2011; as a result, it was pos-sible to switch off the overwhelming majority of the former IT system landscape.

SaarLB’s ownership structure at the end of 2011 remained unchanged from the end of the previous year and was as follows: BayernLB holds 49.9% of the shares, Saarland 35.2% and Saar Association of Savings Banks 14.9%. There are further options to transfer addi-tional shares of BayernLB to Saarland. The transfer originally planned for 2011 has been postponed to 2012 with the agreement of all participants.

Total assets of the SaarLB Group have in-creased by 3.7% to EUR 19.8 billion since 31

December 2010 despite the ongoing planned reduction of the portfolios that no longer be-long to the core business. The increase results on the one hand from the good development in the core areas of SaarLB and is reflected in the rise of the commensurate loans and ad-vances to customers. On the other hand, the increase is due to the planned rise in loans and advances to banks. Together with the increase in the volume of money market trad-ing (EUR 0.7 billion), these effects exceed the planned decrease in the “reduction portfolio,” which is no longer a part of the bank’s core business and which fell by another roughly EUR 1.5 billion in 2011.

The financial position of the SaarLB Group can be assessed as good. On the refinancing front, the Bank is able to deposit sufficient first-class securities as collateral and so pro-cure liquidity on suitably favourable terms.

Income in the core business areas of the Saar-LB Group – particularly the net interest and net commission income – also continued, af-ter 2010, their improvement in financial year 2011. The risk provision in the credit business again fell in comparison to the previous year and, at EUR 19.1 million, is EUR 3.2 million (-14.4%) below the already low level of the pre-vious year. The charges are due to the result of fair value measurement (EUR -16.2 million). The poor performance of our equity invested in special funds, which are measured accord-ing to the fair value option, and the negative market performance of interest and credit de-fault swaps (CDS), is reflected here.

The administrative expenses at EUR 78.5 mil-lion were 8.8% above the corresponding level of the previous year as of 31 December 2011. Personnel expenses amount to EUR 38.7 mil-lion and increased by just 1.8% in comparison to the prior year (EUR 38.1 million). The oper-ating expenses including depreciation rose significantly by 16.7% to EUR 39.8 million. Around EUR 8.5 million of project and consult-ing costs are included here, mainly migration costs for the IT migration project completed

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in September 2011. Furthermore, the operat-ing expenses in 2011 were also affected by the bank fee of EUR 2.8 million, which had to be paid for the first time.

The consolidated net profit before taxes amounted to EUR 18.2 million in the 2011 financial year (2010: EUR 31.3 million). Af-ter consideration of the actual taxes of EUR 11.6 million and deferred tax income of EUR 15.4 million – EUR 5.5 million of which is due to the capitalisation of deferred taxes for losses carried forward – and thus in total posi-tive income taxes of EUR 3.8 million, there re-mains a consolidated net profit after taxes of EUR 22.0 million (2010: EUR 21.6 million).

The SaarLB Group will service its hybrid capi-tal in full, however no dividends will be paid on the shareholder capital of SaarLB, result-ing in an overall retained profit of EUR 11.3 mil-lion (2010: EUR 13.4 million).

Under consideration of the further improve-ment in the revaluation reserve (EUR +4.6 mil-lion in comparison to 31 December 2010), the SaarLB Group’s equity increased again.

EARNINGS

The SaarLB Group’s net interest income rose by 11.7% from EUR 109.2 million in 2010 to EUR 122.0 million in 2011. Again the increases were from the rise in the interest margin con-tribution in Corporate Customers Germany and in Real Estate and Project Financing. They were able to overcompensate the lower income from the reduction portfolio that came with the decrease in the portfolio. The interest margin contribution from the depos-its business also increased on account of the significantly higher margins. The maturity transformation contribution improved year on year, in part due to the inexpensive refi-nancing opportunities at the ECB. The Landes-bausparkasse’s net interest income also in-creased in comparison to 2010. Furthermore,

the interest expenses for subordinated and hybrid capital declined by EUR 7.9 million in comparison to the prior year on account of lower portfolios.

The risk provision in the credit business fell again as compared to the previous year and, at EUR 19.1 million, is EUR 3.2 million (-14.4%) below the already low level of EUR 22.3 mil-lion from 2010. Just under 20% of the individ-ual risk provisions were attributed to the Cor-porate Customers business segment, roughly 35% to Real Estate Customers and roughly 30% to the reduction portfolio that is no longer part of the bank’s core business. Partic-ularly affected, as in the previous year, were the industries of automobile production, real estate, construction and risk-relevant private persons. The risk ratio (EL ratio) of the credit portfolio is 0.174% as of 31 December 2011 and fell again in comparison to the previous year’s amount (0.206%).

The risk provision also decreased in 2011 through the net releases for portfolio risk pro-visions for the balance sheet and off-balance sheet credit business of EUR 3.7 million (2010: EUR 12.6 million).

Another pleasing development is the perfor-mance of net commission income, which rose by 6.5% or EUR 0.7 million year on year to EUR 11.5 million. In its budget, the Group ex-pected a decline in income as compared to the previous year (2010: EUR 10.8 million). The in-crease in the net commission income is main-ly due to the commission income in the credit business (EUR +1.8 million), which is primarily connected with the significant increase in the volume of new business in the financing of projects in the area of renewable energy. The increase in commission expenses in the secu-rities business as compared to the prior year (EUR +0.6 million) is directly connected with the increase in sales in the consolidated secu-rities special funds. In the home loan savings business, the increases in closing fees and the brokerage commissions showed up in the lower commission income (EUR -0.5 million)

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due to the higher volume of new business as compared to the prior year.

The gains on fair value measurement fell by EUR 23.5 million from EUR +7.3 million in 2010 and thus reduced the gains or losses on fair value measurement to EUR -16.2 million. The result was significantly impacted by the ongo-ing drop in interest rates in the course of 2011 in the euro zone. For the interest derivatives used primarily for the management of assets and liabilities, negative fair value changes of EUR -3.3 million were reported (prior year: in-come of EUR +12.0 million). Equity/index-relat-ed transactions and transactions with other risks as well as credit derivatives assigned to the reduction portfolio (CDS) reduced the re-sult in 2011 by another EUR -3.8 million (2010: EUR -1.4 million).

Furthermore, the equities and securities of the special funds measured at fair value of EUR -9.8 million (2010: EUR -2.9 million) made a significant contribution to the negative re-sult in this item.

The gains on hedge accounting in the amount of EUR +43,000 (2010: EUR +479,000) result from hedges that were concluded and desig-nated to protect against the risks of changes in interest rates for receivables in the cat-egory of “Loans and Receivables” (LaR) as well as securities in the category of “Available for Sale” (AfS).

The losses on investments amounted to EUR -3.9 million in 2010 and to EUR -0.5 mil-lion in the past financial year 2011. While the gains on investments in the category of “Held to Maturity” (HtM) were insignificant, as in 2010, at EUR +0.1 million, the gains or losses on investments in the categories of LaR and AfS were very different in financial year 2011.

The losses of EUR -12.1 million on invest-ments from the category of LaR, which are due on the one hand to the write-down of securitisations in the reduction portfolio of so-called ABS (asset-backed securities) and

on the other to the additions to the portfolio provision, particularly due to the addition of two bonds from Greek banks (total volume of EUR 25 million) for roughly EUR 4.9 mil-lion, could be largely compensated by income on investments from the category of AfS. In particular, the disposal proceeds from the capital reduction of GLB GmbH & Co. OHG on account of the sale of the interest in Deka-Bank contributed EUR +12.3 million to the positive gains in this category. Write-downs on investments in the AfS category amount-ed to EUR -1.1 million and were due in particu-lar to other investments.

The administrative expenses were EUR 78.5 mil-lion as of 31 December 2011 or 8.8% above the amount from 2010, but still significantly be-low the amount of EUR 82.2 million, which was planned for 2011. Personnel expenses amount-ed to EUR 38.7 million and increased by just 1.8% in comparison to 2010 (EUR 38.1 million). Operating expenses, including depreciation of property, plant and equipment and amorti-sation of intangible assets, rose significantly by 16.7% to EUR 39.8 million. Around 8.5 mil-lion of project and consulting costs are includ-ed here, mainly migration costs for the IT mi-gration project completed in September 2011. Furthermore, the operating expenses in 2011 were hurt by the bank fee of EUR 2.8 million, which had to be paid for the first time.

Other income amounted to EUR -1.3 million (2010: EUR +1.6 million). Other income fell from EUR 6.3 million in 2010 to EUR 4.0 mil-lion in 2011. It mainly includes rental income from the real estate held as an investment (EUR 1.4 million; 2010: EUR 1.1 million), income from the release of accruals (EUR 1.2 million; 2010: EUR 2.5 million) and the reimburse-ment of costs and charged-on staff and op-erating costs from data processing services (EUR 1.2 million; 2010: EUR 2.6 million).

Other expenses increased year on year by EUR 0.5 million to EUR 5.2 million in 2011. In particular, the offsetting of expenses with partnerships (EUR 1.5 million) and expenses

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in connection with personnel adjustments (EUR 1.0 million) contributed to this.

In total, there was a consolidated net profit before taxes of EUR 18.2 million in financial year 2011 (2010: EUR 31.3 million).

After consideration of the actual taxes of EUR 11.6 million and deferred tax income of EUR 15.4 million – EUR 5.5 million of which is due to the capitalisation of losses carried for-ward – and thus in total positive income taxes of EUR 3.8 million, there remains a consolidat-ed net profit after taxes of EUR 22.0 million (2010: EUR 21.6 million).

The SaarLB Group will service its hybrid capital in full, and EUR 10.7 million (2010: EUR 8.2 mil-lion) will be distributed on the equity compo-nents, but no dividends will be paid on the shareholder capital of SaarLB, resulting in an overall retained profit of EUR 11.3 million (2010: EUR 13.4 million).

The cost income ratio (CIR) of the SaarLB Group is defined as the ratio of the admin-istrative expenses to the gross income (net interest income, commission income, shares of profits in associated companies and other income). In 2011, it amounts to 59.3% despite the bank fee and the increase in project and migration costs (2010: 59.2%).

SaarLB’s return on equity (ROE) – the ratio of the Group’s earnings before taxes to average allocated equity – was 4.0% (2010: 7.6%).

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FINANCIAL POSITION

The SaarLB Group’s financial position also remained good in 2011. There is still a net in-flow of liquidity in the liquidity commitment schedule, which will continue in the years ahead. This flow of liquidity from the asset business can be used again to refinance new business. SaarLB’s collateral pool – the pool of assets serving as collateral for Pfandbriefs – continues to be at a high level.

The situation on the capital market improved again as compared to financial year 2010, from the perspective of the SaarLB Group. With just under EUR 0.7 billion (2010: EUR 0.6 bil-lion), the issuing volume in 2011 slightly in-creased again as compared to the previous year of 2010. In the process, the SaarLB Group also succeeded in refinancing itself primarily via uncollateralised issuances with long ma-turities. The refinancing instrument dominat-ing the new issuances is promissory notes, which make up 56% of it.

In order to ensure solvency at all times, SaarLB deposited securities amounting to EUR 1.4 billion at the ECB. Payment obliga-tions could therefore be met independently of other sources of refinancing.

The SaarLB Group’s ability to meet its pay-ment obligations was thus ensured at all times in the 2011 financial year.

The SaarLB Group’s access to money and capi-tal markets is supported by the credit ratings of two international rating agencies. The rat-ing agency Fitch introduced the Viability Rat-ing in 2011 and raised SaarLB since then by one notch to bb+. The rating agency Moody’s Investor Services lowered the Group’s parent company SaarLB in November 2011 by two notches in the course of a general review of the state bank ratings. No impact on the fi-nancial position of the SaarLB Group was observed from these measures. Even if both

rating agencies made ununiform adjustments in their ratings, the assessment of the bank’s credit rating remains on a relatively high level:

• Moody’s Investors Service: A3 / P-2 (with state guarantee: Aa1)

• Fitch Ratings: A / F1 (with state guarantee: AAA) / bb+ Viability.

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ASSETS

The SaarLB Group increased its total assets by 3.7% to EUR 19.8 billion as of 31 December 2011 (31 December 2010: EUR 19.0 billion). The growth resulted from the good performance in the core areas of the SaarLB Group, which can be seen in the increase in loans and ad-vances to customers. At the same time, loans and advances to banks and securities repur-chase transactions rose as of 31 December 2011 as planned. In total, the scheduled de-cline in the reduction portfolio (EUR -1.5 bil-lion in 2011) was overcompensated.

The liabilities to customers rose again on ac-count of the inflow of money market funds. Although the issuing volumes in 2011 were above the level of the previous year, the secu-ritised liabilities fell further as a result of ma-turities. Subordinated capital was reduced on schedule as a result of the maturities of profit participation rights and silent reserves.

The SaarLB Group’s equity increased further to EUR 461 million (2010: EUR 449 million) – also under consideration of the further im-provement in the revaluation reserve.

The credit volume of the SaarLB Group – simi-lar to total assets – rose by 2.8% in the 2011 financial year. It amounts to EUR 20.3 billion (2010: EUR 19.7 billion).

Loans and advances to banks rose by roughly 7.1% to EUR 4.1 billion as compared to 31 De-cember 2010. The investment of excess liquid-ity primarily at major European banks was responsible for this.

Investments fell by roughly EUR 0.8 billion to EUR 6.5 billion (-10.9%) due to the redemption of bank securities and investments in corpo-rates that do not belong to the core business.

Loans and advances to customers increased by 13.7% to EUR 8.6 billion (2010: EUR 7.6 bil-lion). The reason for this was the portfolio growth in the core business segments, par-ticularly in the Projects and Real Estate seg-ments.

Both contingent liabilities of EUR 0.3 bil-lion (2010: EUR 0.3 billion) and irrevocable credit commitments of EUR 0.8 billion (2010: EUR 0.7 billion) were almost at the level of previous year.

The portfolio performance is reflected – as illustrated in the following – in the business segments of the SaarLB Group:

PORTFOLIO PERFORMANCE

Changes in credit volume 31 Dec. 2011 EUR million

31 Dec. 2010 EUR million

Change

absolute %

Loans and advances to banks 4,106 3,834 272 7.1

Investments1) 6,531 7,330 -799 -10.9

Loans and advances to customers 8,607 7,573 1,034 13.7

Contingent liabilities 290 271 19 7.0

Irrevocable credit commitments 757 737 20 2.7

Total credit volume 20,291 19,745 546 2.8

1) Including interests in associated companies and securities repurchase transactions

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Corporate Customers serves German and French SMEs. In the past financial year, the positive trend from 2010 continued overall. Both in our target markets of Saarland, Rhine-land-Palatinate and the surrounding regions, including the French side, and particularly Alsace and Lorraine, it was possible to moder-ately increase the credit volume as of the end of the year. This is, among others, due to the increased usage of cross-border consulting and financial services, which now represent a unique selling point for the SaarLB Group with its French and German customers. The SaarLB Group also benefits, on the German side, from long-term customer relationships that were in turn the basis for the structur-ing and financial support of numerous in-vestment projects in 2011. The revaluation of the entire Corporate Customers business segment amounts to EUR 196 million (2010: EUR 210 million), whereby roughly two-thirds is attributable to Germany and one-third to France. The margins rose noticeably year on year. Risk premiums can be charged increas-ingly better on the market. Furthermore, the portfolio quality continued to improve. Over-all, the credit volume in the business segment as of 31 December 2011 was EUR 1.7 billion, slightly above the level from the prior year.

The business segment of Real Estate and Projects is responsible for the financing of commercial real estate and project financ-ing, especially in the sector of renewable en-ergy in Germany and France. Furthermore, PPP (public private partnership) financing in both regional markets is also included in the project financing. In the subsegment Real Estate, roughly EUR 631 million was re-valued/extended in 2011 (2010: EUR 420 mil-lion) of which EUR 357 million was in France and EUR 274 million in Germany. In the PPP subsegment, the Group has positioned it-self well on the French market in the mean-time. Consequently, SaarLB was awarded 3 financing mandates with a total volume of EUR 77 million, including 2 projects with in-vestments in the educational infrastructure (EUR 61 million) in Lorraine. In the Project

Financing subsegment, loans for renewable energies were valued at EUR 561 million (2010: EUR 249 million). Of this amount, almost 90% was attributable to the French market, which again underscores the substantial market po-sition and the structuring and legal expertise of the SaarLB Group as the Franco-German re-gional bank. Overall, the credit volume of the business segment rose by roughly EUR 0.9 bil-lion from EUR 3.8 billion as of 31 December 2010 to EUR 4.7 billion as of 31 December 2011.

Privately used real estate was financed in close collaboration with the Saarland sav-ings banks exclusively through Landesbaus-parkasse Saar, which belongs to the SaarLB Group. The credit volume of the Landesbaus-parkasse was EUR 0.5 billion as of 31 Decem-ber 2011 and roughly at the level of 2010.

The credit volume of the Savings Banks, Insti-tutionals and High Net Worth Individuals seg-ment – above all from the financing of savings banks and municipalities in the region – in-creased slightly in comparison to 31 December 2010 to roughly EUR 2.1 billion. The new busi-ness in the municipal sector improved succes-sively in particular to secure the low interest rates. Demand on the part of savings banks remained limited due to their good liquidity position. The non-portfolio-related business with institutional investors and high net worth individuals was fairly moderate. The ex-pectation of increasing interest and particu-larly the ongoing discussion of the sovereign debt crisis made activities in this segment difficult in the past financial year. In addition to the cooperation between the SaarLB Group and Berenberg Bank, Hamburg, which has existed since the end of 2009, we improved high net worth individuals’ perception of the SaarLB Group through the creation of a spe-cialised team for wealth management in 2011 and strengthened our image in this segment.

The Treasury and Portfolio Management segment handles the active management of all the portfolios of the SaarLB Group that no longer belong to the core business. This

20

includes both the so-called reduction portfo-lios (mainly the investments in international banks and corporates outside the core of Europe, the international commercial real es-tate financing, the securitisations and diverse smaller subportfolios that the SaarLB Group would like to dispose of in the medium term) and Securities Account A, which is held pri-marily according strict liquidity criteria and consists of a securities portfolio with a focus on European companies in the investment grade area). While the reduction portfolios in 2011, in accordance with the Group’s strate-gic orientation, fell by roughly EUR 1.5 billion to EUR 3.7 billion primarily due to redemp-tions, but also due to the reclassification to Securities Account A, the corresponding vol-ume in Securities Account A rose slightly to EUR 2.3 billion on the basis of the prescribed structural and investment parameters.

In consideration of Basel III, the building of a corresponding LCR portfolio was be-gun in 2011. As of 31 December 2011, a good EUR 0.3 billion of securities meeting Basel III requirements were in the portfolio.

Furthermore, this business segment is re-sponsible for liquidity and the asset/liabili-ties management of the Group. For this rea-son, the SaarLB Group managed a money market portfolio with an asset volume of EUR 2.2 billion as of 31 December 2011 (2010: EUR 1.5 billion). This increase is mainly con-nected with the additions of contributions by institutional investors. On the other hand, the securities investments of EUR 2.9 billion (2010: EUR 3.2 billion) were below the level of the prior year.

Derivatives business is conducted overwhelm-ingly to hedge the Bank’s own interest rate risk as part of asset/liability management. The nominal volume fell by EUR 0.6 billion to EUR 16.5 billion (2010: EUR 17.1 billion). In the breakdown according to types of business, 80.6% of this is attributable primarily to in-terest swaps.

REFINANCING

Development of liabilities 31 Dec. 2011 EUR million

31 Dec. 2010 EUR million

Change

absolute %

Banks 8,008 7,692 316 4.1

Customers 5,905 5,136 769 15.0

Securities (Securitised liabilities) 4,329 4,749 -420 -8.8

Volume of liabilities 18,243 17,577 666 3.8

21


Liabilities to banks increased by EUR 0.3 bil-lion (4.1%) to EUR 8.0 billion in comparison to 31 December 2010.

Liabilities to customers rose, on the other hand, more significantly by 15% or EUR 0.8 bil-lion to EUR 5.9 billion (2010: EUR 5.1 billion). The reason for this was primarily the inflow of liquidity from institutional investors in the money market.

The two aforementioned balance sheet items show that the SaarLB Group is increasingly in demand on the market.

The securitised liabilities declined by EUR 0.4 billion to EUR 4.3 billion (2010: EUR 4.7 billion). The SaarLB Group used the capital market and replaced due securities to the extent required for interest and liquidity management.

The SaarLB Group’s liabilities structure is shown in the chart below:

SUBORDINATED CAPITAL

Subordinated capital fell by EUR 61 million to EUR 352 million. While the subordinated lia-bilities remained almost identical to the prior year, profit participation rights (EUR 23.9 mil-lion) scheduled to fall due were not replaced so that the debt components, partially due to the shorter maturities of the still denominat-ed profit participation rights, fell on balance by EUR 20.6 million.

Furthermore, the debt components for the reserves of silent shareholders fell by EUR 40.5 million in 2011. Of this amount, EUR 47.8 million are due to scheduled maturi-ties and EUR 2.7 million to contractual adjust-ments. The opposite effect resulted from the lower maturities, which had the impact of raising the debt components of the reserves of silent shareholders by EUR 10.0 million.

REPORTED EQUITY

Reported equity rose by EUR 12 million to EUR 461 million. The change is primarily due to the decline in equity components with hybrid cap-ital instruments (EUR -10.6 million) and the increase in retained earnings (EUR +20.3 mil-lion).

Finally, the reported equity improved, among others, due to an increase in the revaluation reserve by EUR 4.6 million to EUR -11.6 mil-lion. The reason for the positive development of the revaluation reserve was primarily the shortening of the maturities in the securities portfolio.

The reclassification of securities from AfS to LaR and HtM was completed in the 2008 fi-nancial year on the basis of the amendments to IAS 39 as a result of the financial market crisis and led to the disclosure of further gross valuation losses (i.e. before offsetting deferred tax assets) of EUR 66.7 million as of 31 December 2011 (2010: EUR 42 million).

Structure of liabilities (in %)*

45

40

35

30

25

20

15

10

5

0Banks Customers Securities

31 Dec. 2009 31 Dec. 2010 31 Dec. 2011

* Excluding held for trading, other liabilities and subordinated liabilities

22

REGULATORY CAPITAL

SaarLB’s equity in accordance with regulatory requirements remained almost unchanged in comparison to 31 December 2010. The equity required according to the Solvency Ordinance amounted to EUR 865.2 million as of 31 De-cember 2011 (2010: EUR 868.8 million). On ac-count of the use of the exemption provisions pursuant to Sec. 31 of the Banking Act, SaarLB has not prepared any regulatory group report since the reporting deadline of 30 June 2011. To this extent, the following figures include only the single institute, while the figures from 2010 still represent the group report.

The core capital before deductible items rose by roughly EUR 23.1 million to EUR 822.6 mil-lion. This is due to the increase in reserves pur-suant to Sec. 340 g of the German Commercial Code in the amount of EUR 15.0 million that took effect upon approval of the annual fi-nancial statements and the retained earnings of EUR 8.1 million due to the implementation of the German Accounting Law Modernisa-tion Act. For permanent silent reserves with a volume of EUR 20.0 million, the date of the creditor termination right was amended and moved from 31 December 2013 to 31 December 2016.

The supplementary capital before the de-ductible items was EUR 173 million (2010: EUR 178.7 million) and declined slightly on ac-count of the regulatory subordinated liabili-ties that cease to be eligible.

The value adjustment shortfalls, which must be deducted fifty-fifty from core and sup-plementary equity, rose by EUR 19 million to EUR 109.1 million. This amount results from the difference between the actual value ad-justments made in accordance with economic standards and those that must be forecast based on prudent regulatory requirements.

Likewise, the items, which must be de-ducted fifty-fifty from core and supplemen-tary capital, increased for investments to

EUR 20.9 million (2010: EUR 17.1 million). The reason for this is both the increase in an in-vestment and the discontinuation of the group reports.

The SaarLB Group’s risk positions slightly rose as of 31 December 2011 to EUR 7.6 billion in comparison to EUR 7.4 billion at the end of 2010, as total assets also slightly increased. In 2010, they declined slightly.

As of the reporting deadline, the core capital ratio was 9.9% and almost at the 2010 level (10.0%), while the solvency coefficient fell to 11.4% (2010: 11.7%).

With the approval of the annual financial statements (German Commercial Code) of the Group’s parent company SaarLB, the sup-plementary equity of SaarLB will be strength-ened by EUR 0.2 million through the increase in reserves pursuant to Sec. 340 f of the Ger-man Commercial Code.

Furthermore, in 2010, the SaarLB Group had already begun the preparations for the stricter capital requirements pursuant to Basel III and will extend the majority of its dated silent reserves under consideration of the new regulations. Whether and how the recognition of silent reserves will ultimately be regulated as equity under Basel III has not been determined yet. Irrespective of these de-cisions that are expected in 2012, the prepara-tions for Basel III in the coming financial year will be systematically continued.

23


SUPPLEMENTARY REPORT

There have been no events of special signifi-cance since the end of the year under review.

RISK REPORTRisk management and monitoring principles

The SaarLB Group manages and monitors its risks on the basis of uniform principles. All in-formation given below relates to the SaarLB Group unless expressly stated otherwise. Management of subsidiaries and companies valued at equity takes place as part of invest-ment controlling.

The key risk management and monitoring principles are laid down in SaarLB’s risk strat-egy. In accordance with the business strat-egy, the Board of Management lays down the policy for dealing with counterparty default risk (incl. credit spread risks, country and in-vestment risks), market price risk, liquidity risk and operational risk, which are the key risk types for SaarLB. It is responsible for and monitors the implementation of these guide-lines.

Generating a reasonable and sustainable re-turn after allowing for risk is the ultimate aim of all SaarLB’s business activities. Risks may only be entered into to the extent permitted by SaarLB’s risk-bearing capacity.

Suitable limits for the key risk types have therefore been set and appropriate proce-dures for identifying, measuring and monitor-ing them defined as part of the risk strategy.

The tasks, competencies and responsibilities of the staff involved are based on clearly de-fined organisational structures and proces-ses. Organisational structures take account of the supervisory requirements under the Minimum Requirements for Risk Manage-ment (MaRisk) and the Solvency Ordinance

(SolvV) on the division of functions between Sales and Trading (business segments) on the one hand and Risk Office, Settlement and Risk Controlling on the other.

While business areas are based around Saar-LB’s business model, core competencies have been combined in the organisation of the Risk Office and Settlement.

Global Risk Management is in charge of risk controlling of all risk types at the portfolio level. Risk Office is responsible for managing and monitoring counterparty risk at the indi-vidual exposure and sub-portfolio level. This involves integrated risk reporting of all risk types as part of a joint MaRisk risk report.

Internal Audit reports directly to the Board of Management and is answerable to its Chair-man. It is an independent internal division that audits and assesses, on the basis of a risk-oriented audit approach, all activities and processes within SaarLB, including the internal control system and risk manage-ment and controlling. This also applies for outsourced activities and processes. Internal Audit acts in accordance with legal and super-visory requirements such as KWG (Banking Act), MaRisk.

With the enforcement of the 3rd MaRisk amendment on 15 December 2010, SaarLB im-mediately began the implementation of the new requirements and completed them in ac-cordance with the requirements at the end of 2011.

Capital management

The supervisory requirements set out in the Solvency Ordinance are key for SaarLB when assessing and managing capital adequacy as well as maintaining economic risk-bearing ca-pacity.

24

Regulatory capital

SaarLB has applied the relevant rules on calcu-lating capital requirements under the Solven-cy Ordinance since obtaining approval from the German Federal Financial Supervisory Authority (BaFin) to use the Internal Ratings Based Approach (IRBA) from 1 January 2007.

Regulatory capital – i.e. equity – comprises core capital (essentially nominal capital, si-lent partner contributions and reserves, in-cluding the reserves under Section 340 g of the Commercial Code) plus supplementary capital (essentially profit participation rights and long-term subordinated liabilities) after deductible items.

The overall ratio – the ratio of capital to risk positions calculated under Solvency Ordi-nance rules – may not fall below 8.0% from a regulatory point of view. SaarLB has specified a stricter target ratio of 10.0% for its Group figure and a core capital target ratio of 8.0% in its internal management. The latter is the ratio of core capital (after deductible items) to risk exposures.

Target values are constantly maintained by means of medium-term planning over a five-year timeframe. The Corporate Development segment is responsible for the strategic plan-ning process. On the basis of the economic conditions determined in this process, each business area performs its own risk exposure planning for this time period. Their figures are then collated at Group level by Controlling – the department in charge of the quantitative aspects of medium-term planning – and com-pared with the equity available in the plan-ning period. Finally, the measures needed to procure capital or scale back proposed busi-ness area budgeting are defined to ensure the targets are met.

An overview of the key Solvency Ordinance data as of the balance sheet date of 31

December 2011 and the corresponding fig-ures from the previous year are given below. SaarLB has no longer prepared regulatory group reports since the middle of 2011. To this extent, the figures as of 31 December 2011 include only the single institute (the figures from 2010 are on the Group level).

Key Solvency Ordinance (SolvV) data 31 Dec. 2011 31 Dec. 2010

Risk exposure (EUR million) 7,618 7,434

Equity (EUR million) 865 869

of which: core capital (EUR million) 757 745

Equity ratio (Group level in %) 11.4% 11.7%

Core capital ratio (in %) 9.9% 10.0%

SaarLB’s equity remained almost unchanged year on year. SaarLB complied with the mini-mum regulatory ratio of 8.0% for the total ratio during the entire reporting period at all times as well as its stricter target ratios. Good overall capital adequacy ratios were also re-flected in the results of the required regula-tory stress tests: based on the assumption of economic weakness, the equity ratio at the Group level was 9.5% and the core capital ra-tio was 8.5% as of 31 December 2011.

25


ECONOMIC CAPITAL (RISK-BEARING CAPACITY)

The core aim of the SaarLB Group’s risk man-agement, aside from complying with regula-tory capital requirements, is to ensure that economic risk-bearing capacity, which is the difference between risk capital (risk cover funds) and risk capital needed, is adequate.

Risk cover funds were fundamentally de-termined on the basis of IFRS accounting and indicate the maximum actual level of

unexpected losses from risks entered into that can be borne.1 In the reporting period, the division of the components of the risk cover funds according to their availability (liquidity) and the external impact of their changes (capital market effects) was discon-tinued with the systematic implementation of the liquidation approach.2

Components of the risk cover funds (EUR million) 31 Dec. 2011 31 Dec. 2010 Delta

Results after taxes (minimum YTD and Proj.) 11.1 21.6 -10.5

+ nominal capital 132.1 132.1 -

+ capital reserves 50.8 50.8 -

+ retained earnings 129.3 116.8 +12.5

+ undated silent partner contributions 137.0 137.0 -

+ dated silent partner contributions 252.3 300.1 -47.8

+ profit participation rights 38.5 82.4 -43.9

+ subordinated liabilities 133.8 143.4 -9.7

+ revaluation reserve -19.0 -16.2 -2.8

Risk cover funds 865.9 968.1 -102.2

less intangibles -2.1 -2.1 -

less balance of silent reserves and hidden charges from securities (LaR and HtM) -39.5 -42.1 +2.6

less excess of deferred tax assets -13.3 -12.9 -0.4

Liquidation cover funds +811.0 +910.9 -99.9

less buffer for business and strategic risks -46.7 -50.5 +3.7

less buffer for real estate risks -6.7 -7.7 +1.0

less buffer for liquidity and reputation risks -17.7 -20.5 +2.8

Available cover funds +739.9 +832.3 -92.4

1 On account of the one-year period under consideration, the equity items as of 31 December 2011 are not reported in the risk cover funds, but rather the figures as of 31 December 2012 (if need be, reduced by maturities in the period under consideration).

2 The comparable figures as of 31 December 2010 were adjusted to the new system. The amount of the risk cover fund as of 31 December 2010 fell by EUR 11.5 million as compared to the system presented in the risk report for the 2010 consolidated financial statements due to the changes in the method of the result (previously a projection before taxes, now a minimum from the current figure and the projection after taxes).

26

The risk cover funds fell in comparison to the date of the previous year primarily due to the declines in the dated silent reserves, profit participation rights and subordinated liabilities. On the one hand, these are maturi-ties from the year 2011, on the other hand ma-turities from the year 2012 that are deducted in the risk cover funds at the reporting dead-line on account of the one-year time horizon of the risk-bearing capacity calculation.3 The available risk cover funds result from the risk cover funds due to the reductive considera-tion of other effects:

• In the liquidity cover funds, elements are de-ducted from the cover funds, which might not retain their value in the case of a liqui-dation.

• Additionally, buffers for risk types are used that are not explicitly taken into consid-eration in the framework of the further eco-nomic risk-bearing capacity calculation.

As part of economic risk capital management, SaarLB monitors its risk profile and ensures

its risk-bearing capacity is always adequate by comparing each month the risk capital al-located to the available cover funds and risk capital needed. Risk capital needed is deter-mined by analysing risk types such as coun-terparty risk (incl. country risk), market price risk, investment risk and operational risk in a consistent manner. The risks from across the Group are collated into an overall assessment of the risk existing. In ICAAP, the value at risk (VaR) method based on a confidence level of 99.95% is used to determine risk capital needed. The limits are set at the level of the individual risk types. The assumptions and results of risk quantification are validated at least annually.

The ICAAP risk-bearing capacity as of 31 De-cember 2011 is illustrated in the following overview.4

Economic risk-bearing capacity (ICAAP) (EUR million)

31 Dec. 2011 31 Dec. 2010

Capital needed

Limit Range Capital needed

Limit Range

Counterparty risk 168.8 230.0 73.4% 176.9 230.0 76.9%

of which default risk (136.5) (180.0) 75.8% (138.9) (180.0) 77.2%

of which credit spread risk (32.3) (50.0) 64.7% (38.0) (50.0) 76.0%

Market risk 7.4 40.0 18.6% 7.2 32.0 22.4%

Operational risk 22.8 27.0 84.4% 22.3 25.0 89.2%

Investment risk 3.4 10.0 34.0% 8.1 10.0 81.0%

Other risks 1.0 3.0 32.5% 1.2 3.0 40.0%

Total 203.4 310.0 65.6% 215.7 300.0 71.9%

Available cover funds 739.9 832.3

3 In 2011, silent reserves of EUR 47.8 million and profit participation rights of EUR 23.9 million were paid back. In 2012, another EUR 20.0 million of profit participation rights and EUR 9.5 million of subordinated liabilities will fall due.

4 In comparison to the system outlined in the risk report for the 2010 consolidated financial statements, credit spread risks (EUR +12.4 million) and market risks (EUR +0.8 million) are quantified higher in the comparable figures as of 31 December 2010. The credit spread risks now include securities from all IFRS holding categories (previously only securities from available for sale and fair value option); market price risks are no longer scaled for a liquidation period of 126 days, but rather for a holding period of 10 days.

27


The SaarLB Group’s risk-bearing capacity was ensured at all times without limitations throughout the reporting period (both in total and on the level of individual types of risk).

Besides the ICAAP risk capital needed, the risk capital needed in the case of serious economic weakness (ICAAP stress) is also determined. While the risk capital needed was initially

calculated under “normal” market conditions, in this instance it reflects possible additional requirements in various stress scenarios. With regard to counterparty risks, a general dete-rioration of the credit portfolio and a further increase in credit spreads are assumed, and for all other types of risk, more stringent assump-tions also apply.

Serious economic weakness (ICAAP stress)(EUR million)

31 Dec. 2011 31 Dec. 2010

Capital needed Capital needed

Counterparty risk 351.5 397.6

of which default risk (298.2) (333.8)

of which credit spread risk (53.3) (63.7)

Market risk 8.4 8.1

Operational risk 27.4 26.8

Investment risk 4.1 9.7

Other risks 1.2 1.4

Total capital needed 392.6 443.6


The further fading of the financial market crisis and the accompanying improvements in the portfolio are reflected in the decline in capital needed for counterparty risks. Even under the assumption of serious economic weakness, the risk-bearing capacity of the SaarLB Group was present at all times without limitations in the reporting period.

COUNTERPARTY RISK (CREDIT RISK)

Under counterparty risk (credit risk), SaarLB combines counterparty default risk and credit spread risks. SaarLB defines counterparty de-fault risk as the risk that the credit quality of a business partner will deteriorate to such an extent that it is unable to meet its payment or contractual obligations towards the Bank either in full and/or on time. Counterparty default risk traditionally covers credit risk but also includes issuer risk, borrower risk,

country risk and investment risk. Other coun-terparty risks (credit spread risks) result from credit-related changes in prices for the securi-ties portfolio (incl. credit derivatives and se-curitisation).

The risk strategy sets out the framework for taking on counterparty default risks. A limit on them, calculated from the risk-bearing ca-pacity, is then set in the annual strategy pro-cess. To manage and monitor concentration risks and for operationalisation purposes, lim-its are also imposed according to the credit quality of borrowers, transactions, geographi-cal markets and sectors.

The entire credit business chain, including management and monitoring systems, is de-scribed in detail in the SaarLB Lending Man-ual. The master processes defined here apply Bank-wide and are implemented uniformly in all Risk Office areas. The Lending Manual is

28

constantly updated to take account of chang-ing internal and external requirements.

Counterparty default risk is initially assessed at individual borrower and (supervisory) bor-rower unit level using the rating procedures of Rating Service Unit GmbH & Co. KG, Mu-nich, for banks, corporates (including munici-pally-owned companies), international public authorities, leasing entities (leasing compa-nies and real estate leasing SPVs), insurers, international commercial real estate, project financing, country and transfer risk and – in the reporting period approved – DSGV liability association. These procedures are backed up by the savings banks standard rating and the savings bank real estate rating modules from Sparkassen Rating und Risikosysteme GmbH, Berlin. All these rating procedures have been approved by the German Federal Financial Supervisory Authority (BaFin) for use within the Internal Ratings Based Approach (IRBA) to calculate capital requirements in accord-ance with the Solvency Ordinance. They are validated annually by the Bank in coopera-tion with these partners on the basis of the current credit portfolio.

Significant input parameters for the quanti-tative part of the credit rating analysis per-formed in the rating process come from a bal-ance sheet analysis system, which supports the major accounting standards (among oth-ers HGB, IFRS, US-GAAP) and facilitates peer groups and industry comparisons. In addition to borrowers’ credit ratings, the risk assess-ment also takes into account, where required, property and project risks as well as country and transfer risks. Finally, borrowers are allo-cated to a specific rating category on a 25-tier rating scale based on the probability of de-fault. Rating categories are therefore compa-rable regardless of the rating procedure used.

In accordance with SaarLB’s requirements, standard forms of bank collateral – particular-ly mortgage liens, pledges, assignments, chat-tel mortgages and debt undertakings – are ac-cepted by the Bank to reduce risks. Collateral

is processed and valued in accordance with the Collateral Manual. The procedure used to calculate and determine collateral value must be clearly documented. In the case of derivatives trading, master agreements are concluded for the purpose of close-out net-ting. Collateral agreements have been made with certain business partners restricting the risk of default in each case to an agreed maxi-mum.

Exposures that may be at risk are identified using an appropriately constructed early warning system – for example by means of annually revised ratings – and transferred for intensive support. As with problem loan han-dling, this falls within the remit of the Risk Office.

Counterparty default risks from trading are monitored daily by Settlement to take ac-count of MaRisk. In particular, all derivatives business is monitored (counterparty risk). All trading business conducted with each cus-tomer is counted towards the borrower lim-its – including settlement limit – set for that specific customer in a system-supported and uniform Bank-wide process and in accordance with the requirements on market valuation methods under the Solvency Ordinance.

The internal rating is key for managing and monitoring counterparty default risks at the overall Bank level; collateral is currently taken into account only at individual exposure level as part of reaching decisions. In particular for the calculation of the capital adequacy under the Solvency Ordinance, collateral (through the credit risk mitigation techniques) is large-ly not taken into account. Gross exposure limits for borrower units based on rating cat-egories, markets and customer types derived from the business strategy are clearly defined in the risk strategy. In addition, to strength-en individual sector portfolios, only selected new business may be conducted in the risk sectors identified by the Bank. A strict ancil-lary condition requires risk-oriented pricing supported by a suitable calculation tool.

29


The relevant Sales and Risk Office areas moni-tor each individual credit decision to ensure compliance with the risk strategy.

The quarterly MaRisk risk report for the Board of Management, Board of Administration and the SaarLB Risk Committee contains both an analysis of the credit portfolio – particularly in relation to rating categories, sectors and countries – as well as a summary target/ac-tual comparison with the risk strategy.

SaarLB uses the CreditRisk+ credit portfolio model – particularly in calculating risk-bear-ing capacity – to analyse risks at the portfo-lio level. The credit portfolio model takes ac-count of the SaarLB Group’s entire receivables portfolio exposed to counterparty default risk, weighted by the specific probability of default for each borrower derived from the rating categories. A key variable is credit val-ue at risk, which breaks down into expected loss – which the risk-oriented pricing takes ac-count of – and unexpected loss, which must be covered by risk capital in the risk-bearing capacity calculation.

PORTFOLIO ANALYSIS

The changes in maximum credit risk based on IFRS carrying amounts (taking account of specific risk provisions and country risk provi-sions in accordance with IAS 39) in the report-ing period were as follows:

While the table above is based on data from the IFRS balance sheet, the breakdown in the “Portfolio analysis” and “Sub-portfolios with elevated risk profiles” sections below corresponds to the internal risk management (management approach) and therefore devi-ates slightly from the balance sheet data giv-en above with a total exposure of EUR 21.9 bil-lion as of the reporting deadline and EUR 20.4 billion as of 31 December 2010. This is partly due to the use of add-ons when calcu-lating financial market instrument exposure according to the market value method, the counterparty risk from security repurchase transactions as well as credit derivatives at nominal value.

Maximum credit risk (EUR million) by balance sheet items

31 Dec. 2011 31 Dec. 2010

Cash reserves 107 7

Loans and advances to banks 4,083 3,813

Loans and advances to customers 8,491 7,433

Assets held for trading 432 360

Investments* 6,468 7,197

Other assets 4 3

Contingent liabilities 290 271

Irrevocable credit commitments 757 737

Total 20,632 19,822

* Not including equity instruments, including securities repurchase transactions

30

Around 84% of exposure is in the investment grade bracket (rating categories 1 to 5 ac-cording to the DSGV scale). In comparison to 2010, this share has increased by around two percentage points due in particular to the in-crease in exposure in rating category 1.

SaarLB uses a value-added and risk-orientated grouping code for the purposes of economic

management and strategic alignment of the sector exposure, breaking down exposure into 32 sector groups. Sector group exposure (excluding the low-risk Banks sector group, which is shown separately below and com-prises just under 49% of total exposure) can be broken down as follows:

Customer exposure by sectors (EUR million)

3,000

2,500

2,000

1,500

1,000

500

0

Real estate Sovereigns Renewable energy Utilities Automotive Construc-

tion Steel Wholesale + retail trade

Food +beverage ABS Retail

customersOther

sectors

31 Dec. 2010 31 Dec. 2011

Exposure by rating category (EUR million)

14,000

12,000

10,000

8,000

6,000

4,000

2,000

0DSGV scale 1 2 – 5 6 – 12 13 – 15 16 – 18

(Landesbanks scale: 0-7 8-11 12-18 19-21 22-24)

31 Dec. 2010 31 Dec. 2011

31


SaarLB’s sector portfolio – particularly the corporates portfolio – continues to be well-diversified. Real estate, the largest individual sector (besides banks), comprises roughly 15% of the total exposure (including banks) after amounting to 16% in 2010.

In the year under review, exposure in the tar-get sector of Renewable Energy expanded

significantly again by EUR 415 million. Notice-able increases have also been seen in the sec-tors of Sovereigns (by EUR 531 million),5 Real Estate (by EUR 159 million) and Food + Bever-ages (by EUR 28 million). Exposure decreased in the sectors of ABS (by EUR 54 million), Utilities (by EUR 32 million), Automotive (by EUR 30 million) and Wholesale + Retail Trade (by EUR 29 million).

SaarLB uses the official Bundesbank codes to give a breakdown of its exposure in a uniform manner for each individual country. Regions are then grouped on the basis of global and regional links. The focus of SaarLB’s coun-try portfolio is in its defined target markets of Germany and France, which amount to a share of around 84% (as of 31 December 2010: 79%). Another 13% (as of 31 December 2010:

17%) concerns exposure in the rest of Europe, whereby the exposure in Ireland and in the southern European countries of Greece, Ita-ly, Spain and Portugal amounts to a total of EUR 836 million (of which 86% is investment grade). In the reporting period, the volume of French and German business was expanded in particular, while the portfolio outside the tar-get markets was again substantially reduced.

5 The increase is largely in euro countries with the best credit rating: France by EUR 268 million, Germany by EUR 128 million, Austria by EUR 68 million and Netherlands and Finland each by EUR 18 million.

Exposure by region (EUR million)

14,000

12,000

10,000

8,000

6,000

4,000

2,000

0

Germany France Rest of Europe North America Other

31 Dec. 2010 31 Dec. 2011

32

The loans and advances to banks – includ-ing the credit substitute securities portfolio reported under investments on the balance sheet – are predominantly to banks head-quartered in Europe, mostly in Germany. While the exposure in Germany and France was increased by a total of roughly EUR 1.3 bil-lion, the volume in other countries fell by EUR 0.8 billion in accordance with the busi-ness strategy.

Banks: Maximum credit risk (EUR million)Regions

31 Dec. 2011 31 Dec. 2010

Germany 7,815 6,712

France 707 555

Other Western Europe 1,775 2,468

North America 264 259

Other 77 166

Total exposure 10,639 10,161

Non-banks: Maximum credit risk (EUR million) as of 31 December 2011 31 Dec. 2010

SectorsGermany France Other

western Europe

North America

Other Total Total

Sovereigns 1,758 357 185 0 14 2,314 1,783

Real estate 1,343 1,430 342 237 12 3,364 3,206

Automotive 234 77 13 2 0 326 357

ABS 11 0 139 9 1 160 214

Wholesale + retail trade 234 3 11 0 0 248 277

Construction 140 178 23 0 0 341 348

Utilities 241 50 59 0 2 353 385

Steel 287 9 16 0 0 312 318

Renewable energy 353 883 0 0 0 1,236 821

Food + beverage 124 73 93 8 0 297 269

Retail customers 356 149 3 0 0 508 509

Other sectors 1,221 313 221 35 7 1,798 1,726

Total exposure 6,302 3,522 1,105 292 37 11,258 10,211

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Loans and advances to customers are well-diversified in terms of size. In accordance with SaarLB’s business model, most of the new exposures were in the EUR 1 million to EUR 50 million range.

Most of the loans and advances to customers (around 97%) – including the credit substitute securities portfolio reported under invest-ments on the balance sheet – are to customers

based or resident in Western Europe. The larg-est proportion of these customers, roughly 90%, are from Germany and France.

Banks: Maximum credit risk (EUR million) Size category

31 Dec. 2011 31 Dec. 2010

Up to EUR 1 million 74 91

> EUR 1 million to 5 million 281 339



> EUR 20 million to 50 million 1,864 2,035




> EUR 500 million to 1 billion 699 1,875

> EUR 1 billion to 2.5 billion 1,062 0


Non-banks: Maximum credit risk (EUR million)Size category

31 Dec. 2011 31 Dec. 2010

Up to EUR 1 million 742 830









Loans to banks were mostly in larger volumes and were reduced slightly in the reporting year. The changes in the higher size categories result from the shift of individual customers to adjacent classes.

34

Sub-portfolios with elevated risk profiles

The securitisation positions held by SaarLB largely possess a very good external rating. More than 95% of the held volumes have a rating in the investment grade area.

Securitisations: Maximum credit risk (EUR million) Rating category

31 Dec. 2011

31 Dec. 2010

1 115 185

2 - 5 37 20

6 - 8 0 4

9 - 12 3 0

13 - 15 3 0

Default categories 3 5

Total exposure 160 214

The receivables from the support given to SachsenLB are included in the overall expo-sure of the securitisation positions. These had a volume of roughly EUR 27.6 million as of 31 December 2011 (as of 31 December 2010: roughly EUR 52.3 million). When classified ac-cording to regions, a share of 7% of other ex-posure is represented by Germany. 87% is dis-tributed across the rest of Europe, with a focus on Spain (23%), Ireland (21%) and Great Britain (17%). The share of the North American market is EUR 9.0 million and did not change in comparison to the prior year.

Total exposure from securitisation positions decreased significantly. The reason for this was the EUR 24.7 million reduction of the ex-posure from the support given to SachsenLB as well as the sales (roughly EUR 1 million) and redemption (roughly EUR 24.8 million) and the amortisations of EUR 4.2 million. These figures include a negative currency effect of EUR 1.4 million. Amortisation of EUR 0.8 mil-lion was partially compensated in the report-ing year by income from the sales and redemp-tions of EUR 0.8 million. New business was not conducted in the reporting year and will also be excluded in the future in accordance

with SaarLB’s business and risk strategy. There was a charge of around EUR 5.2 million from the securitisation portfolio to the reval-uation reserve at the balance sheet date. In addition, reclassification of holdings as LaR in 2008 avoided a further charge of EUR 21.9 mil-lion to the revaluation reserve.

On account of the sovereign debt crisis in the euro zone, exposure in Portugal, Ireland, Italy, Greece and Spain (“PIIGS” countries) are cur-rently being observed very carefully.

PIIGS exposures:Maximum credit risk (EUR million)

31 Dec. 2011

31 Dec. 2010

Spain 370 653

Italy 274 357

Ireland 96 175

Portugal 70 114

Greece 26 46

Total exposure 836 1,345

The new business in these countries was dis-continued early on so that the credit level in the reporting period continued to fall in all the PIIGS countries. As of the reporting dead-line, the maximum credit risk was 86% in the investment grade (rating 0-5 according to DSGV scale). SaarLB has only limited sover-eign debt exposure in Italy (EUR 3.5 million) and Spain (EUR 1.0 million). Impairments of EUR 1.7 million have already been considered in the maximum credit risk of the Spanish ex-posure (real estate sector, EUR 1.7 million).

35


Risk provisions

As part of risk monitoring, all exposures with counterparty default risk are subject to a set “early warning, intensive care and problem loan handling process” and the relevant in-structions and policies. Within this process, exposures with warning signals are trans-ferred to the appropriate type of support adequate for the risk content and classified. This is based on objective indicators pointing to impairment of the exposure. These include:

• clear deterioration of financial circumstances

• expectation of lower future payment streams than those agreed

• default or delay in arranged payments of capital and/or interest, application for deferment or extension

• concessions to the borrower for economic or legal reasons in connection with finan-cial difficulties

• breach of agreements material to lending• high probability of insolvency proceedings

or other restructuring of the borrower• ratingrelated restructuring or reorgani

sation• disappearance of an active market for this

financial asset due to financial difficulties• countryspecific evidence of impairment• discounts in market prices of more than

15%

When the risk analysis shows that the con-tractual repayment or collection of all contrac-tual compensation for credit is improbable, a risk provision is established. The calculation of the risk provision is made for each business and considers all risks. The amount of the im-pairment is fundamentally determined by the difference between the carrying value of the receivables and the anticipated future cash flows, which are discounted with the original effective interest rate. Specific risk provisions are also established for exposures if repay-ment of fees and costs is improbable due entirely to country risks. When establishing risk provisions, a distinction is made between

specific risk provisions for existing receiva-bles and provisions for future drawdowns (provisions for non-balance sheet business in the credit business). Where a default has oc-curred and it has been established that there are no prospects of recovery, the receivable is written off directly against the gain/loss.

Portfolio risk provisions are established for financial instruments that are held at am-ortised cost and for which no impairment has been identified. These include expo-sures where objective indications as listed above did exist for an impairment but, after subsequent examination, were not rated as impaired. When establishing portfolio risk provisions, it needs to be ensured that impair-ments not individually identified are taken into account, thereby covering latent risks. The portfolio risk provisions are calculated us-ing Basel II parameters and under considera-tion of the loss identification period (LIP) for portfolios with the same risks.

Adequate provision was made for any poten-tial losses detected as part of risk monitoring in the reporting year. The changes in risk provi-sions for individual risks in the SaarLB Group (including the Landesbausparkasse and the country risk provisions) were as follows:

36

Direct write-downs due to ratings changes amounted to EUR 3.7 million. Portfolio risk provisions of EUR 24.8 million have been es-tablished for latent risks in the credit busi-ness, including financial assets measured at amortised cost, of which EUR 1.4 million are related to warranties and irrevocable credit commitments. As a result of ratings changes,

write-downs of EUR 5.3 million were carried out on investments. In the following, the maximum credit risk on the basis of the IFRS carrying values are ana-lysed with regard to the aspects of maturity and impairment.

Risk provisions for individual risks in EUR million 1 Jan. 2011- 31 Dec. 2011

1 Jan. 2010- 31 Dec. 2010

Start level 163.5 159.3

Release -16.6 -16.0

Unwindings -3.4 -4.3

Utilisations -39.3 -26.9

Additions 37.6 50.6

Other* -0.0 0.6

End level 141.7 163.5

* in particular, exchange rate fluctuations

Financial assets that are neither past due nor impaired:Maximum credit risk (EUR million)

Distribution by rating category as of 31 December 2011 31 Dec. 2010

Balance sheet item and category*1 2-5 6-12 13-15 Default

categoriesUnrated Total Total

CASH RESERVE (LaR) - - - - - 107 107 7

LOANS AND ADVANCES TO BANKS (LaR) 3,703 193 7 0 - 59 3,962 3,785

LOANS AND ADVANCES TO CUSTOMERS (LaR) 2,450 2,854 2,274 86 66 49 7,779 6,955

ASSETS HELD FOR TRADING (HfT) 299 62 24 1 0 2 387 359

INVESTMENTS*** 5,322 981 94 54 0 3 6,455 7,192

Available for sale 3,787 542 48 0 0 1 4,379 4,578

Fair value option 359 44 0 - - 3 406 498

Held to maturity 649 103 - - - - 752 885

Loans and receivables 526 292 46 54 - 0 918 1,232

Other assets - - 0 - - 4 4 3

Contingent liabilities 43 135 78 0 2 0 259 244

Irrevocable credit commitments 155 314 235 0 0 30 733 680

Total 11,970 4,539 2,713 141 68 255 19,686 19,225

* Categories are: Loans and Receivables (LaR), Held for Trading (HfT), Available for Sale (AfS), Fair Value Option (FVO) and Held to Maturity (HtM). ** Not including equity positions, including securities repurchase transactions.

37


Exposures that are neither past due nor im-paired increased by roughly EUR 0.5 billion primarily due to loans and advances to cus-tomers (increase of EUR 824 million) and loans and advances to banks (by EUR 177 million). In return, investments fell by EUR 737 million.6

In the year under review, renegotiations of contractual conditions were conducted for financial assets with a total carrying value of EUR 26 million (2010: EUR 0 million). The goal of the renegotiations was also to enable cus-tomers to continue their business operations.

Financial assets that are neither past due nor impaired (EUR million)*

31 Dec. 2011 31 Dec. 2010

Maximum credit risk by period overdue Fair value of

collateral

Max. credit risk

Fair value of

collateral

Balance sheet item, category** and sector< 30 days 30 days to

3 months3 months to 1 year

> 1 year Total

LOANS AND RECEIVABLES TO BANKS (LaR) 119 - - - 119 59 25 6

Banks / Finance 119 - - - 119 59 25 6

LOANS AND ADVANCES TO CUSTOMERS (LaR) 423 55 56 6 539 267 303 75

Real estate 217 16 28 5 266 132 164 41

Renewable energy 114 0 - - 114 56 35 9

Hotels 17 18 - 0 35 17 34 8

Retail customers 1 - - - 1 0 29 7

Sovereigns 22 17 - - 39 19 17 4

Other sectors 52 5 28 1 86 42 25 6

ASSETS HELD FOR TRADING (HfT) 45 - - - 45 22 0 0

Banks / Finance 37 - - - 37 18 - -

Real estate 6 - - - 6 3 - -

Steel - - - - 0 - 0 0

Other sectors 2 - - - 2 1 0 0

INVESTMENTS*** - - - - 0 - - -

Contingent liabilities 8 13 - - 22 11 23 6

Steel - 10 - - 10 5 12 3

Food + beverages - - - - 0 - 5 1

Construction - 3 - - 3 2 4 1

Other sectors 8 - - - 8 4 1 0

Irrevocable credit commitments 17 - 3 - 20 10 55 14

Renewable energy 9 - - - 9 5 47 12

Real estate 2 - - - 2 1 6 1

Other sectors 6 - 3 - 9 5 2 1

Total 611 68 59 6 745 369 406 101

* In the event of overdue receivables, the entire exposure of the borrower incl. investments, assets held for trading, contingent liabilities and irrevoca-ble credit commitments are reported as overdue.

** Categories are: Loans and Receivables (LaR), Held for Trading (HfT), Available for Sale (AfS), Fair Value Option (FVO) and Held to Maturity (HtM).*** Not including equity instruments, including securities repurchase transactions

6 Unrated items relate to assets for which a derived rating could not be allocated in accordance with the management approach, e.g. active balances for ledger accounts.

38

The loans and advances that were past due but not impaired were largely those to cus-tomers, while only a small number of loans and advances to banks were slightly past due. The increase of roughly EUR 339 million

in the reporting year is primarily due to the loans and advances to customers as well as, to a smaller degree, to loans and advances to banks.

Individual risk provisions of roughly EUR 139 million were offset in the maximum credit risk as of the reporting deadline. The collateral includes standard forms of bank

collateral, particularly mortgage liens, pledg-es, assignments, chattel mortgages as well as debt undertakings.

Financial assets that are impaired (EUR million) 31 Dec. 2011 31 Dec. 2010

Balance sheet item, category* and sectorMax. credit

riskFair value of

collateralMax. credit

risk*Fair value of

collateral

LOANS AND RECEIVABLES TO BANKS (LaR) 2 1 3 1

Banks / Finance 2 1 2 1

Other sectors 1 0 1 0

LOANS AND ADVANCES TO CUSTOMERS (LaR) 173 85 174 43

Real estate 78 38 78 19

Automotive 11 6 21 5

Pulp + Paper 19 9 15 4

Retail customers 25 13 13 3

Sovereigns 12 6 13 3

Textiles + Apparel 1 0 5 1

Steel 5 2 5 1

Logistics - - 5 1

Aviation 0 0 4 1

Construction 13 6 4 1


INVESTMENTS** 13 6 5 1

Available for sale 0 0 1 0

Loans and receivables 13 6 5 1

ABS portfolio 13 6 5 1

Contingent liabilities 10 5 5 1

Pulp + Paper 3 2 3 1

Construction 6 3 1 0

Other sectors - - 1 0

Irrevocable credit commitments 3 2 3 1

Automotive 3 1 3 1


Total 201 99 191 47

* Categories are: Loans and Receivables (LaR), Held for Trading (HfT), Available for Sale (AfS), Fair Value Option (FVO) and Held to Maturity (HtM).** Not including equity instruments, including securities repurchase transactions

39


Market risk

Market risk is the risk of (valuation) losses on open (trading) positions due to unfavourable market price fluctuations. For SaarLB, rele-vant market prices are in particular interest rates (in both EUR and foreign currencies), share prices and exchange rates. Open posi-tions are created from spot, forward and op-tion transactions.

The strategic principles for dealing with mar-ket risks at SaarLB are set out in the risk stra-tegy. Organisationally, the trading business is structured around the requirements of MaRisk. Treasury and Portfolio Management actively manages asset and liabilities, inte-rest rate risks from the banking book, while the Savings Banks, Institutionals and High Net Worth Individuals segment is in charge of interest rate products and foreign exchange. Trading transactions are processed by the Ser-vices area. Controlling is responsible for ma-naging and monitoring market risks and for systematically developing the tools required to perform this.

Since the Minimum Requirements for Tra-ding Activities (MaH) was introduced in 1996, SaarLB has measured and limited market pri-ce risks from both the trading book and the banking book, including interest rate risks, using a uniform Value at Risk (VaR) approach. Controlling monitors the risks in all six sub-portfolios, taking account not just of trading risks in the narrow sense, but also the asset/liability management positions, which hold substantial interest rate risks for the Bank.

The parameters used for calculating VaR re-flect the Bank’s caution to exposing itself to market risks. Standard deviations in market price variations over ten trading days are cal-culated using the Bank’s own and sometimes historically long timeframes and are scaled to a one-side confidence interval with 99.5% sta-tistical probability. Particular account is ta-ken of any recent increases in volatility. When

producing a risk summary, correlations that minimise risks are disregarded.

The Board of Management has set a maxi-mum potential loss limit (VaR limit) and a maximum loss limit (target deviation limit) for each sub-portfolio based on the risk co-ver funds. Each sub-portfolio’s value-at-risk, which is calculated daily, may not exceed the VaR limit allocated to it at any time. Negati-ve deviations in the sub-portfolio’s net gain/loss must not exceed any of the target devi-ation limits either. The target deviation limit is usually 50% of the VaR limit. In some cases, VaR limits can be supplemented by guideline values for upper portfolio limits and other re-strictive stipulations laid down by the mem-ber of the Board of Management responsible for Trading.

Reporting to all departments and segments, including the Board of Management, involved in the risk monitoring and management pro-cess takes place at the start of each trading day. It covers realised gains/losses, valuation gains/losses, VaR and limit utilisation for the preceding trading day.

40

Negative variations from the pro-rated fore-cast net gain/loss for each portfolio can affect calculated VaR and therefore the Trading De-partment’s room for manoeuvre. This prevents any trading losses exceeding upper loss limits allocated to market risks. However, the scope for trading may also be increased if targets are exceeded. For the (net) VaR determined under consideration of the target values, limits total-ling EUR 30.0 million were allocated to the in-dividual portfolios from the risk cover funds of SaarLB as of the reporting deadline. 36.5% of the limit (across all portfolios) was utilised on average in the reporting period, whereby the utilisation fluctuated in a range varying from a minimum 0.0% to a maximum of 63.4%.7 The latter corresponded – in absolute terms – to potential losses of EUR 19.0 million. As of the reporting deadline of 31 December 2011, the VaR from market risks due to the exceeding of targets amounted to EUR 0.0 million, i.e. across all divisions, the gross VaR amounts are (more than) compensated by the exceeding of target values built up in the course of the year.

The tools described above are constantly modified to take account of changing circum-stances. Risk quantification methods in partic-ular are validated in a back-testing procedure and refined accordingly every six months. The risk parameters are updated on a revolving ba-sis every quarter.

When calculating risk-bearing capacity, the potential losses in the daily management are scaled at a uniform Group-wide confidence level and holding period. In addition to quanti-fying ICAAP risk capital needs, forward-looking analyses based on unusual market price chang-es (scenario analyses) are also carried out here.

Each month, interest rate risk in the banking book is assessed specifically based on monthly interest rate changes of +/-200 basis points in line with Bundesbank specifications. The cal-culated changes in net present value relative to liable capital were well below the regulatory thresholds.

Market risks at LBS arise solely in the form of interest rate risks. Interest rate risk is managed using gap analysis, basis point value calcula-tions and building society actuarial models based on the risk parameters used by SaarLB:

Market risk (EUR million)

12 month comparison as of 31 Dec. 2011 12 month comparison as of 31 Dec. 2010

Average Maximum Minimum Average Maximum Minimum

Interest rate VaR 2.9 5.7 0.9 4.1 15.0 0.4

FX VaR 0.2 0.2 0.1 0.2 0.3 0.1

Equity VaR 0.0 0.0 0.0 0.0 0.0 0.0

Special funds VaR 7.2 10.8 2.1 3.6 5.2 1.1

Total VaR 10.3 16.7 3.2 7.9 20.5 1.5

7 In the above table, the minimum (maximum) of the gross VaR (not including the target value deviations) of the respective market risk type are summarised, while the minimum (maximum) of the net VaR (including target value deviations) is reported across all market risk types here.

41


Market risk (EUR million)

12 month comparison as of 31 Dec. 2011 12 month comparison as of 31 Dec. 2010

Average Maximum Minimum Average Maximum Minimum

Interest rate VaR 0.9 2.4 0.2 0.6 2.1 0.1

Total VaR 0.9 2.4 0.2 0.6 2.1 0.1

The market risks of LBS were integrated into SaarLB’s risk-bearing capacity analyses in the reporting year.

Liquidity risk

SaarLB defines liquidity risk as the risk of be-ing unable to meet payment obligations as they fall due in full or on time or – in the case of a liquidity crisis – only being able to obtain funds at high rates or sell assets at discounts to the market prices.

The strategic principles for dealing with li-quidity risks at SaarLB are set out in the risk strategy and the liquidity contingency plan. The prime goal of liquidity risk management and risk controlling is to ensure SaarLB’s pay-ment obligations can be met and refinancing obtained at all times.

Liquidity management is handled by Treasury, which also includes the money market trad-ing unit responsible for ensuring that liquid-ity is balanced on the market for maturities of up to one year. Liquidity risk controlling is performed by Controlling.

The most important tools for measuring li-quidity risks are the liquidity commitment schedule and counterbalancing capacity.

The liquidity commitment schedule depicts the incoming and outgoing payments in net form, cumulated over time. The calculation factors in all deterministic payment flows and, modelled on assumptions, the relevant non-deterministic payment flows (e.g. from irrevocable credit commitments or invest-ments).

The liquidity commitment schedule and coun-terbalancing capacity are compared against each other. The latter indicates how soon SaarLB can procure liquid funds, how much it can obtain and how cost-effectively. It shows the Bank’s ability to cover liquidity gaps and therefore all liquidity risks arising from cash flow. The most important components of counterbalancing capacity are freely available access to central bank funds at the European Central Bank (ECB), securities that can be sold or pledged at short notice and the opportuni-ty to place Pfandbrief issues at short notice.

As well as depicting the normal liquidity situ-ation, the liquidity situation has also been an-alysed under stress conditions. This includes • the “bank stress” scenario, which simulates

a downgrading of SaarLB, • the “market liquidity crisis” scenario, which

models market disruption to the supply of liquidity and

• the “combination” scenario that involves both stress scenarios of ‘bank stress’ and ‘market liquidity crisis’.

Lastly, the range of tools available under the supervisory liquidity regulation (LiqV) is used to measure short-term liquidity.

To remain solvent even in times of crisis, SaarLB has a suitable portfolio of securities eligible for refinancing at central banks. An adequate facility with the ECB ensures that any unexpected payment obligations can be covered on the same day. SaarLB thereby limits its short-term liquidity needs so that the shortfall arising from liabilities maturing overnight does not exceed the central bank refinancing freely available at the time con-cerned.

42

The volume of the ECB deposits was reduced with the fading of the financial crisis by re-moving securities and by not replacing ma-turities from roughly EUR 3.0 billion (as of 31 December 2010) to approx. EUR 1.4 billion (as of 31 December 2011). Payment obligations can continue to be covered, if need be, largely independently of other sources of refinanc-ing. The Bank did not resort to the overnight facility of the ECB in the reporting period (as in 2010).

Liquidity management and monitoring for each next 180-day period is performed using the liquidity commitment schedule and coun-terbalancing capacity. In the process, in the period under review, negative net positions arising from cumulated incoming and outgo-ing payments were not allowed to exceed the counter-balancing capacity available at the time in question either in the normal situa-tion or under the stress scenarios. Appropri-ate counter-measures must be deployed even at lower levels of utilisation of the counter-balancing capacity.

The liquidity commitment schedule is also the key for managing maturities for periods of longer than 180 days. Suitable funding in-struments are employed by the Bank to cre-ate a balanced funding structure so it can safeguard its solvency and ability to refinance in the medium and long term. At present: SaarLB’s collateral pool – the pool of assets serving as cover for pfandbriefs – has suffi-cient surplus cover, enabling issuing activity to continue in normal market situations. On the other hand, the liquidity commitment schedule has been structured so that there will be a net inflow of liquidity in the coming years. Returns from asset management can therefore be reused as credits.

All the tools described form part of the regu-lar reporting to the Board of Management and are integrated into the MaRisk risk report. In the reporting year, potential liquidity cover-age was sufficient to cover SaarLB’s liquidity needs at all times. This also applies for the re-porting date, as the following illustration of the liquidity situation on 31 Dec. 2011 shows:

Liquidity situation as of 31 December 2011 in EUR million

Up to 1 month Up to 3 months Up to 1 year Up to 5 years

Potential liquidity coverage 3,930.9 4,454.0 4,335.9 397.3

less liquidity gap

from balance-sheet items -375.9 -1,595.5 -1,742.7 -653.8

from commitments and guarantees -81.1 -201.2 -201.2 0.0

Liquidity surplus 3,474.0 2,657.3 2,392.1 -256.6

43


In the situative (up to 1 year) and in the struc-tural liquidity, sufficient liquidity overhangs show the comfortable liquidity position of SaarLB. Only in 2015 will the liquidity over-hang in connection with the expiring liquid-ity reserves significantly decline with respect to the loss of government liability. The un-changed positive assessment with regard to the situative liquidity is also confirmed by the liquid ratio (in accordance with the regulatory requirements of the liquidity ordinance). In its internal regulations, SaarLB’s managing and monitoring goes further than the super-visory requirement that the liquidity ratio within the coming month must be greater

than 1. The bank sets its warning level to 1.25, which triggers counter-measures. In the year under review, the liquidity ratio of the bank was between 1.75 and 2.23; as of the reporting deadline of 31 December 2011, it amounted to 1.93. The observance of both the regulatory and internal requirements was thus ensured at all times. LBS also complied with the regu-latory requirements on liquidity in 2011.

In addition, a breakdown of balance sheet financial liabilities by contractually agreed terms to maturity (excluding home loan sav-ings deposits that have no maturity) is given below:

The three observed scenario analyses under stress conditions as of 31 December 2011 re-main clearly in the uncritical area with limit utilisation of 69% (market liquidity crisis), 55% (bank stress) and 74% (combination sce-nario). In the reporting period, SaarLB was

again able to place sufficient covered issues on the capital market. There was also demand from investors for uncovered issues. In view of the pricing involved, the Bank utilised this op-tion, but out of business considerations used its sufficient other refinancing possibilities.

In EUR 000’s 31 Dec. 2011

up to 3 months >3 months to 1 year

>1 year to 5 years >5 years

Liabilities to banks 3,194 1,947 2,111 756

Liabilities to customers 2,642 914 986 858

Securitised liabilities 0 361 3,887 82

Off-balance sheet liabilities 1,047

Liabilities held for trading 10 30 235 269

Total 6,892 3,252 7,219 1,965

31 Dec. 2010

Liabilities to banks 3,346 1,218 2,665 463

Liabilities to customers 2,665 264 1,119 592

Securitised liabilities 117 508 4,073 51

Off-balance sheet liabilities 1,009

Liabilities held for trading 13 20 228 200

Total 7,150 2,010 8,085 1,306

44

The short-term refinancing needs pursuant to BTR 3.2 MaRisk have been reported since the end of 2011 by offsetting both the ECB-eligible and GC pooling-eligible assets. The resulting potential liquidity should be sufficient in the weekly report updated on each trading day for the coverage of the liquidity gap result-ing from the “combination” scenario and in-creased by an additional collateral surcharge of 10% (“yellow/green” threshold). But at least the liquidity gap of the “basic” scenario (“red/yellow” threshold)must be covered.

Operational risk

a) General information

Operational risk describes the risk of losses that occur in consequence of inappropriate-ness or the failure of internal processes and systems, people or as a result of external events. This definition includes legal risks.

SaarLB undertakes to manage operational risks efficiently so as to protect the Bank, its employees and clients from financial loss, loss of trust and loss of reputation.

The methods and processes for controlling and managing operational risk are set out in detail in the SaarLB OpRisk manual. The measurement and limitation of operational risks are also part of the risk strategy.

Operational risk is managed decentrally in the individual business segments, with each one being responsible for dealing with the opera-tional risks coming under its responsibility. This in particular covers preventive measures against risks from incomplete business pro-cesses and human error. The intention is to avoid or at least mitigate impairments arising from unforeseen events – especially in tech-nical areas – through disaster recovery plans and the use of parallel systems. The disaster recovery plans are regularly adapted to cater for changing structural and procedural or-ganisational circumstances and the systems updated on an ongoing basis.

The duties of SaarLB’s Legal Department in-clude minimising legal risks from contractual terms and conditions, provisions of national and international law and litigation and court decisions. Pending litigation is taken into ac-count appropriately in the annual financial statements.

Controlling provides central monitoring of operational risks. The used instruments cur-rently include in particular the systematic collation of operational losses occurring at SaarLB in a loss database, forward-looking assessment of the OpRisk profile through regular self-assessments of all of SaarLB’s organisational units and the requisite struc-tural and procedural organisation within the Bank. Since 1 January 2007, SaarLB has used the standardised approach under the Solven-cy Ordinance for calculating capital require-ments for operational risk.

In particular, losses that have occurred and the results of the self-assessments are ana-lysed in a regular reporting process that is in-tegrated into the MaRisk risk report. In the re-porting period, 30 losses were observed. These losses had a negative impact on net income of less than EUR 0.6 million. This amount is significantly below the risk capital allocated for operational risk based on the capital re-quirements of the regulatory standardised approach in the amount of EUR 22.8 million.

b) Accounting-related internal control and risk management system

The following comments relate to the pro-vision of Section 315 (2) Nr. 5 of the German Commercial Code, in conjunction with Sec-tion 315a (1) of the German Commercial Code, according to which corporations in terms of Section 264d of the German Commercial Code have to describe the significant features of the internal control and risk management system with regard to the Group accounting process.

45


Responsibilities and goals

To ensure the appropriateness and reliability of the accounting, the SaarLB Group has set up an internal control system (ICS). It includes principles, processes and measures to ensure the effectiveness and efficiency of the ac-counting. Against this backdrop, the internal control system also serves to present a true and fair view of the SaarLB Group’s net assets, financial position and results of operations. The main goal of the internal control system is to ensure that all transactions are recorded, processed and documented correctly and in full in accordance with the legal requirements and standards as well as the provisions of the articles of association and the other internal guidelines. The internal risk management sys-tem is viewed as a component of the internal control system.

Organisation

The SaarLB’s Board of Management (Group’s Board of Management) bears responsibil-ity for the Bank having a proper business or-ganisation, which includes both appropriate internal control processes and above all the adequate controlling and monitoring of the significant risks. The Group’s Board of Man-agement is supported in this particularly by the corporate area of Global Risk Manage-ment with its two organisational units of Controlling (risk controlling as a subunit), Financing and Reporting, and the corporate area of Services with its IT organisational unit as well as by Internal Audit.

Risk management and monitoringSee “Risk management and monitoring princi-ples” for the organisation of these areas.

Financing and Reporting Financing and Reporting in the SaarLB Group is responsible for the preparation of the con-solidated financial statements, the develop-ment of accounting requirements, the initia-tion of accounting-relevant projects and for the observance of national and international

changes in the accounting. With regard to the creation of the consolidated financial statements, other subdivisions as well as units to be consolidated are included.Responsibilities in this context include pri-marily ensuring the appropriateness of the accounting, in particular the uniform Group accounting and valuation (partially in collab-oration with the IT organisational unit). This primarily consists of setting up and monitor-ing the effectiveness of the accounting pro-cesses as well as the implementation of the accounting standards and statutory require-ments in the area of accounting that are relevant for the SaarLB Group and are stipu-lated in the accounting guidelines, the book-ing logic and the posting rules. Furthermore, the special departments and consolidation units define the rules for business recogni-tion, master data maintenance and the fulfil-ment of storage obligations in organisation and process instructions. These instructions form an essential basis for the accounting-related internal control system. The consolidated financial statements and Group management report prepared on the basis of the accounting guidelines are pre-pared by the Group’s Board of Management, examined by the Group’s auditor and finally presented to the Board of Administration for approval. The Board of Administration cre-ated an Audit Committee that is responsible for the review of the Group’s audit report and the preparation of the decision by the Board of Administration to approve the consolidat-ed financial statements and the Group man-agement report prepared in accordance with the requirements of IFRS/IAS. Furthermore, the Audit Committee addresses the account-ing process. It monitors the effectiveness of the internal control, audit and risk manage-ment system to the extent that this task is not handled by the Board of Administration. The Group auditor participates in the con-sulting of the Audit Committee on the con-solidated financial statements and reports on the significant results of his audit.

46

Internal AuditInternal Audit audits the business operations of the SaarLB Group and is subordinate to the Chairman of the Group’s Board of Manage-ment. The audit activities extend fundamen-tally to all the SaarLB Group’s activities and processes, also to the extent that they are outsourced, on the basis of a risk-oriented au-dit approach. This includes a review of the ef-fectiveness and appropriateness of the inter-nal control system and the risk management. Internal Revision carries out the tasks as-signed to it independently of the activities, processes and functions to be reviewed or audited in accordance with the applicable le-gal and regulatory requirements (e.g. German Banking Act, MaRisk).

Control environment and control process

The internal control system is based on organ-isation and process instructions.

The central components of these regulations with regard to the accounting-related inter-nal control system are:• the provisions from the socalled new prod-

uct processes for the recording, valuation and reporting of security products and de-rivatives

• the instructions in the Lending and Control Manual for recording, valuing and reporting on receivables as well as

• the documentation of the process for pre-paring the financial statements.

These provisions include the significant re-quirements for uniform Group accounting and valuation methods in the SaarLB Group on the basis of IFRS/IAS. Furthermore, Financing and Reporting pre-pares the annual and semiannual instruc-tions at each reporting deadline, which con-tain not only legal changes, but also primarily the significant preparation work (including the required proofs) as well as a schedule to be undertaken by the respective special de-partments.The rules for the recording and controlling of business data are at the disposal of the

respective organisational unit; these instruc-tions are prepared decentrally and updated if need be.The organisation and process instructions also include the handling of the SaarLB Group’s significant risks with regard to the risk management and monitoring.The rules for risk management and monitor-ing are regularly reviewed and updated. On account of the migration to the systems of FinanzInformatik, a comprehensive revision of all instructions and risk controlling and monitoring was undertaken in the year under review.To ensure a complete and correct processing of the transactions including the proper data recording, booking and documentation, a va-riety of internal controls are performed in the SaarLB Group. These include appropriate sep-arations of functions, a differentiated access authorisation system for protection against unauthorised access, continuous controls within the scope of the work processes under application of the four-eye principle as well as programmed controls within the IT systems. As part of the internal controls, general ledg-ers and sub-ledgers are reconciled in SaarLB and manually postable ledger accounts are monitored by the responsible areas. Further-more, controls and reconciliations are also handled to ensure the proper transfer of data between the different IT systems. Within the process for preparing the consolidated finan-cial statements, the correct professional pres-entation of the circumstances forming the basis of the financial statements is reviewed and the quality assurance measures are car-ried out for data included in the consolidated financial statements. The IDL-KONSIS server-based software that is used for the consolida-tion contains multiple programmed controls to ensure the recording of data and documen-tation in accordance with the Group require-ments.The SaarLB Group outsourced a portion of its services (primarily IT services, services in the area of payment transactions and securi-ties settlement) to external companies. The integration of the outsourced areas into the

47


SaarLB Group’s internal control system is en-sured. Furthermore, Internal Audit at Saar LB considers the outsourced areas in the test process. Where there is an audit by the Internal Audit of the outsourcer, SaarLB’s In-ternal Audit regularly convinces itself of the functionability of the respective audits by the outsourcers. In the SaarLB Group, the accounting process is subject to regular controls with regard to the inherent risks in order to introduce appro-priate measures for the further development of the internal control system, if need be. This also relates to the internal risk management and monitoring.

Summary of risk situation

Saar LB has risk cover funds that are sufficient to cover all the ICAAP risk capital needed in the year under review and to cover risk capital needed under the assumption of serious eco-nomic weakness (ICAAP stress). Consequent-ly, the SaarLB Group’s economic risk bearing capacity was present at all times in the past financial year.

48

OUTLOOKThe prospects for the German economy in 2012 will be hurt by the slowing global economy and the ongoing smouldering sovereign debt crisis in the euro zone. A fairly flat economic performance is expected in the first half of the year, which should gain a little momen-tum in the second half of the year. Over the entire year, economic growth of around 0.5% is considered possible. The latest economic surveys show slightly positive signals over-all. The labour market should remain stable. A further slight improvement in employment is anticipated, even if no longer at the same pace as in prior years. Fiscal policies will con-tinue to be defined by consolidation efforts. An intensification of the European crisis and a possible chain reaction for the banks and capital markets cannot be ruled out, however. This would have serious consequences for overall economic development. The absence of a crisis scenario and a more strongly grow-ing global economy should make it possible for GDP to increase to 1.8% in 2013.

At the beginning of 2012, sentiment in the Saarland economy improved. Despite the con-siderable ongoing economic risks, there are more and more signs of an economic recovery. For 2012, growth of 1% to 1.5% is considered possible. Positive assessments come primar-ily from industrial companies, above all auto-mobile production and machine building and the steel industry. As a result, a continuation of the positive development is expected for the labour market. A significant condition for this is, however, a sustainable containment of the sovereign debt crisis. Then in 2013 growth should increase again, commensurate with the trend on the federal level.

Despite the uncertain prospects, stable growth continues to be anticipated for Rhine-land-Palatinate. The investment and employ-ment prospects remain positive overall. Risks for the economic course are seen primarily in

the development of energy and raw material prices.

The prospects for growth in France, with re-gards to 2012, were revised down again at the beginning of the current year to just 0.3%. This is due to the private households and companies’ loss of confidence, particularly in connection with the poor business environ-ment in many European countries. Private households will be more likely to save in 2012 so that an already weak consumption rate should not enjoy any positive lift. The effects from the result of the presidential election and the ongoing development of the Euro-pean sovereign debt crisis remain to be seen. If need be, confidence-building measures can be generated, which could bring about an in-crease in economic activity in France by 2013.

For 2012, the forecasts for Lorraine are slight-ly below the level of 2011. Falling activity and investments, analogous to the development prospects of France, are anticipated. For Al-sace only very low growth is anticipated. This applies both to industry and retail. Invest-ments in Alsace should, however, be higher than in Lorraine.

After the reduction in the base interest rate in November 2011, we anticipate for 2012 a three month base interest rate of 1.2% on av-erage for uncollateralised interbank loans on account of the market expectations, which should rise again to 1.4% in 2013.

The SaarLB Group as a whole sees a positive development of business in the coming two years if our expectations with regard to a sta-ble economy are correct and the crisis in the euro zone remains under control. Otherwise, our forecasts will not be maintained.

In the German target market of Corporate Customers, the most important industries of automobile production, machinery build-ing, steel industry and energy appear very

49


strong despite the clear economic turmoil in neighbouring European countries so we also anticipate a moderate increase in new busi-ness in Germany as of 2012. The launch of new products, sales initiatives and the constant intensification of cooperation between the Sparkassen-Finanzgruppe (savings banks fi-nance group) should also contribute to this development.

The French economy may significantly slow in the future. Nonetheless, a steady intensifica-tion of the Franco-German activities and pro-jects in both economic zones can be observed. For its financial support, the SaarLB Group, with its expertise, will be in increasing de-mand as a financing partner of savings bank customers. The cautiously optimistic assess-ment for the corporate customers business in France is also due to the more hesitant award-ing of credit by major French banks as a re-sult of the ongoing European sovereign debt crisis. In this environment, the SaarLB Group is also increasingly considered and called on by public sector-affiliated companies as a re-gional finance partner. We expect a growing credit volume and slightly rising margins in the French corporate customers business and moderate risk costs.

Real Estate and Projects again foresees dy-namic growth in 2012, which is driven by cri-sis-related excess demand for investments in (commercial) real estate and the unchanged booming investments in renewable energy and will maintain this level in 2013. This devel-opment is taking place in the Group’s two stra-tegically important markets of Germany and France, and will lead to high demand for lend-ing on account of the good market position of the SaarLB Group. In particular, strong portfo-lio growth, particularly for project financing, is anticipated again in 2012. In relation to this, the increase in the credit volume in the real estate subsegment should be moderate due to the high volume of redemptions. For new business in the entire business segment, we

anticipate stable and very adequate margins and good commission income. The segment results after risk costs should also meet the ambitious targets, even in the case of a cau-tious assessment.

Savings Banks, Institutionals and High Net Worth Individuals will concentrate on the de-posit and service business with institutional investors and high net worth private custom-ers in the next two years. With a trend toward rising interest rates in the euro zone and an improvement in sentiment in the relevant as-set markets, the commission income should also increase. The interest margin contribu-tion from the liabilities business should also increase again according to this scenario. Previously, additional possibilities for income emerged through derivatives in the interest and currency management due to the use of the currently low interest rate.

The low market interest rate level will con-tinue to limit the income possibilities for Landesbausparkasse in the next two years. The liabilities side of the Bausparkasse is de-fined by interest payments on the home loan savings deposits, while the asset side with the credit business and investment possibili-ties largely depends on the current market conditions. Consequently, the net interest income is only anticipated to rise moderately, which is justified by rising volumes. On ac-count of the ongoing positive development of new business, negative commission income is expected for Landesbausparkasse. Overall, we anticipate positive operating income in the next two years.

Treasury and Portfolio Management will con-tinue active portfolio management within the framework of the risk and income man-agement of the SaarLB Group. On the income side, we also expect a further decline in con-tributions from non-core business in the next two years, and the scheduled portfolio de-crease (approx. EUR 1.7 billion in the next two

50

years) will exceed the growth in the Group’s core business segments. Depending on the de-velopment of financial markets, last but not least the situation in the euro zone, another increase in risk is possible in the forecast time frame despite the pleasing course of business in 2011. Consequently, the business segment for portfolio management anticipates anoth-er increase in the need for risk provisions or rating-related value adjustments in the secu-rities portfolio in this year. The income from the management of assets and liabilities should stabilise at the level of the prior years on account of the ongoing volatility on money and capital markets as well as the expansive monetary policies of the ECB.

In the area of Banking, the SaarLB Group is in good shape due to the application of interna-tional accounting standards, the regulatory requirements of the Solvency Ordinance, and the implementation of the 3rd amendment of MaRisk in 2011. The implementation of fur-ther, new regulatory requirements, particular-ly Basel III, but also IFRS 9 and numerous in-ternal projects will keep us active in 2012. The impact of the regulatory reforms, the increas-ing of liquidity buffers for Basel III or the pos-sible launch of a financial market transaction tax would have a negative impact on income.

In 2012, there will be new challenges in the technical-organisational area, which the Saar-LB Group will advance on the way to the great-est possible integrated data management.

These positive assessments will also show up in a continuous increase of the anticipated pretax income in the coming years. The great-est risk for the SaarLB Group continues to be another intensification of the sovereign debt crisis in Europe, which could produce a chain reaction across the entire sector and also drag in the SaarLB Group.

Net interest income should reach roughly the high level of 2011 in part due to the overall higher margin core business combined with the offer of financial products going beyond the credit business in 2012 and maintain this in 2013 despite the slight anticipated decline in portfolios.

In the commission income, we anticipate, af-ter a very good year in 2011, a slight decline initially in the coming financial year in order to rise again from this level in the following years.

Personnel expenses will rise again in accord-ance with the plans in 2012 due to the antici-pated increase in salary before they fall again noticeably as of 2013. Due to the loss of the costs connected with the IT migration and the closure of the Luxembourg branch at the end of 2011, it should be possible to lower the op-erating expenses according to plan.

The relatively high losses from fair value measurement in 2011 should not be repeated in the coming years after the restructuring and reduction of the special fund at the end of 2011 and the anticipated valuation effects from our interest swap book on account of the relatively low interest rate level and the shorter average maturities. Here we antici-pate positive contributions to earnings in the coming years as opposed to 2011.

Departing from the 2011 target, we also antici-pate lower charges in the (individual) risk pro-visions and the rating-related impairments in investment income for the next two years. Measured on the very low actual charge in 2011, the total charges in 2012 and 2013 will be above those in the past financial year.

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The members of the DSGV and the deposit security reserve of the Landesbanks and giro associations have agreed to the supportive measures for the final restructuring of West-LB. The SaarLB Group will also participate in this to a modest degree. In summary, the SaarLB Group anticipates that the recovery in the results of operations in the operating core areas, which has been observed since the 2010 financial year, will also continue in the next two years of 2012 and 2013 unless there is a worsening of the situation in the euro zone and the connected negative impact on economic development.

Saarbrücken, 13 April 2012

Landesbank SaarBoard of Management

Thomas Christian Buchbinder Werner Severin Frank Eloy

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SaarLB Group Management Report 2011

53

CORPORATE REPORT 2011 | STATEMENT OF COMPREHENSIVE INCOME

Statement of comprehensive income FROM 1 JANUARY 2011 TO 31 DECEMBER 2011

EUR ’000s Notes 2011 2010 Delta

1 Interest income (26) 834,274 767,354 66,920

2 Interest expenses (26) -712,317 -658,129 -54,188

3 Shares of profits in associated companies accounted for using the equity method (27) 269 242 27

4 Risk provisions in the credit business (28) -19,118 -22,324 3,206

5 Commission income1) (29) 25,186 22,705 2,481

6 Commission expense1) (29) -13,662 -11,882 -1,780

7 Gains or losses on fair value measurement (30) -16,150 7,323 -23,473

8 Gains or losses on hedge accounting (31) 43 479 -436

9 Gains or losses on investments (32) -507 -3,939 3,432

10 Administrative expenses (33) -78,521 -72,159 -6,362

11 Other income (34) 3,977 6,324 -2,347

12 Other expenses (34) -5,242 -4,713 -529

13 Income taxes (35) 3,769 -9,728 13,497

14 Consolidated net profit/loss 22,001 21,553 448

Consolidated net profit/loss 22,001 21,553 448

Change in revaluation reserve (net) 7,694 39,784 -32,090

of which valuation changes (gross) 1,490 14,007 -12,517

of which portfolio changes due to recognition of profits or losses 6,204 25,777 -19,573

Total other earnings before taxes 7,694 39,784 -32,090

Income taxes established without impact on profit or loss -3,046 -11,207 8,161

Total other earnings before taxes 4,648 28,577 -23,929

Total consolidated earnings 26,649 50,130 -23,481

1) Figures from 2010 have been adjusted; see note 29.

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Consolidated balance sheet AS OF 31 DECEMBER 2011Assets

EUR ’000s Notes 2011 2010

1 Cash reserves (7), (36) 106,737 7,269

2 Loans and advances to banks (8), (37) 4,105,613 3,834,459

3 Loans and advances to customers (8), (38) 8,607,193 7,572,791

4 Risk provisions in the credit business (9), (39) -154,020 -180,521

5 Assets held for trading (10), (40) 431,629 359,649

6 Investments (12), (41) 5,574,215 6,547,362

7 Securities repurchase transactions (6), (42) 954,197 779,740

8 Interests in entities valued at equity (13), (43) 2,762 2,493

9 Investment property (14), (44) 21,232 15,631

10 Property, plant and equipment (14), (45) 23,558 29,485

11 Intangible assets (15), (46) 1,612 2,120

12 Current income tax claims (25), (47) 8,036 9,451

13 Deferred income tax claims (25), (47) 73,523 61,236

14 Other assets (16), (48) 4,047 3,131

15 Non-current assets held for sale and disposal groups (17), (49) 0 4,500

Total assets 19,760,336 19,048,796

55

CORPORATE REPORT 2011 | CONSOLIDATED BALANCE SHEET

Liabilities

EUR ’000s Notes 2011 2010

1 Liabilities to banks (18), (50) 8,008,089 7,692,416

2 Liabilities to customers (18), (51) 5,905,351 5,136,091

3 Securitised liabilities (18), (52) 4,329,445 4,749,283

4 Liabilities held for trading (19), (53) 544,131 461,208

5 Negative fair values from derivative financial instruments (hedge accounting) (20), (54) 32,585 20,010

6 Provisions (21), (55) 32,445 30,868

7 Current income tax liabilities (25), (56) 2,884 1,434

8 Deferred income tax liabilities (25), (56) 47,166 45,141

9 Other liabilities (22), (57) 45,290 50,546

10 Subordinated capital (23), (58) 351,888 412,970

11 Shareholders’ equity (59) 461,060 448,828

Subscribed capital (59) 169,114 169,114

Hybrid capital (23), (59) 104,258 114,909

Capital reserve (59) 50,841 50,841

Retained earnings (59) 137,108 116,800

Revaluation reserve (41), (59) -11,585 -16,233

Consolidated profit (59) 11,324 13,396

Total liabilities 19,760,336 19,048,796

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Schedule of changes in equity

EUR ’000s Subscribed capital

Hybrid capital

Capital reserve

Retained earnings

Revaluation reserve

Retained profit

Consolida-ted share-

holders’ equity

as of 1 Jan. 2010 169,114 66,039 50,841 128,658 -44,809 1,216 371,059

Change in the revaluation reserve 0 0 0 0 28,577 0 28,577

Total changes taken directly to equity 0 0 0 0 28,577 0 28,577

Consolidated net profit/loss 0 0 0 0 0 21,552 21,552

Total consolidated profit 0 0 0 0 28,577 21,552 50,129

Change in deferred taxes 0 0 0 -13,075 0 0 -13,075

Allocations to/withdrawals from retained earnings 0 0 0 1,217 0 -1,217 0

Increase in hybrid capital instruments 0 48,870 0 0 0 0 48,870

Distributions on silent partner contri-butions and profit participation rights 0 0 0 0 0 -8,155 -8,155

Dividends paid 0 0 0 0 0 0 0

as of 31 Dec. 2010 169,114 114,909 50,841 116,800 -16,232 13,396 448,828

as of 1 Jan. 2011 169,114 114,909 50,841 116,800 -16,232 13,396 448,828

Change in the revaluation reserve 0 0 0 0 4,648 0 4,648

Total changes taken directly to equity 0 0 0 0 4,648 0 4,648

Consolidated net profit/loss 0 0 0 0 0 22,001 22,001

Total consolidated profit 0 0 0 0 4,648 22,001 26,649

Change in deferred taxes 0 0 0 6,911 0 0 6,911

Allocations to/withdrawals from retained earnings 0 0 0 13,396 0 -13,396 0

Decrease in hybrid capital instruments 0 -10,651 0 0 0 0 -10,651

Distributions on silent partner contri-butions and profit participation rights 0 0 0 0 0 -10,677 -10,677

Dividends paid 0 0 0 0 0 0 0

as of 31 Dec. 2011 169,114 104,258 50,841 137,107 -11,584 11,324 461,060

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CORPORATE REPORT 2011 | SCHEDULE OF CHANGES IN EQUITY & CASH FLOW STATEMENT

Cash flow statement

EUR ’000s 2011 2010

Consolidated net income for the year 11,324 21,552

Non-cash items included in net income for the year and reconciliation to cash flow from operating activities

Write-downs, impairments and write-ups on receivables, property, plant and equipment, investments, intangibles and investment properties 33,560 29,592

Changes in provisions 1,577 -6,742

Changes in other non-cash items -22,189 -13,330

Gains on sales of non-current assets -11,393 -173

Other adjustments -118,960 -89,877

Sub-total -117,404 -80,530

Change in assets and liabilities after adjusting for non-cash items

Loans and advances to banks -279,002 691,813

Loans and advances to customers -1,064,492 -382,847

Assets held for trading -78,640 -1,147

Other operating assets -915 108

Liabilities to banks 315,435 418,472

Liabilities to customers 767,542 332,479

Securitised liabilities -414,851 -298,281

Liabilities held for trading 82,923 -29,492

Other operating liabilities -5,256 1,973

Positive/negative fair value of hedging derivatives 981 5,917

Interest paid -669,482 -608,040

Interest received 827,809 757,815

Dividends received 6,004 4,212

Income tax paid/reimbursed -6,801 126

Cash flow from operating activities -624,825 834,130

Inflows from sale/repayment of investments 1,813,949 470,904

Inflows from disposal of property, plant and equipment, investment properties and intangibles 4,703 64

Outflows for purchase of investments -1,018,018 -1,215,588

Outflows for purchase of property, plant and equipment, investment properties and intangibles -1,913 -1,692

Cash flow from investment activities 798,721 -746,311

Payments to shareholders 0 0

Application of funds from subordinated capital (net) -74,429 -151,667

Cash flow from financing activities -74,429 -151,667

Cash and cash equivalents at end of previous period 7,269 71,118

Cash flow from operating activities -624,825 834,130

Cash flow from investment activities 798,721 -746,311

Cash flow from financing activities -74,429 -151,667

Cash and cash equivalents at end of period 106,737 7,269

58

Notes to the consolidated financial statements of Landesbank Saar .............................................. 60Accounting policies ............................................................................................................................ 61

(1) General principles ................................................................................................................................... 61(2) Scope of consolidation ......................................................................................................................... 65(3) Principles of consolidation .................................................................................................................. 65(4) Currency translation ............................................................................................................................. 65(5) Offsetting ............................................................................................................................................... 65(6) Financial instruments .......................................................................................................................... 65(7) Cash reserves .......................................................................................................................................... 71(8) Receivables ............................................................................................................................................. 71(9) Risk provisions in the credit business ................................................................................................. 71(10) Assets held for trading ........................................................................................................................ 71(11) Positive market value of derivative financial instruments (hedge accounting) .......................... 71(12) Investments ..........................................................................................................................................72(13) Interests in entities valued at equity ................................................................................................72(14) Investment property/property, plant and equipment ....................................................................72(15) Intangibles .............................................................................................................................................73(16) Other assets ..........................................................................................................................................73(17) Non-current assets held for sale and disposal groups .....................................................................73(18) Liabilities ...............................................................................................................................................73(19) Liabilities held for trading ...................................................................................................................73(20) Negative fair values from derivative financial instruments (hedge accounting) .......................73(21) Provisions ..............................................................................................................................................74(22) Other liabilities ....................................................................................................................................75(23) Hybrid capital .......................................................................................................................................75(24) Leasing transactions ...........................................................................................................................75(25) Taxation .................................................................................................................................................76

Segment reporting .............................................................................................................................77Disclosures on the comprehensive income statement ...................................................................... 81

(26) Net interest income ............................................................................................................................. 81(27) Shares of profits in associated companies accounted for using the equity method ................ 82(28) Risk provisions in the credit business .............................................................................................. 82(29) Net commission income ..................................................................................................................... 83(30) Gains or losses on fair value measurement .................................................................................... 84(31) Gain/loss on hedge accounting .......................................................................................................... 84(32) Gains or losses on investments ........................................................................................................ 85(33) Administrative expenses ................................................................................................................... 86(34) Other income ........................................................................................................................................87(35) Income taxes ........................................................................................................................................ 88

Notes to the balance sheet ............................................................................................................... 90(36) Cash reserves ....................................................................................................................................... 90(37) Loans and advances to banks ............................................................................................................ 90(38) Loans and advances to customers ................................................................................................... 90(39) Risk provisions in the credit business .............................................................................................. 92

Group Notes to the consolidated financial statements 2011

59

CORPORATE REPORT 2011 | NOTES

(40) Assets held for trading ....................................................................................................................... 94(41) Investments ......................................................................................................................................... 95(42) Securities repurchase transactions ...................................................................................................97(43) Interests in entities valued at equity ............................................................................................... 98(44) Investment property .......................................................................................................................... 98(45) Property, plant and equipment ........................................................................................................ 99(46) Intangibles ..........................................................................................................................................100(47) Current and deferred income tax claims ......................................................................................... 101(48) Other assets ........................................................................................................................................103(49) Non-current assets held for sale and disposal groups ..................................................................103(50) Liabilities to banks ............................................................................................................................103(51) Liabilities to customers .....................................................................................................................104(52) Securitised liabilities .........................................................................................................................105(53) Liabilities held for trading ................................................................................................................105(54) Negative fair values from derivative financial instruments (hedge accounting) .....................106(55) Provisions ............................................................................................................................................106(56) Current and deferred income tax liabilities ...................................................................................109(57) Other liabilities ..................................................................................................................................109(58) Subordinated capital ......................................................................................................................... 110(59) Shareholders’ equity .......................................................................................................................... 111

Notes on financial instruments ........................................................................................................117(60) Fair value of financial instruments ..................................................................................................117(61) Level information for financial instruments measured at fair value ...........................................121(62) Financial instrument measurement categories ............................................................................ 124(63) Net gains or losses on financial instruments ................................................................................. 125(64) Derivative transactions ..................................................................................................................... 125

Notes to the cash flow statement ................................................................................................... 128(65) Notes to items in the cash flow statement ................................................................................... 128(66) Subordinated assets..........................................................................................................................129(67) Assets and liabilities in foreign currencies ..................................................................................... 129(68) Assets pledged as collateral .............................................................................................................129(69) Collateral received that may be sold on or pledged on .................................................................130(70) Leasing transactions ..........................................................................................................................131(71) Fiduciary transactions ....................................................................................................................... 132(72) Contingent liabilities and other obligations .................................................................................. 132(73) Other financial obligations ............................................................................................................... 133(74) List of shareholdings of Landesbank Saar (excerpt) ..................................................................... 133(75) Administrative bodies of SaarLB .....................................................................................................136(76) Related party disclosures ................................................................................................................138(77) Auditors’ fees .......................................................................................................................................141(78) Employees ........................................................................................................................................... 142

Responsibility statement by the Board of Management ................................................................. 143

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The consolidated financial statements for Landesbank Saar, Saarbrücken, a corporation established under public law (hereinafter SaarLB), for the financial year 2011 have been prepared in accordance with International Financial Reporting Standards (IFRS), pursu-ant to Commission Regulation 1606/2002 of the European Parliament and of the Council dated 19 July 2002, and in conjunction with Section 315a (1) of the German Commercial Code (HGB). In addition to the IFRS-defined standards, IFRS also comprise the Interna-tional Accounting Standards (IAS), the in-terpretations of the International Financial Reporting Interpretations Committee (IFRIC) and the Standing Interpretations Committee (SIC). All standards and interpretations that are mandatory in the EU for the financial year 2011 have been applied. In addition, German Accounting Standards (DRS) 5-10 and 15 were applied.

The consolidated financial statements con-tain the statement of comprehensive income, consisting of the income statement with an effect on profits and losses and without an ef-fect on profits and losses, the balance sheet, the schedule of changes in equity, the cash flow statement, the Notes and the segment reporting. The reporting currency is the euro. Unless explicitly stated otherwise, all amounts are given in thousands of euro (EUR ’000s). Figures in the tables may be rounded by +/- one unit and are not normally preceded by a symbol if it is clear from the context.

BayernLB continues to hold an unchanged 49.9%, Saarland 35.2% and Sparkassen- und Giroverband Saar (Saarland Savings Bank As-sociation) 14.9% of the shares in SaarLB. Saar-LB is included in the consolidated financial statements of BayernLB at equity.

The Group management report, which in-cludes the risk report, has been published in a separate section of the corporate report.

Notes to the consolidated financial statements of Landesbank Saar

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(1) GENERAL PRINCIPLES

The consolidated accounts of SaarLB are drawn up using consistent accounting poli-cies across the Group. The accounting policies are based on the assumption that the Group is a going concern.Income and expenses are accrued pro rata temporis and recognised in the income state-ment in the period to which they are economi-cally relevant.Estimates and measurements required for ac-counting and valuation under IFRS are carried out in accordance with the relevant stand-ards. They are examined on an ongoing basis and are based on past experience and other factors such as expectations of future events. The assumptions and estimates essentially relate to the calculation of the fair values of certain financial instruments, the identifica-tion and calculation of impairments under IAS 39, the accounting treatment and meas-urement of provisions and the realisability of future tax reliefs. Where broader estimates were necessary the relevant assumptions are shown in the notes to the corresponding items.Assets are recognised when it is probable that the SaarLB Group will derive a future econom-ic benefit from them and the cost of acquisi-tion or production can be reliably determined.Debts are recognised when it is probable that satisfaction of a current obligation will result in a direct outflow of economically useful re-sources and the amount required to do so can be reliably determined.

Effects of new and amended IFRS

Standards and interpretations that must be applied for the first time in the reporting periodThe amended standards of IAS 1 (“Presenta-tion of Financial Statements”), IAS 34 (“In-terim Financial Reporting”), IFRS 7 (“Financial Instruments: Disclosures”) and the amended interpretation of IFRIC 13 (“Customer Loy-alty Programmes”), which were published as part of the annual improvement project

by the International Accounting Standards Board (IASB) on 6 May 2010 and endorsed by the EU on 19 February 2011, had to be applied for the first time in the reporting period. The amended standards of IAS 24 “Related Party Disclosures,” IAS 32 “Classification of Rights Issues” and the amended interpretation of IFRIC 14 “Prepayments of a Minimum Funding Requirement” and IFRIC 19 “Extinguishing Fi-nancial Liabilities with Equity” were also ap-plied for the first time. The amendment of IAS 1 “Presentation of Fi-nancial Statements” relates to the clarifica-tion that the breakdown of other income does not have to take place in the calculation of the changes in equity, but can also take place in the notes to the financial statements.The amendment of IAS 34 “Interim Financial Reporting” relates to the additional informa-tion that must be reported on the interim fi-nancial statements. It involves the following information:• changes in the economic environment or

general economic environment that affect the fair value of financial assets and liabili-ties,

• transition between the various steps of the fair value hierarchy, which forms the basis of the fair value and

• reclassification of financial assets on ac-count of a change in the purpose or use.

These amendments were already considered by SaarLB in the interim financial statements for 2011.In IFRS 7 “Financial Instruments: Disclosures,” the rule that the disclosures on the default risk, liquidity risk and market risk are to be included at all times unless the risk is insig-nificant in terms of IAS 1 was amended so that the reference to IAS 1 was eliminated.The amendments to IFRIC 13 “Customer Loy-alty Programmes” relates to the clarification that the fair value of award credit is funda-mentally to be reported at the amount for which the award credit could be sold separate-ly. Since such customer loyalty programmes do not exist at SaarLB, this clarification did not have any impact on SaarLB.The amendment of IAS 24, which was

Accounting policies

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published by the International Accounting Standards Board (IASB) in November 2009 and endorsed on 20 July 2010, primarily relates to the definition of related parties. Accordingly, related parties include subsidiaries, associ-ated companies and joint ventures with the same investor. The definition of transactions that must be reported was adjusted. Among others, it was clarified that pending transac-tions are also to be included in the obligatory reported transactions. The changes of IAS 24 tend to lead to an expansion of the circle of related parties. Public sector companies, i.e. companies that are under the control, joint control or signifi-cant influence of the state, were given an ex-emption in IAS 24. If this exemption is used, the detailed disclosures required in IAS 24.18 are not to be made with regard to transac-tions between related parties, but rather the following minimal disclosures are sufficient:• naming the public sector investor and its in-

fluence on the company,• disclosure of the type and amount of each

significant individual transaction as well as• disclosure on the scope of the transactions

that are significant in total, but not individ-ually.

On account of the amendments to IAS 24, there is an expansion of the related parties for SaarLB (see Note 76). This amendment was considered in the 2011 interim financial statements.The amendments to IAS 32 were published by the International Accounting Standards Board (IASB) in October 2009 and endorsed by the EU on 23 December 2009. The amended IAS 32 contains new provisions on classify-ing subscription rights and similar rights. Ac-cordingly, such rights are equity instruments when the company offers them prorated to all present holders of the same class of own non-derivative equity instruments. Since such rights do not currently exist at SaarLB, these changes did not have any impact on SaarLB.The amendment to IFRIC 14, which was pub-lished by the IASB in November 2009 and endorsed on 20 July 2010, applies under lim-ited circumstances under which a company

is subject to the minimum financing require-ments and makes a prepayment of the con-tributions that satisfy these requirements. After the amendment, it is approved that a company represents the benefits from such a prepayment as an asset. This amendment has no impact on SaarLB, since there are no pre-payments at SaarLB at the present time.In November 2009, the International Ac-counting Standards Board (IASB) published the amendments to IFRIC 19, which were en-dorsed on 23 July 2010. The new IFRIC 19 con-tains guidelines for the accounting of equity instruments that a borrower hands out after the renegotiation of the conditions of a finan-cial liability for its full or partial redemption. If a borrower hands out such equity instru-ments, these equity instruments are to be viewed as “paid salary” according to IAS 39.41. Consequently, the borrower has to close out the financial liability in full or in part. The bor-rower recognises the equity instruments that are provided to the lender at fair value unless the fair value cannot be determined reliably. The equity instruments are recognised then at the fair value of the redeemed liability. Since such constructions do not currently ex-ist at SaarLB, these changes did not have any impact on SaarLB..

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Standards and interpretations passed in the reporting period and to be applied in the peri-ods following the reporting period and not ap-plied in advance

The key standards approved in 2011, the man-datory effective date and the expected impact on SaarLB are summarised below.

Standard Effective date for financial years that begin after the stated date

Description of amendments and impact on SaarLB

IAS 1 “Presentation of Financial Statements”

1 July 2012 (published in June 2011; not yet endorsed)

The items reported in other income must be divided separately according to items that are reclassified as income or losses in the following periods (so-called “recycling”) and those that are not “recycled”).The change will have an impact on the disclosure of other income at SaarLB.

IAS 12 “Income Taxes” 1 January 2012 (published 20 December 2010; not yet endorsed)

For real estate held as an investment and measured at fair value, deferred tax assets and liabilities are to be recognised in the future on the basis of the tax consequences of a sale.Since SaarLB does not conduct any fair value measurement of real estate held as an investment, this amendment will not have any impact on SaarLB.

IAS 19 “Employee Benefits” 1 January 2013 (published 16 June 2011; not yet endorsed)

The amendments to IAS 19 relate above all to the recording and valuation of the expenses and income for defined benefit loans and termination benefits. The significant change consists of the discontinuation of the corridor method so that actuarial profits and losses in the period in which they emerge are reported in other income/losses. This amendment will have an impact on SaarLB, since SaarLB is currently apply-ing the corridor process.

IFRS 7 “Financial Instruments: Disclosures”

1 July 2011 (published on 7 Oct. 2010; en-dorsed by EC Directive 1205/2011 as of 22 Nov. 2011)

The amendments to IFRS 7 relate to disclosures in connection with the transfer of financial assets. Accordingly, now, even in the event of complete derecogni-tion of the financial asset, complete disclosures on the rights and obligations possibly retained or possibly acquired as part of the transaction (e.g. default guarantee, repurchase agreements) are required.Besides a description of the rights and obligations, IFRS 7 requires in particular the following quantitative disclosures:• the fair value or the carrying value of the rights and obligations that result or

remain from the transaction and reflect the ongoing investment,• the amount of the maximum loss risk,• the point in time and the amount of the payouts (notdiscounted) that result

from the retained or acquired rights and obligations (e.g. the earliest possible exercise point and the exercise price are to be reported in the case of a writ-ten sell option for transferred financial assets). In the disclosures, a difference must be made between the degree of the obligation, i.e. the acquired options (voluntary repurchase), written options (possible repurchase) and forward transactions (obligatory repurchase).

The disclosures are made according to the type of the remaining investment. The difference can be made both by the type of rights and obligations (e.g. guaran-tees, call or put options) and by the transaction types (such as e.g. factoring, securitisation, securities).In the event that the transferred financial assets are not dereognised, a detailed description is to be provided on whether the company can continue to use the recognised financial assets despite the transfer without limitations or whether the usage – e.g. on account of a pledge of the financial asset to a purchaser – is limited. If the purchaser possesses rights of recourse to the transferred financial asset, the fair value of both the transferred, financial asset and the related li-ability are also to be reported.The application of the amended IFRS 7 will have a corresponding impact on the disclosures in the Notes of SaarLB.

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Standard Effective date for financial years that begin after the stated date

Description of amendments and impact on SaarLB

IFRS 9 “Financial Instruments” 1 January 2015 (published 12 November 2009; not yet endorsed)

The new IFRS 9 contains the results of the first revision of IAS 39, which refers to the classification and measurement of financial instruments. Accordingly, when financial assets are recognised, they are to be allocated to the amortised cost category or to the fair value category. Recognition at amortised cost occurs when• the financial asset is held in conformity with the business model in order to

receive contractual cash flows and• the contractual conditions of the financial asset foresee payments at sched-

uled dates that represent interest and redemption payments on the out-standing nominal amount.

Financial assets that do not fulfil these conditions are recognised under profit or loss on fair value.A voluntary allocation of financial assets to the fair value category is possible upon recognition if incongruities are eliminated or significantly reduced with such measurement or disclosure.For the initial recognition of equity instruments that are not held for trading purposes, there is the option of disclosing changes in the value of these financial assets including the gain/loss on disposals not at profit or loss, but rather in the statement of comprehensive income.A change in the business model requires a rededication.Financial liabilities are usually measured at amortised cost. The exceptions to this are the trade portfolios and the financial liabilities for which the fair value option was selected. Fair value changes to financial liabilities in the fair value op-tion are fundamentally recognised in total other earnings according to IFRS 9 if the fair value changes result from a change in the credit risk. All other fair value changes continue to be recognised at profit or loss.The application of the new IFRS 9 will have a major impact on the classification and measurement of financial assets of SaarLB.

IFRS 10 “Consolidated Financial Statements”

1 January 2013 (published 12 May 2011; not yet endorsed)

IFRS 10 replaces the consolidation guidelines in the former IAS 27 and SIC 12. Through this new standard, a uniform consolidation model is introduced for all companies, which is based on the control of the subsidiary by the parent compa-ny. The control concept of IFRS 10 includes the following three elements, which must be cumulatively fulfilled:• discretionary power,• variable returns and• the possibility of influencing variable returns by exercising discretionary

power. SaarLB will analyse the impact on the consolidated financial statements.

IFRS 11 “Joint Arrangements” 1 January 2013 (published 12 May 2011; not yet endorsed)

IFRS 11 replaces IAS 31 “Interests in Joint Ventures” and eliminates the former possibility of proportionate consolidation of joint ventures. A participant in a joint venture is to report his interest as an equity investment and use the equity methods pursuant to IAS 28. SaarLB will analyse the impact on the consolidated financial statements.

IFRS 12 “Disclosures of Interests in Other Entities”


IFRS 12 will lead to a reporting obligation for all equity investments in subsidiar-ies, joint ventures and associated companies as well as not-consolidated special purpose vehicles according to one standard. Accordingly, companies must pro-vide quantitative and qualitative information that make it possible for readers of the financial statements to identify the risks and financial effect that is con-nected with the company’s equity investment in the business.It is anticipated that the amendment will not have any material impact on SaarLB.

IFRS 13 “Fair Value Measure-ment”


In IFRS 13, uniform methods of valuation are set for measurement at fair value by defining the fair value and illustrating the methods for the determination of the fair value. The new standard will also lead to an expansion of the infor-mation in the notes with regard to the measurement at fair value. Accordingly, all assets and liabilities measured at fair value are divided into classes. Further-more, the processes that were applied for the determination of the fair value are specifically represented.The amendment will not have any material impact on SaarLB.

IAS 27 “Separate Financial State-ments”


On account of the introduction of the new IFRS 10 standard, the consolidation rules included in IAS 27 were removed. Consequently, IAS 27 includes only the requirements that are to be applied to separate individual financial statements. In this connection, the standard was renamed.It is anticipated that the amendment will not have any material impact on SaarLB.

IAS 28 “Investments in Associ-ates and Joint Ventures”


IFRS 11 resulted in the elimination of the proportionate consolidation of joint venture companies. Since the joint venture companies are to be considered ac-cording to the equity method pursuant to IAS 28, the application area of IAS 28 was expanded for joint venture companies and the standard renamed accord-ingly.SaarLB will analyse the impact on the consolidated financial statements.

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SaarLB has refrained from early implementa-tion of any amended or new standards and in-terpretations (partially not yet endorsed) that have been issued by the IASB and the IFRIC and are fundamentally relevant for the SaarLB Group where their use is not mandatory as of the 2012 financial year or later.

(2) SCOPE OF CONSOLIDATION

The group of consolidated companies at SaarLB includes seven (31 Dec. 2010: six) sub-sidiaries. These include SaarLB Bankenbeteili-gungsgesellschaft mbH, Saarbrücken, and special funds that are consolidated in full in accordance with IAS 27 in conjunction with SIC 12. The consolidated financial statements do not include entities that are only proportion-ately consolidated. Two associated companies (31 Dec. 2010: two) continue to be valued ac-cording to the at-equity method.Materiality criteria are used to determine Saar-LB’s scope of consolidation. A total of three subsidiaries (4 as of 31 Dec. 2010) and five as-sociated companies were neither fully consoli-dated nor valued at equity as they are only of minor significance to the group’s net assets, financial position and results of operations. The accounting and earnings-related impact of the contractual relationships between Group companies and these excluded companies is contained in the consolidated financial state-ments. A complete overview of the special funds and associated companies included in the consoli-dated financial statements can be found in the list of shareholdings (see note 74).

(3) PRINCIPLES OF CONSOLIDATION

Consolidation was carried out using the pur-chase method under IAS 27.18 in conjunction with IFRS 3.The costs of acquisition of the consolidation entities were offset against their equity. To date, there have been no amounts where the costs of acquisition exceed equity.In consolidating the balance sheet and income statement and eliminating intragroup gains,

all receivables and liabilities, income and expenses and gains arising from intragroup transactions have been eliminated.Associated companies are valued at equity and shown under the balance sheet item interests in entities valued at equity. Under this meth-od, the costs of acquisition of an investment in an associated company is recognised at its acquisition cost at the time of acquisition and subsequently carried over in line with the Group’s share of the associated company’s net income or other change(s) in its net assets.

(4) CURRENCY TRANSLATION

All assets and liabilities denominated in a for-eign currency are translated into the function-al currency at the spot rate on the day of the business transaction on initial recognition. In subsequent periods, it is necessary to distin-guish between monetary and non-monetary items when translating currency. Monetary assets and liabilities denominated in foreign currencies are translated using the rate on the balance sheet date. In the case of non-mone-tary items valued at historic cost of acquisi-tion or production, currencies are translated at the historical acquisition rate. Non-monetary items designated at fair value are translated using the rate on the date the fair value was calculated. Gains and losses from monetary items resulting from currency translation are recognised in the income statement.

(5) OFFSETTING

Receivables and liabilities are offset against each other where they relate to the same coun-terparty, are payable on demand, and it has been agreed with the counterparty that inter-est and commission will be charged as if there were only one account.

(6) FINANCIAL INSTRUMENTS

Definition

A financial instrument is an agreement that simultaneously creates a financial asset for

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one of the contracting parties and a financial liability or equity instrument for the other party.

Recognition and measurement

Financial instruments are recognised on the balance sheet from the date on which the company reporting becomes a contracting party and is either entitled to obtain consid-eration or required to provide consideration.Normal purchases or sales (spot transactions) of financial assets (regular way contracts) can be recognised either on their trade date or settlement date. Under IAS 39.9, purchases and sales of financial assets where delivery of the asset takes place in accordance with a specified deadline in line with customary mar-ket practice are deemed to be such contracts. At SaarLB securities and derivatives are al-ways recognised on their trade date. Other financial instruments are recognised on their settlement date. All financial instruments, including financial derivatives, are carried on the balance sheet in accordance with IAS 39 and allocated to categories set out in IAS 39.Initial recognition of financial instruments is at fair value, which generally corresponds to the consideration (the transaction price) paid or received at the time of acquisition.

Subsequent measurement

Subsequent measurement of financial instru-ments depends on their measurement cat-egories under IAS 39, which differ as follows:

• Financial assets and liabilities at fair value through profit or loss:

These include financial instruments and derivatives held for trading purposes that do not meet hedge accounting criteria un-der IAS 39 (held for trading), and financial instruments not held for trading purposes where the fair value option under IAS 39 is used.

– Financial instruments held for trading (HfT):

These are measured at fair value and rec-ognised in the income statement under gains or losses on fair value measure-ment. This item also shows realised gains and losses; current income and expenses appear under net interest income. Deriva-tives in hedges do not meet the hedge ac-counting criteria under IAS 39. They are used for risk management and have not been concluded for trading purposes.

HfT financial instruments are recognised under assets held for trading and liabili-ties held for trading accordingly.

– Financial instruments in the fair value op-tion category (FVO):

The fair value option is used for portfolios of financial instruments managed on a fair value basis in accordance with a docu-mented risk management or investment strategy; this relates primarily to securi-ties managed by the securities special funds. For structured products and the realised results that have to be separat-ed, the fair value option is also applied to avoid splitting the underlying transaction and the embedded derivative. Measure-ment is at fair value. Gains and losses are recognised in gains or losses on fair value measurement, while current income is recognised in net interest income.

Financial instruments designated under the fair value option are included under investments. Financial instruments that would otherwise have to be measured at amortised cost are not categorised under the fair value option.

• Investments held to maturity (HtM): This category covers non-derivative finan-

cial assets with fixed or determinable pay-ments as well as fixed maturities that the Bank intends and is able to hold to maturity, as far as an active market exists for them at the time of recognition or reclassification. Measurement is at amortised cost. Please refer to the comments on impairments for the calculation of required write-downs.

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These financial instruments are recognised under investments. Current gains and losses and income and expense from amortisation are recognised under net interest income. • Loans and receivables (LaR): These are non-derivative financial assets

with fixed or determinable payments that are not quoted on an active market. They are measured at amortised cost. Please re-fer to the comments on impairments for the calculation of required risk provisions and write-downs.

Financial instruments in the LaR category are shown under cash reserves, loans and advances to banks/customers, investments and other assets. Current gains and losses and income and expense from amortisation are recognised under net interest income; this also applies for holdings that are part of a hedge under IAS 39. Gains and losses on sale are shown under gains or losses on in-vestments if they relate to investments and under other income/expense if they relate to receivables.

• Available for sale financial assets (AfS): These include any non-derivative financial

assets (securities, equity investments) that are classified as available for sale or have not been assigned to any of the categories above. The financial instruments in this cat-egory are measured at fair value. Any differ-ence between fair value and amortised cost is shown as a separate item under share-holders’ equity (the revaluation reserve) until the asset is either sold or matures or a permanent impairment (see comments on impairments) has to be recognised at profit or loss.

Available for sale financial instruments are included in investments. Gains/losses on their sale and permanent impairment are reported in gains or losses on investments, current income and income and expense from amortisation are recognised under net interest income; this also applies for hold-ings that are part of a hedge under IAS 39.

• Liabilities measured at amortised cost: Liabilities measured at amortised cost in-

clude financial liabilities not held for trading

purposes. They are shown at amortised cost under liabilities to banks/customers, securi-tised liabilities, other liabilities and subordi-nated capital. Current gains and losses and income and expense from amortisation are shown under interest expense.

Fair value

The fair value of a financial instrument is the amount for which it could be exchanged or settled between knowledgeable, willing and independent business partners.The fair value is determined according to the valuation hierarchy of IAS 39. In calculating fair value, a distinction is made as to whether fair values exist on active markets or whether, for inactive markets, there is recourse to valu-ation methods. Equity instruments for which fair value cannot be reliably calculated are recognised at their costs of acquisition less any impairments.As far as possible, SaarLB uses the quoted price on an active market (such as the ex-change price) to determine fair value (level 1 and 2 of the valuation hierarchy of IAS 39). A market for financial instruments is regarded as active if quoted prices are easily and regu-larly available from an exchange or broker and these prices represent actual, regularly oc-curring market transactions between knowl-edgeable, willing and independent business partners. SaarLB uses the market price and prices on other active markets for subsequent meas-urement of financial instruments traded on active markets and carried at fair value (se-curities and derivative exchange-traded con-tracts). If there is no active market, valuation meth-ods are used (level 3 to 5 of the valuation hierarchy of IAS 39). The aim is to determine the transaction price that would have been reached between two knowledgeable, willing and independent business partners on the valuation date. The inputs used for this pur-pose must include all inherent market expec-tations. Inactive markets are characterised by heavily reduced trading volumes, extremely

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wide bid/offer spreads and existing arbitra-tion possibilities.With securities, mainly indicative prices from independent market data providers are used in applying the valuation methods and – where these are not available – prices from other market participants (especially issue arrangers). In the process, prices are obtained from different providers for each financial in-strument. The prices provided are compared for plausibility. If in exceptional circumstanc-es only one price is available, a credit analy-sis is also performed as a plausibility check; where present, prices of securities with simi-lar features, residual maturities and credit ratings are used for plausibility. This approach was used to calculate the fair values of securi-ties. In the absence of other sources, fair val-ues of ABS securities were mainly calculated using prices provided by arrangers.Valuation models are used for OTC derivatives and equity securities not traded on active markets. Fair values are also calculated using recog-nised valuation models based on publicly available market inputs and, to a limited ex-tent, internal company data. The valuation models include the net present value method and option pricing models. The net present value method is used for un-conditional derivative financial instruments (interest rate swaps, interest rate/currency swaps, forward rate agreements and forward foreign exchange transactions). Valuation is based on cash flow structure taking account of nominal values, residual maturities and the agreed interest rate calculation method. Credit default swaps are also treated as un-conditional derivative financial instruments, with expected defaults based on current cred-it spreads also being taken into account.The cash flow structure of financial instru-ments with contractually agreed fixed cash flows is calculated using the cash flows agreed. For variable rate instruments, cash flows are determined using forward curves. Discounting uses a yield curve in the same currency and of matching maturity, and a risk-adjusted spread. Observable market inputs

are used where spreads are publicly available. Material equity securities held as invest-ments that are not traded on active markets are valued using earnings power value analy-sis. Expected cash flows are based on the tar-gets of the entities in question. Non-material holdings and holdings without reliable pro-jected values are carried at amortised cost.Options and other financial derivatives with option-type characteristics are largely val-ued on the basis of the Black Scholes option pricing model. The following parameters are regularly used in the valuation process: cu-mulative probability distribution function for standard normal distribution, option strike prices, risk-free interest rates (for different currencies and maturities), price volatilities, option time to expiry, (as applicable) interest rate and pricing barriers, and probabilities of occurrence. Options include interest rate cap and floor agreements, swaptions and curren-cy options.The valuation models are therefore used to calculate fair values for accounting purposes for financial instruments in the categories HfT and AfS. Balance sheet items and prod-ucts affected are:

• OTC derivatives in assets held for trading• equity instruments held in investments• OTC derivatives in liabilities held for trading

For Notes purposes, the financial instruments recognised at fair value in the balance sheet are allocated to a three-level system (level 1 to 3). These three levels are defined on the basis of the input parameters used for fair value measurement. Allocation to level 1 occurs if the fair value measurements is made with prices on the ac-tive markets (without adjustment). This is the case for securities where transaction-based market prices or binding offers are available. If the fair value is calculated according to the valuation methods whose valuation param-eters are directly or indirectly observable on the market and have a significant impact on the calculation of the fair value, then they are allocated to level 2. Derivatives that are

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valued solely with parameters observable on the market are to be allocated to level 2. If the fair value is calculated with valuation methods where the influence of valuation pa-rameters – that are not based on observable market data – is significant for the fair value, they are allocated to level 3. The Bank also in-cludes those securities that are valued on the basis of indicative prices here.Please refer to Note 60 and note 61 for the dis-closures of the fair values of financial instru-ments and their level allocation.

Hedge accounting

Interest rate, currency and credit risks are managed using financial derivatives to hedge assets or liabilities on the balance sheet. The different valuation methods possible for the underlying transaction and the hedging transaction can give rise to asymmetric ef-fects in the income statement that do not re-flect economic reality and, most notably, give an incomplete picture of earnings. Hedges that meet hedge accounting criteria within the meaning of IAS 39 are currently reported exclusively as fair value hedges. By applying hedge accounting, which in respect of the hedged risk provides a valuation of the un-derlying transaction through the fair value, the frequency of asymmetric valuations is re-duced. All or a portion of an asset or liability in the balance sheet is hedged against a change in fair value due to interest rate risk that could affect the net income for the period. As a precondition for applying hedge accounting a high degree of effectiveness is needed; i.e. that changes in the fair value of the hedged underlying transactions must stay within a range of 80%-125% of the hedged risk and the hedging derivative. Fair value hedge account-ing uses micro-fair value hedges. Interest rate swaps are used as hedging instruments. De-rivatives used to hedge the fair value of assets and liabilities held on the balance sheet are measured at fair value; changes in value have to be taken to the income statement. The car-rying values of the underlying transactions are adjusted for the measurement gains/

losses arising from the hedged risk, which are recognised on the income statement. Both the measurement gains/losses of hedge transactions and measurement gains/losses of underlying transactions are reported in “Gain/loss on hedge accounting” on the in-come statement. Current income from deriva-tives that are part of a hedge and meet the hedging criteria under IAS 39 is recognised under net interest income.

Impairments

At every balance sheet date, SaarLB assesses whether objective indicators of impairment exist for a financial asset. A financial asset is considered to be impaired and an impairment loss to have occurred if:• there are objective indicators of an impair-

ment due to a loss event that occurred after the financial instrument was recognised for the first time and no later than the report-ing date,

• the loss event has an influence on the esti-mated future cash flow of the financial as-set or group of financial assets and

• a reliable estimate of the amount can be made.

For financial instruments in the LaR, HtM and AfS categories, SaarLB initially assesses at the individual level whether objective indica-tors of an impairment exist. To this end, cus-tomer relationships and securities issuers are analysed at regular intervals. The following criteria are specifically regarded as objective indicators of an impairment:• clear deterioration of financial circum

stances,• expectation of lower future payment

streams than those agreed,• default or delay in arranged payments of

capital and/or interest, application for de-ferment or extension,

• concessions to the borrower for economic or legal reasons in connection with financial difficulties,

• breach of agreements material to lending,• high probability of insolvency proceedings

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or other restructuring of the borrower,• ratingrelated restructuring or reorganisa-

tion,• disappearance of an active market for this

financial asset due to financial difficulties,• countryspecific evidence of impairment,• discounts in market prices of more than 15%

in comparison to the original buying price.

For receivables, the amount of the specific provision is equal to the difference between the carrying value of the financial instrument concerned and the net present value of ex-pected future cash inflows calculated using the discounted cash flow method and based on the original effective interest rate. Cash flows also have to include flows that may re-sult from the realisation of collateral after de-duction of the costs of acquisition and sale. The carrying value of the financial instrument is reduced by means of a specific risk provi-sion, which is shown on the assets side of the balance sheet. The impairment expense is rec-ognised in the income statement as part of the risk provisions. Changes in expected inflows lead to releases from or additions to risk provisions. For securities in the LaR and HtM categories, the amount of the impairment expense is equal to the difference between the carry-ing value and the fair value. The impairment expense is recognised as a write-down and shown in gains or losses on investments.As soon as a receivable in the LaR or HtM cate-gory is identified as impaired, interest income ceases being recognised on the contractual terms. Notwithstanding this, the change in the net present value of expected future cash inflows over time (unwinding) is reported un-der interest income. For financial instruments in the LaR and HtM categories, portfolio risk provisions are cal-culated on the basis of historic default prob-abilities for receivables where there are no objective indicators of impairment and for those where, in the case of objective indica-tors, an individual examination has revealed no need for impairment. Historical default

probabilities are updated on an ongoing basis in the course of backtesting.Country risks (transfer risk) are also reflected through the creation of portfolio risk provi-sions based on country-specific probabilities of default, unless the risks have already been taken into account through specific risk provi-sions.Irrecoverable financial instruments are derecognised. With receivables this normally involves utilising specific risk provisions. De-faults for which no or insufficient specific provisions have been created were charged to current portfolio risk provisions.For financial instruments in the AfS category, an assessment is also made on each reporting date as to whether objective indicators of im-pairment exist.For equity instruments classified as AfS, a significant or lasting decline in the fair value of the investment below the costs of acquisi-tion constitutes an objective indicator of an impairment. For debt instruments classified as AfS, the existence of an impairment is de-termined based on the same criteria as for se-curities in the LaR and HtM categories.If an impairment exists, the cumulative un-realised loss that previously was reported under shareholders’ equity in the revaluation reserve has to be reallocated to the income statement for the reporting period and rec-ognised under gains or losses on investments. The amount to be reclassified from the revalu-ation reserve is the difference between the amortised cost and the current fair value. Where there is no further reason for impair-ments on debt instruments, these are re-versed through the income statement up to a maximum of amortised cost. Increases in the value of equity instruments may only be reversed after prior impairment against the revaluation surplus directly to equity.

Derecognition

Financial liabilities are derecognised when the contractual rights to cash flows from the respective assets expire or the financial asset

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is transferred and the transfer meets the cri-teria for derecognition in accordance with IAS 39. A transfer in accordance with IAS 39 occurs when the contractual rights to the cash flows from the financial asset are transferred to a third party or the cash flows are forwarded to a third party in accordance with IAS 39.19. If such a transfer occurs, the financial asset is derecognised when the Group has transferred fundamentally all the rewards and risks from the financial asset. Financial liabilities are derecognised when the contractual obliga-tions are settled, removed or expire.Transfers that do not meet the criteria for derecognition at SaarLB include in particular real securities repurchase transactions and securities-lending transactions. Since all the risks and rewards connected with ownership are primarily retained in these cases, the trans-ferred assets continue to remain in full on the balance sheet and are disclosed in a separate item (Note 42). The equivalent values received from real repurchase transactions as well as accepted cash collateral are disclosed as liabili-ties under liabilities to banks/customers.Please refer to the explanations under “Assets pledged as collateral” (Note 68) for the trans-ferred assets that continued to be recognised.

(7) CASH RESERVES

The cash reserves include cash on hand and deposits at central banks. Disclosure was at nominal value.

(8) RECEIVABLES

Loans to banks and customers involve non-derivative financial assets with fixed or de-terminable payments that are not quoted on an active market and not held for trading purposes. Measurement is at amortised cost unless the receivable is not an underlying transaction in an efficient fair-value hedge. Premiums, discounts and fees that are part of the effective interest rate of the financial instruments are spread over the fixed interest period and reported in interest income.

Impairments on receivables are recognised in a separate risk provision on the balance sheet and offset against the value of the asset.

(9) RISK PROVISIONS IN THE CREDIT BUSINESS

The risk provisions for receivables are shown as a negative item under an individual asset; the item includes specific risk provisions and portfolio risk provisions for receivables.Expenses for allocations to risk provisions, income from the release of risk provisions and receipts on receivables written off are reported under risk provisions on the income statement.

(10) ASSETS HELD FOR TRADING

Assets held for trading contain exclusively financial derivatives with positive fair values not designated as hedging instruments under IAS 39. Measurement is at fair value. Measure-ment gains/losses and realised gains/losses on assets held for trading are recorded on the income statement under gains or losses on fair value measurement; current gains/losses, with the exception of gains/losses from credit derivatives (premium payments), are recog-nised in net interest income.

(11) POSITIVE MARKET VALUE OF DERIVA-TIVE FINANCIAL INSTRUMENTS (HEDGE ACCOUNTING)

This item contains financial derivatives with positive market values that are used as hedg-es and meet the hedge accounting criteria of IAS 39. These derivatives are measured at fair value. Both changes in the fair value of hedg-ing instruments and changes in the fair value of underlying transactions that result from the hedged risk are shown under gain/loss on hedges. Interest income and expense from hedging derivatives are recognised in net in-terest income.As of balance sheet date, no portfolios were recognised, as in 2010.

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(12) INVESTMENTS

Investments comprise investments in the HtM, LaR, FVO and AfS categories. Shares in non-consolidated subsidiaries and associated companies not consolidated under the equity method are reported under available for sale investments. Measurement of investments varies according to the valuation category to which they belong. The impairments to be made are identified in accordance with the cri-teria set out in Note 6.

(13) INTERESTS IN ENTITIES VALUED AT EQUITY

Interests in entities valued at equity include the shareholdings in two companies valued accordingly (cf. Note 43).

(14) INVESTMENT PROPERTY/PROPERTY, PLANT AND EQUIPMENT

Investment property includes land and build-ings rented to third parties or primarily held to achieve an increase in capital value. Prop-erty, plant and equipment mainly comprises land and buildings for own use and operating fixtures and fittings. Where properties are used for both purposes, the different por-tions are normally accounted for separately. If the portions cannot be separately sold or let, the properties are only regarded as invest-ment property if the portion used for own purposes is insignificant.Measurement is at cost of acquisition or production, which in the case of depreciable assets is reduced on a straight line basis in accordance with the useful life. The option under IAS 40 permitting companies to choose between fair value and amortised cost for in-vestment property was exercised in favour of amortised cost for investment property.The useful life is determined according to the expected rate at which future economic use is exhausted and therefore factors in physical wear and tear; technical or commercial obso-lescence is taken into account independently of expected physical wear and tear.

For the determination of the useful life, ad-ditions to buildings (not incl. property) are broken down into their main components. In the subsequent measurement, these compo-nents of property, plant and equipment are to be depreciated separately if they• are significant in proportion to the total acquisition and manufacturing costs of the property, plant and equipment (IAS 16.43) and• differ from each other with regard to their length of use and depreciation methods.The identification of the components and the assessment of the essentiality are required at the time of the first measurement of the asset for the execution of the component ap-proach. The applicable methodology for the identification of the components and the subsequent distribution of the total costs of property, plant and equipment for the main components is to be handled in accordance with prudent business judgement (IAS 16.9). As a rule, an estimate is required in the event of an acquisition of property, plant and equip-ment. Individual utilisability of a component is not required for this. The buildings (not incl. property) at SaarLB are divided into the following components with the following useful lives:

• Skeleton construction / supporting structure 90

• Roof 40• Facade 40• Windows 30• Electrical installation 30• Heating / air conditioning 20• Sanitation (including sanitary objects) 30• Interior construction

(painting and floor work) 20• Grounds 40

With regard to individual buildings for the reconstruction/renovation measures, i.e. if major renovations are made, capitalisation of these measures occurs unless their costs are inessential. Ongoing maintenance costs are taken to the income statement.The useful life of the operating and office equipment is between 3 and 15 years.

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An impairment charge is recognised in cases of permanent impairment (according to IAS 36) and is the difference between the (higher) carrying value and the recoverable amount. Where the reasons for impairments no longer apply, they are reversed, up to a maximum of cost of acquisition or production. The impair-ment process applies to components of an as-set accordingly.Impairments on investment property are shown under other income/expense, impair-ments on property, plant and equipment are reported under administrative expenses. Re-versals appear under other income.

(15) INTANGIBLES

The only intangibles are purchased software.Intangibles are carried at amortised cost and depreciated on a linear basis over an expected useful life of between three and five years.An impairment charge is recognised in cases of permanent impairment. Where the reasons for impairments no longer apply, they are re-versed, up to a maximum of cost of acquisi-tion or production.Depreciation of intangibles is disclosed under administrative expenses. Reversals appear under other income.

(16) OTHER ASSETS

Other assets include prepaid expenses and miscellaneous assets.

(17) NON-CURRENT ASSETS HELD FOR SALE AND DISPOSAL GROUPS

The SaarLB Group classifies non-current as-sets and disposal groups as being held for sale when the intention is to realise their carrying value by selling them. Conditions for categoris-ing assets as being held for sale include: the fact that the asset is immediately realisable in its current condition; that there is a plan for disposal; that an active search for a buyer has started; and that the sale is expected to be completed within one year of the time of clas-sification and that the price is reasonable in

relation to the current fair value.Non-current assets and disposal groups classi-fied as held for sale are measured at the lower of carrying value and fair value less selling costs; financial instruments falling within the scope of IAS 39 are measured according to the principles set out in IAS 39.Operating gains and losses are reported un-der the same item in the income statement as they would have been were there no inten-tion to sell. Impairments are recognised when fair value less selling costs is less than carrying value. These are shown under other income/expense.There were no non-current assets held for sale or disposal groups as of 31 December 2011. Please refer to Note 49 with regard to the sale of a building at the beginning of 2011.

(18) LIABILITIES

Liabilities to banks and customers and secu-ritised liabilities are measured at amortised cost where they are not underlying transac-tions in an effective fair value hedge. Premi-ums and discounts are spread over the fixed interest period on a constant effective yield basis and recognised under interest expense on the income statement.

(19) LIABILITIES HELD FOR TRADING

Liabilities held for trading contain exclusively financial derivatives with negative fair values not designated as hedging instruments under IAS 39. Measurement is at fair value. Measure-ment gains/losses and realised gains/losses on liabilities held for trading are recorded in the income statement under gains or losses on fair value measurement; current gains/losses, with the exception of gains/losses from credit derivatives, are recognised in net interest income.

(20) NEGATIVE FAIR VALUES FROM DERIVATIVE FINANCIAL INSTRUMENTS (HEDGE ACCOUNTING)

This item contains financial derivatives with

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negative market values that are used as hedg-es and meet the hedge accounting criteria of IAS 39. These derivatives are measured at fair value. Both changes in the fair value of hedg-ing instruments and changes in the fair value of underlying transactions that result from the hedged risk are shown under gain/loss on hedges. Interest income and expenses from hedging derivatives are recognised as those of the underlying transactions in net interest income.

(21) PROVISIONS

This item shows the provisions for pensions and similar obligations and other obligations as well as other provisions.There are various pension plans within the SaarLB Group, which in the event of deferred compensation are financed through an exter-nal provider by means of reinsurance. The de-fined benefit plans have set benefits that are provided in the event of retirement or disabil-ity and to surviving dependants in the event of death and that depend on multiple factors such as age, length of service and salary. Pension obligations are calculated annually in an actuarial report. The pension provisions were calculated on the basis of the following actuarial assumptions:

% 2011 2010

Interest rate 4.80 5.40

Expected return on plan assets 3.90 4.20

Increases in salaries 2.50 2.50

Increases in retire-ment benefits 2.00 2.00

The amount of the pension obligations is calculated using the projected unit credit method, whereby they are measured on the basis of the defined benefit entitlements ac-crued at the balance sheet date. Assumptions about the future trend of certain parameters that affect the value of the benefits, such as

increases in salaries and pensions, are taken into account in this measurement.The determination of the pension accrual is carried over on the basis of the anticipated actuarial parameters at the beginning of the period so that there is usually a difference between the disclosed carrying value and the current actuarial value that is reported as an actuarial profit or loss. To the extent that ac-tuarial gains and losses at the end of the re-porting period exceed the corridor threshold of 10% of the greater of net present value of liabilities and fair value of plan assets under IAS 19.92, from the following year they are al-located over the estimated average remaining working life of active plan beneficiaries as an additional component of the pension expense.SaarLB is also a voluntary member of Zusatz-versorgungskasse Saarland (ZVK). This is a joint retirement benefit plan covering a num-ber of employers; the benefits provided are financed on a pay as you go basis.Under the terms of IAS 19, the ZVK retirement benefit plan is categorised as a defined benefit plan. However, since the Bank does not have access to the information required to account for it as a defined benefit plan and is unable to obtain it (IAS 19.32(a)), and under the pay as you go arrangement is also exposed to ac-tuarial risks relating to active and former em-ployees of other members (employers), under IAS 19.32(b) no provision has been created in the IFRS consolidated financial statements for the contributions of SaarLB to ZVK. In ac-cordance with IAS 19.32 the commitment is recognised for convenience as a defined con-tribution retirement benefit plan, so the con-tributions SaarLB pays to ZVK are recognised immediately as an expense under staff costs.From an economic perspective all the pay-ments SaarLB makes to ZVK, i.e. the regular pay as you go contributions and the addition-al “recapitalisation payments,” represent con-tributions towards the ongoing financing of ZVK. They serve neither to settle a past deficit nor to create a capital base. The recapitalisa-tion payments in particular are in essence sim-ply increased pay as you go contributions.Other provisions are set up in accordance

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with IAS 37 for present obligations both le-gal and constructive arising as a result of an event where it is probable that an outflow of resources with economic utility will be re-quired to perform the obligation. It must also be possible to make a reliable estimate of the amount of the outflow of resources. There are no other long-term provisions to be discounted except for long-term employee benefit provisions.Provisions have been set up at both the indi-vidual transaction and portfolio level in the credit business to meet contingent liabilities and other liabilities where there is a risk of de-fault.

(22) OTHER LIABILITIES

Other liabilities contains deferred income, other liabilities, accruals and amounts to be distributed on hybrid capital reported under equity.

(23) HYBRID CAPITAL

Debt and equity instruments are classified in accordance with IAS 32, taking account of IDW recommendation RS HFA 9 dated 11 March 2011 on accounting for financial instru-ments. It states that a financial instrument must be treated as equity if it:• evidences a residual interest in a share of

the assets of an entity after deducting all its liabilities (IAS 32.11)

• and, in particular, it contains no contractual obligation to transfer cash or cash equiva-lents or other financial assets to the con-tractual partner (IAS 32.16).

The accounting and measurement methods used in the consolidated financial statements for the contractual terms of the hybrid capi-tal instruments issued by SaarLB are shown below.Undated silent partnership contributions not recallable by the lender meet the criteria for inclusion under shareholders’ equity if the usual conditions exist.Silent partnership contributions with a fixed term or recallable by the lender and profit

participation rights are compound financial instruments and have to be divided into their equity and debt components (split account-ing). On initial recognition the fair value of the debt component is determined by discount-ing the nominal value of the total compound instrument at the agreed effective interest rate. The debt component is shown under subordinated capital. In subsequent years in-terest is accrued on the debt component and the associated expense is recognised in net interest income.The equity component, which on initial rec-ognition is equal to the net present value of expected future distributions, is shown as hy-brid capital under equity. Distributions are re-ported as part of the appropriation of profit.Subordinated loans and bonds are shown un-der subordinated capital.

(24) LEASING TRANSACTIONS

Under IAS 17, leases are divided into finance leases and operating leases. Agreements are classified on the basis of the distribution of economic risks and rewards arising from the leased property. A lease is classified as a finance lease if substantially all the risks and rewards associated with ownership are transferred to the lessee; otherwise it is an operating lease. SaarLB is currently only ex-posed to operating leases.

SaarLB as lessor

The leased assets – primarily land and build-ings – are reported in the balance sheet under investment property and carried at amortised cost. Both leasing instalments received and depreciation and impairments are recorded in other income.

SaarLB as lessee

Leasing payments made under operating leases are recognised as an administrative expense. The assets leased are operating fix-tures and fittings.

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(25) TAXATION

Current income tax assets and liabilities are measured by applying currently valid tax rates. Income tax receivables and liabilities are carried at the amount of the refund or payment due.Deferred tax assets and liabilities arise from the difference between the value of an asset or a liability as shown on the balance sheet and its assigned value for taxation purposes. These are so-called timing differences. This gives rise to increases and decreases in income taxes that can be expected in the future. For each entity in the Group financial statement these are measured at the specific applicable income tax rate expected to be valid when the timing differences are reversed, based on tax legislation that is in force or has already been passed.Deferred tax assets from as yet unutilised tax losses carried forward and deductible timing differences are only capitalised if it is prob-able that sufficient taxable earnings will be generated in the future for the tax benefit to be utilised. Deferred taxes are not discounted. Deferred tax assets and liabilities are formed and recog-nised on the income statement where the un-derlying transaction is recognised as income or expense; where the underlying transaction does not pass through the income statement they are recognised directly under the respec-tive item in equity.Income tax expenses and receipts arising from normal operating activities are shown under the income tax in the consolidated in-come statement.Other taxes not dependent on income appear under other income.

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Segment reporting is based on the business structure of the SaarLB Group. In total, the Group reports on six segments: the five op-erating business areas of SaarLB, including the Landesbausparkasse Saar and the invest-ments segment. For the current financial year, the separation of the segment “Real Estate and Projects” is planned so that as of 2012 the segment reporting will involve seven segments. The divisional heads in charge of each segment are responsible for earnings and serve as segment managers as defined in IFRS 8.8. The reconciliation contains those amounts that cannot be meaningfully al-located to the operating units. The column headed Consolidation shows the results of the consolidation of the special funds and the investments valued at equity that are in-cluded in the internal accounting on the basis of the calculation. Segment reporting is based on IFRS 8 and therefore on the monthly management

reports to the Board of Management, which serves as the chief operating decision-maker as defined by IFRS 8.7. For the years 2010 and 2011 the management information for net interest and net commission income and ad-ministrative expenses was calculated on an arithmetical basis (internal accounting) and for the other items using the accounting and valuation methods of IFRS; however, unre-alised gains or losses on fair value measure-ment that SaarLB assumes will be reversed in subsequent years are not allocated. These amounts, together with those above, are also presented in the Reconciliation column.

Segment reporting

Segment reporting as of 31 December 2011

EUR ’000s Corporate Customers

Real Estate and Projects

Savings Banks, Ins-titutionals

and High Net Worth Individuals

Treasury and Port-folio Ma-

nagement

LBS Invest-ments

Reconcilia-tion

Consolida-tion

Total

Net interest income1) 20,338 42,183 3,589 44,310 14,442 4,782 -3,712 -3,705 122,227

Risk provisions in the credit business -6,152 -6,675 -269 -8,932 -1,232 - 4,142 - -19,118

Net commission income 3,182 11,539 4,487 820 -767 - -5,637 -2,100 11,524

Gains or losses on fair value measurement2) 212 4 863 5 - - -3,455 -13,735 -16,106

Gains or losses on investments - - - -4,559 11 11,247 -7,206 - -507

Administrative expenses -12,631 -12,524 -7,370 -11,258 -10,993 -383 -23,184 -178 -78,521

Other income - - - 59 412 - -2,245 509 -1,265

Earnings from ordinary operating activities/earnings before taxes

4,949 34,527 1,300 20,445 1,873 15,646 -41,297 -19,209 18,232

Segment assets 1,217,039 4,243,148 2,114,693 6,691,800 648,832 49,627 5,079,754 -284,556 19,760,337

1) including shares of profits in associated companies accounted for using the equity method 2) including gain/loss on hedge accounting

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Notes on the definition of segments

Corporate Customers

The segment covers the entire SME business of the SaarLB Group in its target markets. In Germany, this includes Saarland, Rhine-land-Palatinate and the adjacent regions. In France, the SaarLB Group concentrates on the Grand-Est (Grand East) and here in par-ticular on the neighbouring Alsace-Lorraine where the Bank is represented by its SaarLB France branch at the offices in Metz and Strasbourg. The main product in this segment is traditional lending. Furthermore, a full ser-vice is provided, primarily by offering invest-ment business and interest rate and currency management as well as the foreign trade and payment transactions in accordance with cus-tomers’ needs and giving business advice on how to finance companies.


The segment is responsible for the financing of commercial real estate and project financing, especially in the sector of renewable energy and in the area of public private partnership (PPP) in the SaarLB Group. The regional focus is also on the target markets of Corporate Cus-tomers, whereby the support of the French real estate financers also takes place from the office in Paris. As in the Corporate Customers segment, the main product in Real Estate and Projects is lending, whereby the SaarLB Group’s structuring and legal expertise is significant for the business success in this segment. As of the 2012 financial year, a separation of the pre-vious segment into the segments “Real Estate” and “Projects” will take place.

Segment reporting as of 31 December 2010

EUR ’000s Corporate Customers


Savings Banks, Ins-titutionals

and High Net Worth Individuals

Treasury and Portfo-lio Manage-

ment

LBS Invest-ments

Reconcilia-tion

Consolida-tion

Total

Net interest income1) 19,313 35,934 3,375 44,152 14,205 3,805 -8,215 -3,102 109,467

Risk provisions in the credit business -10,895 -19,228 - -3,407 -1,663 - 12,869 - -22,324

Net commission income 3,421 7,334 4,801 1,664 -167 - -4,561 -1,669 10,823

Gains or losses on fair value measurement2) 300 5 1,353 5 - - 13,795 -7,657 7,801

Gains or losses on invest-ments - -2 - -3,964 369 -600 440 -182 -3,939

Administrative expenses -11,732 -11,457 -6,856 -10,782 -11,207 -280 -20,157 312 -72,159

Other income - - -1 12 387 - 2,713 -1,500 1,611

Earnings from ordinary operating activities/earnings before taxes

407 12,586 2,672 27,680 1,924 2,925 -3,116 -13,798 31,280

Segment assets 1,187,305 3,312,724 2,029,526 7,133,887 646,229 99,377 4,923,035 -283,319 19,048,764

1) including shares of profits in associated companies accounted for using the equity method 2) including gain/loss on hedge accounting

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Savings Banks, Institutionals and High Net Worth Individuals

This segment handles investment advisory services and the administration for savings banks, institutionals and high net worth indi-viduals. It also deals with financing of the re-gion’s savings banks and municipalities. Last-ly, as a centre of expertise, it actively supports the other segments in customer relationship management, especially in investment, inter-est rate and currency management.

Treasury and Portfolio Management

This segment is responsible for the Treasury, which is in charge of asset/liability manage-ment as well as the SaarLB Group’s liquidity management. Furthermore, this segment pro-vides active support for all portfolios that no longer belong to the SaarLB Group’s core busi-ness and are to be systematically returned. These primarily include investments in inter-national banks and corporations with a fo-cus on OECD countries. This was done chiefly through involvement in loan syndications and issues. They also include international commercial real estate financing – primarily via investments in consortia – with a focus on Northern and Western European urban cen-tres as well as diverse smaller subportfolios with primarily German counterparties that the SaarLB Group would like to dispose in the medium term. In the past financial year, the returns from these non-core businesses resulting primarily from the regular redemp-tions were partially reinvested with counter-parties in the investment grade area, from an income perspective, as part of asset portfolio management. The focus was on bonds of Ger-man and French banks and corporations.

LBS

Landesbausparkasse Saar is a legally depend-ent unit of SaarLB. It operates the home loan savings business of Sparkassenfinanzgruppe Saar, cooperating closely with the Saarland savings banks.

Investments

Investments are mainly holdings in compa-nies in the savings bank sector and in regional development-type companies.

Segment assets are loans and advances to banks and customers, bonds reported under investments (known as credit substitute se-curities) and investments. The Reconciliation item mainly contains financial assets used for liquidity management.

Notes to the reconciliation:– The reconciliation for net interest income

primarily relates to matters that are not assigned to a specific segment as part of the management reporting to the Board of Management. This includes interest ex-penses for interest-bearing equity not off-set with these segments for EUR -6.3 million (2010: EUR -13.5 million). The reason for the decline as compared to the prior year was that in 2011 a larger share of the interest-bearing equity components could be direct-ly allocated to the segments. Furthermore, the remuneration of the hybrid capital for EUR 13.6 million (2010: EUR 11.1 million) and the effects from the release of hedge adjust-ments for EUR -2.3 million (2010: EUR 1.9 mil-lion) are included. The trailing negative ef-fects from the planned measures in prior years of EUR -2.5 million (2010: EUR -5.9 mil-lion) are declining. As compared to 2010, the net interest expense for the addition to pension provisions pursuant to IAS 19 was almost unchanged at EUR -1.1 million (2010: EUR -1.1 million). Reclassifications from the commission income of EUR 0 million (2010: EUR 0.7 million) and income in connection with early repayment fees of EUR 0.1 mil-lion (2010: EUR -0.8 million) are negligible in 2011.

Furthermore, the reconciliation in the net interest income relates to the compensa-tion for the arithmetical income of the as-set/liability management of EUR -4.3 million (2010: 0.0 million), as determined on the ba-sis of the cash values for 2011. For this, the

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favourable refinancing options at the ECB contributed, but it will initially be reported on the income statement in the coming years.

– The reconciliation of the risk provision items primarily includes EUR 3.7 million (2010: EUR 12.6 million) from the net change in the portfolio adjustment. These are not allo cated to any segment as part of manage-ment information to the Board of Manage-ment.

– In the net commission income, the recon-ciliation primarily results from the differ-ences between the internal and external ac-counting. It concerns EUR -2.9 million (2010: EUR -2.9 million) for expenses from fiduciary assets, EUR -0.8 million (2010: EUR -1.0 mil-lion) for the reclassification of commissions on credit derivatives to the gains or losses on fair value measurement and EUR -0.3 mil-lion (2010: EUR -0.7 million) for the reclas-sification of commissions that are reported in other income statement items in accord-ance with internal reporting.

– In the gains or losses on fair value measure-ment, the reconciliation primarily involves losses from interest-related transactions of EUR -2.1 million (2010: profits of EUR 14.9 mil-lion) and losses from currency-related trans-actions of EUR -0.3 million (2010: losses of EUR -0.8 million) and losses from credit derivatives of EUR -1.2 million (2010: losses of EUR -0.2 million). These gains are not al-located to any segment in the internal ac-counting.

– The reconciliation for the gains or losses on investments almost exclusively includes the net change in the portfolio provision for se-curities in LaR and HtM of EUR -6.9 million (2010: EUR 0.3 million). In the management information to the Board of Management, it is not allocated to any segment, similar to the procedure with the risk provision.

– The reconciliation of administrative ex-penses mainly relates to EUR -23.8 million (2010: EUR -20.8 million) in expenses that could not be meaningfully allocated; these primarily result from strategic projects, overhead costs and staff areas. The increase

in the year under review is primarily due to the higher project and consulting costs. The differing treatment of additions to pension provisions between the internal accounting and the income statement in accordance with IFRS, which amounted to EUR 0.6 mil-lion (2010: EUR 0.6 million), also has an im-pact.

– In other income/expenses, the reconcilia-tion includes almost exclusively non-allo-catable effects. They primarily result from the change in provisions from EUR 1.2 mil-lion (2010: EUR 2.4 million), which are com-pensated through offsetting expenses with partnerships of EUR 1.5 million (2010: EUR 0.3 million), expenses in connection with staff reductions of EUR 0.9 million (2010: EUR 0.0 million) and expenses from the management of security issues of SaarLB for EUR 0.7 million (2010: EUR 0.8 million). In the previous year, other income from tax-able transactions of EUR 0.3 million had an impact.

Most of the earnings contributions shown in the segments are from financial services. No further breakdown of the income by indi-vidual product, service or region is available and the cost of producing such a breakdown would be disproportionate.

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(26) NET INTEREST INCOME

Disclosures on the comprehensive income statement

EUR ’000s 2011 2010

Interest income 834,274 767,354

Interest income from credit and money market transactions 379,241 355,702

including: interest income from unwindings 3,467 4,267

Interest income from debt securities and other fixed-interest securities. 154,884 133,792

Current income from shares and other non fixed-interest securities 2,583 996

Current income from non-consolidated subsidiaries and associates as well as other investments 4,514 3,595

Current income from profit pools and profit and loss transfer agreements 166 137

Interest income from derivatives in hedges 292,886 273,131

Interest expense 712,317 658,129

Interest expense for liabilities to banks and customers 278,611 236,249

Interest expense for securitised liabilities 88,198 90,770

Interest expense for subordinated capital 6,755 7,466

Interest expense for hybrid capital 13,349 20,486

Interest expense for derivatives in hedges 324,258 302,336

Other interest expense 1,146 822

Total 121,957 109,225

Total interest income from financial assets and liabilities measured at fair value not through profit and loss was EUR 524.2 million (2010: EUR 477.7 million) and total interest expense was EUR 388.1 million (2010: EUR 355.8 mil-lion). The constant effective yield basis from the distribution of premiums, discounts and fees led to interest income of 6.6 million (2010: EUR 7.7 million) and interest expenses

of EUR 9.8 million (2010: EUR 16.6 million). Interest income in 2011 included the release of differing amounts from the reclassifica-tion of securities for EUR 16.3 million (2010: EUR 24.8 million), which were largely compen-sated by amounts from the release of the re-valuation reserve.

82

The profits derive from pro-rata recognition of net income for matching periods.


EUR ’000s 2011 2010

Allocations 38,187 50,962

Direct depreciation 3,688 457

Releases 20,898 28,823

Receipts on receivables written off 654 271

Appreciation to receivables 1,205 0

Total 19,118 22,324

The amounts include both on-balance sheet and off-balance sheet credit business. The net addition to the provisions for indi-vidual risks from the off-balance sheet credit business in the reporting period amounts to EUR 1.8 million (2010: release of EUR 919,000).The net release to portfolio risk provisions was EUR 3.7 million (2010: EUR 12.5 million).The direct depreciation amounted to EUR 1.5 million in the reporting period, which is due to an impaired investment in the 2010 financial year. The write-off of the investment was made only at the beginning of January 2011, although it belongs to the 2010 financial year. Furthermore, the direct depreciation includes an amount of EUR 262,000, which relates to investments completed in the pre-vious years and is connected with the recogni-tion of interest income for these receivables.

The appreciation of receivables involves the release of interest cancellations of invest-ments recovered in the financial year.

(27) SHARES OF PROFITS IN ASSOCIATED COMPANIES ACCOUNTED FOR USING THE EQUITY METHOD

EUR ’000s 2011 2010

Shares of profits or losses in associated companies accounted for using the equity method

269 242

Total 269 242

83


(29) NET COMMISSION INCOME

EUR ’000s 2011 2010

Net commission income 25,186 22,705

Securities business 5,232 5,105

Credit business 13,081 11,284

Payment transactions 1,653 1,515

Home loan savings business 4,190 3,664

Fiduciary transactions 15 0

Other services 1,015 1,137

Commission expenses 13,662 11,882

Securities business 3,761 3,146

Broker's commissions 12 21

Credit business 788 703

Payment transactions 199 270

Home loan savings business 5,387 4,347

Fiduciary transactions 2,911 2,901

Other services 604 494

Total 11,524 10,823

The disclosure of the commission income and expenses from the trustee business rep-resents a balanced figure for the first time in this reporting year; the figures from the previ-ous year were adjusted.The improvement in the commissions in the credit business primarily results, as in the pri-or year, from a significant increase in new busi-ness above all for the financing of projects in the area of renewable energy.The increase in commission expenses in the effect business is connected with the increase in sales in the consolidated securities special funds.

In the home loan savings business, an increase in closing fees and broker commissions on ac-count of a higher volume of new business had an effect.

84

These figures include the gains/losses from foreign currency translation. Net trading income includes realised and unrealised gains or losses attributable to trading activities and current income from credit default swaps of EUR 788,000 (2010: EUR 972,000).The gains or losses from the fair value op-tion includes equity-related transactions of EUR -7.4 million (2010: EUR 112,000), in-vestment fund units and other non-fixed

interest securities of EUR -6.7 million (2010: EUR 442,000) and interest rate-related trans-actions of EUR 4.3 million (2010: EUR -3.5 mil-lion).In the gains or losses on the fair value option, the realised gains or losses of EUR -7.3 million (2010: EUR -1.4 million) are reported.Current gains and losses on HfT securities, fair value option holdings and derivatives (except CDS) are shown under net interest income.

EUR ’000s 2011 2010

Net trading income -6,368 10,265

Interest rate-related transactions -3,253 11,976

Equity-/Index-related transactions and transactions with other risks -2,565 -1,216

Currency-related transactions 384 -586

Credit derivatives -1,225 -212

Other financial transactions 291 303

Fair value gains or losses from the fair value option -9,782 -2,942

Total -16,150 7,323

(31) GAIN/LOSS ON HEDGE ACCOUNTING

EUR ’000s 2011 2010

Gains or losses of underlying transactions 11,637 7,591

Gains or losses of hedging instruments -11,594 -7,112

Total 43 479

The designation of hedge accounting was made in the second half of 2008 as well as in the first half of 2010 and in the second half of 2011. The risk of changes in interest rates is hedged. The underlying transactions are

receivables in the category of LaR and securi-ties in the category of AfS.

(30) GAINS OR LOSSES ON FAIR VALUE MEASUREMENT

85


(32) GAINS OR LOSSES ON INVESTMENTS

The write-down of investments in the cat-egory of LaR relate to two securitisations (so-called ABS) and the addition to the portfolio risk provisions that primarily include an addi-tion of EUR 4.9 million for two bonds of Greek banks.The disposal proceeds from the AfS category include EUR 12.3 million for GLB GmbH & Co.

OHG, which result from the capital reduction on account of the sale of the shares in DEKA bank.The write-down of investments in the AfS cat-egory are primarily due to other investments.

EUR ’000s 2011 2010

Gains or losses on investments “held-to-maturity” 118 106

Income from appreciation 118 106

of which portfolio risk provisions 118 106

Expenses from write-downs 0 0


Gains or losses from investments classified as “loans and receivables” -12,066 -1,471

Disposal proceeds -852 323



Expenses from write-downs -11,214 -1,988

of which portfolio risk provisions -7,010 0

Gains or losses from investments “available for sale” 11,441 -2,574

Disposal proceeds 12,527 -208


Expenses from write-downs -1,086 -2,366

Total -507 -3,939

86

(33) ADMINISTRATIVE EXPENSES

Staff costs include expenses for the estab-lishment of pension provisions amounting to EUR 535,000 (2010: EUR 603,000).In other administrative expenses, the bank fee of EUR 2.8 million to be paid for the first time in the financial year is included. Further-more, project costs of EUR 1.2 million (2010: EUR 78,000), handling costs for the closure of the Luxembourg branch of EUR 685,000 and contributions to D&O insurance for EUR 413,000 (2010: EUR 220,000) are reported.

Depreciation of property, plant and equip-ment and amortisation of intangibles in-clude impairments of EUR 152,000 for soft-ware (2010: impairment of two properties for EUR 670,000).Expenses from external management relate to the compensation paid by the Luxembourg branch to Banque LB Lux S.A.

EUR ’000s 2011 2010

Staff costs 38,723 38,053

Wages and salaries 30,976 30,818

Social security contributions 4,787 4,576

Expenses for pensions and other employee benefits 2,960 2,659

of which: Expenses for defined contribution retirement benefit plans

1,711 2,005

Other administrative expenses 37,614 32,523

Expenses of land and buildings for own use 2,488 2,155

IT costs 15,867 17,079

Office costs 268 270

Advertising 1,046 1,178

Communication and other distribution costs 2,280 2,158

Contributions, legal and consultancy fees 6,692 5,814

Other administrative costs 7,804 2,678

Expenses for agency arrangements 1,169 1,191

Depreciation of property, plant and equipment and amortisation of intangibles (not incl. goodwill)

2,183 1,583

Total 78,521 72,159

87


(34) OTHER INCOME

The rest of other income includes cost reim-bursement and charged-on staff and operat-ing costs as well as income from data process-ing services in the previous year. The depreciation of investment property in-cluded EUR 657,000 in the previous year for impairments.

The increase in other expenses is connected with offsetting expenses with partnerships of EUR 1.5 million (2010: EUR 331,000) and ex-penses in connection with staff reductions of EUR 965,000 (2010: EUR 81,000).

EUR ’000s 2011 2010

Other income 3,977 6,323

Rental income 1,442 1,104

of which:

Rental income on investment property 1,442 1,104

Disposal profits from property, plant and equipment, intangibles, investment property and real estate of the inventory assets

37 47

Income from the release of provisions 1,243 2,525

Other miscellaneous income 1,255 2,647

Other expense 5,242 4,713

Expense from the buyback of own issues 739 828

Current expense for investment property 372 856

- Leased properties 372 856

Disposal losses from property, plant and equipment, intangibles, investment property and real estate of the inventory assets

324 17

Depreciation of investment property and real estate of the inventory assets

228 1,604

Expense from the formation of provisions - 162

Expense from loss transfers 32 30

Expense for other taxes 126 83

Other miscellaneous expenses 3,421 1,133

Total -1,265 1,610

88

(35) INCOME TAXES

The current income taxes include income of EUR 353,000 (2010: income of EUR 440,000) not related to the period, as well as current taxes on hybrid capital of EUR -7.6 million (2010: EUR -7.7 million) that do not affect prof-its or losses.Deferred tax income of EUR 15.4 million (2010: deferred tax expense of EUR -2.4 million) con-sisted of EUR 13.3 million (2010: EUR -517,000) from the occurrence or reversal, respectively,

of timing differences and EUR 2.1 million (2010: EUR -1.9 million) from the change in de-ferred tax assets for losses carried forward.The reported income tax income of EUR 3.8 million deviates from the anticipated income tax expense by EUR 9.5 million in the reporting year. The reasons for this deviation are illustrated in the following table.

EUR ’000s 2011 2010

Current income taxes -11,595 -7,309

German and foreign corporation tax incl. solidarity premium -5,296 -3,069

German trade tax / foreign local taxes -6,299 -4,240

Deferred income taxes 15,364 -2,419

German and foreign corporation tax incl. solidarity premium 10,884 -2,338

German trade tax / foreign local taxes 4,480 -81

Total 3,769 -9,728

89


The forecast income tax expense/income was calculated using the tax rate applicable to companies subject to taxation in Germany. Allowing for the non-deductibility of trade tax from the corporation tax, a corporation tax rate of 15%, a solidarity surcharge of 5.5%, and an unchanged trade tax of 15.75%, there was an unchanged Group income tax rate of 31.57% on the reporting date (2010: 31.57%).The impact of the tax-free income results pri-marily from tax-free dividend income and dis-posal profits in the previous years. The impact of non-tax-deductible operating expenses are due to expenses in relation to dividend in-come, non-deductible assumptions of costs for partnerships and expenses for bank fees

pursuant to Section 12 (2) of the Restructur-ing Law. The impact of value adjustments/disclosure corrections is primarily connected with the patriation of taxable losses carried forward of the (former) Luxembourg branch.

EUR ’000s 2011 2010

Earnings before taxes 18,232 31,248

Group income tax rate (in %) 31.57 31.57

Expected income tax expense -5,756 -9,866

Effect of different local tax rates -12 295

Effect from previous years of taxes recognised in the reporting year 496 440

Effect of changes in tax rates - 576

Effect of non-deductible taxes (especially withholding tax) -176 -88

Effect of non-deductible operating expenses -1,544 -235

Effect of tax-free income 3,825 1,134

Effect of permanent accounting differences -3,238 585

Effect of transfers of basis of assessment 2,497 -480

Effect of impairments/value adjustments 8,565 -1,373

Additions and reductions for trade tax -888 -924

Other effects - 208

Effective income tax expense (+) / income (-) 3,769 -9,728

Effective income tax rate (in %) -20.60 31.13

90

(36) CASH RESERVES

EUR ’000s 2011 2010

Cash on hand 1,319 1,442

Balances with central banks 105,418 5,827

Total 106,737 7,269

(37) LOANS AND ADVANCES TO BANKS

EUR ’000s 2011 2010

Loans and advances to domestic banks 3,133,410 3,175,508

Loans and advances to foreign banks 972,203 658,951

Total 4,105,613 3,834,459

Breakdown of loans and advances to banks by maturities:

EUR ’000s 2011 2010

Payable on demand 941,579 930,571

Fixed-term with residual maturity of 3,164,034 2,903,888

up to 3 months 1,154,456 484,869

more than 3 months and up to 1 year 866,040 656,456

more than 1 year and up to 5 years 1,143,538 1,375,936

more than 5 years - 386,627

Total 4,105,613 3,834,459

(38) LOANS AND ADVANCES TO CUSTOMERS

EUR ’000s 2011 2010

Loans and advances to domestic customers 4,827,376 4,401,449

Loans and advances to foreign customers 3,779,817 3,171,342

Total 8,607,193 7,572,791

Notes to the balance sheet

91


Breakdown of loans and advances to customers by sector:

Breakdown of loans and advances to customers by maturities:

EUR ’000s 2011 2010

Real estate 3,081,916 2,985,772

Sovereigns 1,664,711 1,345,547

Renewable energy 1,124,432 543,194

Retail customers 516,332 723,136

Steel 344,609 245,516

Utilities 217,069 181,744

Wholesale & retail trade 211,572 169,439

Automotive 190,770 210,009

Food & beverages 178,589 127,252

Construction 153,032 165,721

Health care 125,235 114,847

Pharmaceuticals 71,222 60,315

Aviation 45,689 73,524

Leasing 0 133,768

Other 682,015 493,007

Total 8,607,193 7,572,791

EUR ’000s 2011 2010


up to 3 months 546,382 394,322



more than 5 years 3,907,292 3,555,531

Indefinite 1,046,343 411,844

Total 8,607,193 7,572,791

92


Specific risk provisions include country risk provi-sions of EUR 93,000 (2010: EUR 393,000).

Specific risk provisions

EUR ’000s Loans and advances to banks

Loans and advances to customers

Total

2011 2010 2011 2010 2011 2010

Balance as of 1 January -21,765 -42,982 -140,410 -113,930 -162,175 -156,912

Changes recognised through profit or loss -343 635 -15,406 -32,593 -15,749 -31,958

Allocations -458 -602 -34,662 -50,016 -35,120 -50,618

Releases 59 1,138 15,825 13,895 15,884 15,033

Unwindings 56 99 3,411 4,168 3,467 4,267

Changes from currency translation - - 20 -640 20 -640

Changes not recognised through profit or loss -567 20,581 39,812 6,114 39,245 26,695

Utilisations 4,298 16,031 34,947 10,664 39,245 26,695

Transfers / Other changes -4,865 4,550 4,865 -4,550 0 0

Balance as of 31 December -22,675 -21,765 -116,004 -140,410 -138,679 -162,175

93


The following table shows the state of the specific risk provisions (not including country risk provisions) by sector.

The unwindings are recorded by a reduction of the specific risk provisions; the income is disclosed in net interest income.

EUR ’000s 2011 2010

Sector groups

Real estate 47,777 49,271

Banks / financial service providers 22,357 21,765

Automotive 17,736 34,537

Retail customers 8,990 6,259

Construction 5,793 4,032

Textiles / clothing 5,588 4,121

Steel 5,437 5,516

Pulp and paper industry 4,327 3,737

Media 4,251 4,518

Food & beverages 3,239 1,904

Machine and system construction 3,160 4,084

Aviation 2,672 2,727

Chemical industry 2,559 2,682

Technology 1,636 1,630

Utilities 967 4,592

Health care 790 820

Sovereigns 339 343

Wholesale & retail trade 59 59

Logistics 0 3,936

Other 908 5,249

Total 138,585 161,782

94

The risk provision for contingent liabilities and other obligations is shown as a provision for risks from the credit business.

(40) ASSETS HELD FOR TRADING

Please see Note 64 for the composition and performance of derivative financial instru-ments.Breakdown of assets held for trading by con-tractual maturity:

Portfolio risk provisions

EUR ’000s Loans and advances to banks

Loans and advances to customers

Total

2011 2010 2011 2010 2011 2010

Balance as of 1 January -277 -670 -18,068 -28,461 -18,345 -29,131

Changes recognised through profit or loss 22 393 -708 9,936 -686 10,329

Allocations - - -3,923 -801 -3,923 -801

Releases 22 393 3,215 10,737 3,237 11,130

Changes not recognised through profit or loss - - 3,688 457 3,688 457

Utilisations - - 3,688 457 3,688 457

Balance as of 31 December -255 -277 -15,087 -18,068 -15,342 -18,345

EUR ’000s 2011 2010

Positive fair values from derivative financial instruments (not hedge accounting)

431,629 359,649

Total 431,629 359,649

EUR ’000s 2011 2010

Fixed-term with residual maturity of 431,629 359,649

up to 3 months 4,803 9,062


more than 1 year and up to 5 years 207,188 216,237

more than 5 years 204,809 118,103

Total 431,629 359,649

95


(41) INVESTMENTS

The investments consist of the following:

Breakdown of investments by maturity:

Recognition of shares without maturity with-in the next twelve months is not planned.

EUR ’000s 2011 2010


up to 3 months 288,042 600,400

more than 3 months and up to 1 year 1,407,116 1,340,734


more than 5 years 506,468 528,194

No maturity 61,134 129,788

Total 5,574,215 6,547,362

EUR ’000s 2011 2010

Bonds, notes and other fixed-interest securities 5,521,163 6,417,178

Money market instruments 894,143 1,108,069

Bonds and notes 4,627,020 5,309,110

Equities and other non-fixed-interest securities 9,077 30,740

Equities 1,136 7,377

Investment fund units 7,061 21,728

Other non-fixed-interest securities 880 1,636

Interest in subsidiaries 1,920 1,968

Associates not consolidated 2,292 1,142

Other investments 47,844 97,521

less portfolio risk provisions 8,081 1,188

Total 5,574,215 6,547,362

96

Reclassification

Due to the financial market crisis, debt se-curities with a value of EUR 1.2 billion were reclassified from the AfS to the LaR category retrospectively as of 1 July 2008 in the fourth quarter of 2008. Furthermore, SaarLB reclas-sified debt securities with a market value of EUR 538.4 million from the AfS to the LaR cat-egory and debt securities with a market value of EUR 1.1 billion from the AfS to HtM catego-ry as of 31 October 2008. More details on the reclassifications can be found in SaarLB’s fi-nancial report for the 2008 financial year (see explanations in Notes 1, 6 and 42).

As of 31 December 2011, with security repur-chase transactions of EUR 468.0 million (2010: EUR 443.0 million), these reclassified securi-ties had a fair value of EUR 1.6 billion (2010: EUR 2.1 billion). The amortised costs of the re-classified securities amounted to EUR 1.7 bil-lion (2010: EUR 2.1 billion).

The revaluation reserve of the reclassified securities amounts to EUR -24.6 million (2010: EUR -41.4 million). If no reclassifica-tion had occurred, there would have been a revaluation reserve of EUR -91.2 million (2010:

EUR -83.5 million) so that the portfolio of the revaluation reserve for the reclassified securi-ties would have been another EUR 66.7 mil-lion lower.

EUR ’000s 2011 2010

Fair value 1,624,123 2,079,721

of which LaR 864,487 1,183,033

of which HtM 759,636 896,688

Amortised cost 1,690,783 2,121,828

of which LaR 938,720 1,237,250

of which HtM 752,063 884,578

Revaluation reserve -24,584 -41,446

of which LaR -19,719 -32,339

of which HtM -4,865 -9,107

Revaluation reserve without reclassification -91,244 -83,522

of which LaR -93,658 -86,402

of which HtM 2,414 2,880

97


The effective interest rates determined at the time of the reclassifications on the basis of the new acquisition costs ranged from a mini-mum of 2.3857% to a maximum of 13.1024%. The estimated cash flows that SaarLB had

expected at the time of the reclassifications amounted to EUR 3.5 billion.As of 31 December 2011, there was an impair-ment of EUR 4.2 million for ABS securitisa-tions in the LaR category.

(42) SECURITIES REPURCHASE TRANSACTIONS

This item includes loans that are the object of the securities repurchase transactions. Due to the buyback obligation, SaarLB will con-tinue to bear the credit rating and interest change risk from these loans. The liabilities connected with the securities repurchase transactions amount to EUR 958.0 million (2010: EUR 788.0 million) and are reported in liabilities to banks.With regard to the transactions, EUR 0 (2010: EUR 62.8 million) have maturities of up to 3

months, EUR 36.8 million (2010: EUR 0) have a term of 3 months to 1 year and EUR 917.4 mil-lion (2010: EUR 717.0 million) have maturities of 1 to 5 years.Counterparties in the transactions are Bay-ernLB, LBBW, NordLB, Sparkasse Köln-Bonn, DZ-Bank and Commerzbank.

EUR ’000s 2011 2010

Change in the revaluation reserve

Without reclassification -7,722 20,572

of which LaR -7,256 18,881

of which HtM -466 1,691

With reclassification 16,862 23,305

of which LaR 12,620 17,449

of which HtM 4,242 5,856

EUR ’000s 2011 2010

Securities repurchase transactions 954,197 779,740

Total 954,197 779,740

98

(43) INTERESTS IN ENTITIES VALUED AT EQUITY

Development of investment property:

Summarised financial information about as-sociated companies that are valued according to the at equity method is included in Note 74.

Recognition of interests within the next twelve months is not planned.

EUR ’000s 2011 2010

Associated companies 2,762 2,493

Total 2,762 2,493

EUR ’000s 2011 2010

Land and buildings leased 21,232 15,631

Total 21,232 15,631

(44) INVESTMENT PROPERTY

EUR ’000s 2011 2010

Costs of acquisition or production

Balance as of 1 January 18,939 17,611

Additions 11 0

Transfers 6,139 1,328

Disposals 0 0

Balance as of 31 December 25,089 18,939

Write-ups/write-downs


Scheduled amortisation 228 195

Transfers for scheduled amortisation 21 146

Impairments 0 657

Transfers for impairments 300 606


Carrying values



99


Limitations regarding the disposability or the generation of income and disposal proceeds did not exist as of balance sheet date.The transfers result from the change in use for one piece of real estate (from use by the bank to use by a third party).The fair value of the investment property and buildings amounted to EUR 22.1 million (2010: EUR 16.3 million), of which EUR 21.2 million (EUR 15.6 million) was calculated by external

experts. The calculation is based on the ap-plication of the discounted cash flow process in which market and geographic data are in-cluded.There was no expert report for investment property with a carrying value of EUR 49,000 (2010: EUR 49,000).Recognition of investment property within the next twelve months is not planned.

EUR ’000s 2011 2010

Land and buildings for own use 20,530 26,703

Operating and office equipment 3,029 2,782

Total 23,558 29,485

(45) PROPERTY, PLANT AND EQUIPMENT

EUR ’000s Land and buildings for own use

Operating and office equipment

Total

2011 2010 2011 2010 2011 2010


Balance as of 1 January 29,466 35,294 14,064 13,715 43,530 49,009

Additions - - 967 451 967 451

Transfers -6,139 -5,828 - - -6,139 -5,828

Disposals - - 320 102 320 102

Balance as of 31 December 23,327 29,466 14,711 14,064 38,038 43,530



Change in the scope of consolidation - - - -10 - -10

Scheduled amortisation 355 460 699 656 1,054 1,116

Transfers for scheduled amortisation -21 -146 - - -21 -146

Impairments - 670 - - - 670

Transfers for impairments -300 -606 - - -300 -606

Disposals - - 298 58 298 58


Carrying values



Performance of property, plant and equipment:

100

Property, plant and equipment with limited disposal rights did not exist as of the balance sheet date.The transfer of the acquisition and produc-tion costs resulted in EUR -6.1 million from the changes in use for one piece of real estate

(from ‘“property, plant and equipment” to “in-vestment property”). Recognition of property, plant and equip-ment within the next twelve months is not planned.

(46) INTANGIBLES

Performance of intangible assets:

Intangible assets involve exclusively standard software.There were no intangible assets that were connected with limited property rights as of balance sheet date.

Recognition of intangibles within the next twelve months is not planned.

EUR ’000s 2011 2010

Other intangible assets 1,612 2,120

Total 1,612 2,120

EUR ’000s 2011 2010



Additions 934 1,241

Balance 6,118 -

as of 31 December 3,185 8,369



Scheduled amortisation 974 549

Reversals 152 -

Disposals - -

Balance 5,802 -

as of 31 December 1,572 6,248

Carrying values



101


(47) CURRENT AND DEFERRED INCOME TAX CLAIMS

Deferred income tax claims and obligations are distributed over the following items:

EUR ’000s 2011 2010

Current income tax assets 8,036 9,451

Domestic 8,036 7,794

International 0 1,657

Deferred income tax assets 73,523 61,236

Domestic 73,523 56,980


Total 81,559 70,687

EUR ’000s 2011 2010

Deferred tax assets

Deferred tax liabilities

Deferred tax assets

Deferred tax liabilities

Cash reserves 0 0 0 0

Loans and advances to banks and customers 0 12,306 0 2,737

Risk provisions 872 0 3,154 242

Assets held for trading 32 9 0 237

Positive market value of derivative financial instruments (hedge accounting) 0 0 0 0

Investments 18,835 367 18,060 3,499

Property, plant and equipment 0 2 46 0

Other assets 0 1,017 346 0

Liabilities to banks and customers 6,897 0 0 741

Securitised liabilities 0 58 0 294

Liabilities held for trading 27,926 0 25,886 0

Negative fair values from derivative financial instruments (hedge accounting) 10,289 0 6,234 0

Provisions 2,484 0 3,923 0

Other liabilities 674 451 154 1,061

Subordinated capital 0 32,956 0 36,330

Losses brought forward for corporation tax and trade tax 5,514 0 3,433 0

Total deferred taxes after impairments and offsetting 73,523 47,166 61,236 45,141

102

The increase of EUR 10.3 million (2010: de-crease of EUR 34.4 million) in the balance of deferred income tax claims and obligations does not correspond to deferred tax income of EUR 15.4 million (2010: tax expense of EUR 2.4 million).The reasons for this are the changes in de-ferred taxes not recognised at profit or loss; these result from bookings of EUR 3.0 million

against the revaluation reserve and profit re-serves of EUR 2.1 million.The stock of taxable losses carried forward where deferred tax assets are reported or an impairment was recognised is listed separate-ly in the following table for all types of losses carried forward in the Group.

In the year under review, the Luxembourg branch was closed. The tax losses that had ac-crued there were transferred to the domestic bank and deferred taxes of EUR 5.5 million were capitalised. EUR 276,000 (2010: EUR 3.0 million) of de-ferred tax assets due to timing differences of EUR 873,000 (2010: EUR 9.6 million) were not taken into account.The surplus of deferred tax assets over de-ferred tax liabilities of EUR 16.1 million in the previous years increased in total to EUR 26.4 million in the reporting year. The dis-closure is based on tax planning that extends

to 2016; a sufficiently precise plan is possible for this period under consideration of appro-priate security discounts. Accordingly, SaarLB assumes that the existing excess of deferred tax assets over deferred tax liabilities can be used in the plan period.

EUR ’000s 2011 2010

Corporation tax

Balance of losses carried forward 81,446 67,636

Losses carried forward for which a deferred tax asset has been created 34,846 14,037

Losses carried forward on which an impairment has been recognised 0 0

Losses carried forward for which no deferred tax asset has been created 46,600 53,599

Expires within 5 years 0 0

Expires after 10 years 0 0

Usable indefinitely 46,600 53,599

Trade tax

Balance of losses carried forward 85,628 58,123

Losses carried forward for which a deferred tax asset has been created 0 4,915

Losses carried forward on which an impairment has been recognised 0 0

Losses carried forward for which no deferred tax asset has been created 85,628 53,208

Expires after 10 years 0 0

Usable indefinitely 85,628 53,208

103


(48) OTHER ASSETS

The intention is to realise other assets within the next twelve months.

(49) NON-CURRENT ASSETS HELD FOR SALE AND DISPOSAL GROUPS

EUR ’000s 2011 2010

Prepaid expenses 876 477

Other assets 3,171 2,654

Total 4,047 3,131

EUR ’000s 2011 2010

Liabilities to domestic banks 6,771,753 6,772,217

Liabilities to foreign banks 1,236,336 920,200

Total 8,008,089 7,692,416

EUR ’000s 2011 2010

Non-current assets held for sale and disposal groups - 4,500

Total - 4,500

The assets held for sale in the previous year affect a building that was sold at the begin-ning of 2011 due to the discontinuation of use.

(50) LIABILITIES TO BANKS

104

Breakdown of liabilities to banks by maturity:

EUR ’000s 2011 2010

Payable on demand 183,928 210,059


up to 3 months 3,009,871 3,135,905

more than 3 months and up to 1 year 1,947,091 1,218,130


more than 5 years 755,775 463,452

Total 8,008,089 7,692,416

EUR ’000s 2011 2010


up to 3 months 2,641,754 2,665,271


more than 1 year and up to 5 years 985,843 1,118,841

more than 5 years 858,458 592,088

No maturity (home loan savings deposits) 505,322 495,949

Total 5,905,351 5,136,091

EUR ’000s 2011 2010

Liabilities to domestic customers 5,607,348 4,802,017

Liabilities to foreign customers 298,003 334,074

Total 5,905,351 5,136,091

(51) LIABILITIES TO CUSTOMERS

Breakdown of liabilities to customers by ma-turity:

105


(52) SECURITISED LIABILITIES

EUR ’000s 2011 2010

Fixed-term with residual maturity of

up to 3 months 0 117,416



more than 5 years 82,157 50,563

Total 4,329,445 4,749,283

EUR ’000s 2011 2010


up to 3 months 9,776 12,642



more than 5 years 269,073 199,658

Total 544,131 461,208

EUR ’000s 2011 2010

Bonds and notes issued 4,329,445 4,749,283

Mortgage Pfandbriefe 208,714 288,536

Public-sector Pfandbriefe 805,722 1,102,365

Other bonds 3,315,009 3,358,382

Total 4,329,445 4,749,283

Breakdown of securitised liabilities by ma-turity:

(53) LIABILITIES HELD FOR TRADING

Please see Note 64 for the composition and per-formance of liabilities held for trading.Breakdown of liabilities held for trading by con-tractual maturity:

EUR ’000s 2011 2010

Negative fair value from derivative financial instruments (not hedge accounting) 544,131 461,208

Total 544,131 461,208

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(54) NEGATIVE FAIR VALUES FROM DERIVATIVE FI-NANCIAL INSTRUMENTS (HEDGE ACCOUNTING)

EUR ’000s 2011 2010

Negative market value of fair value hedges 32,585 20,010

Total 32,585 20,010

The hedges involve securing the risk of a change in interest rates. The underlying trans-actions are loans and advances to customers and fixed interest securities.

(55) PROVISIONS

EUR ’000s 2011 2010

Provisions for pensions and similar obligations 24,081 23,644

Other provisions 8,364 7,224

Provisions for the credit business 4,439 3,385

Other provisions 3,925 3,839

Total 32,445 30,868

EUR ’000s 2011 2010

Net present value of pension obligations 24,107 21,945

unfunded 23,493 21,302

funded 614 643

Fair value of plan assets -710 -680

Actuarial gains and losses not yet recognised 649 2,352

Assets not recognised due to the limitation of IAS 19.58 (b) (Asset Ceiling) 35 27

Pension provisions reported 24,081 23,644

Provisions for pensions and similar obliga-tionsThe value recorded on the balance sheet for pension provisions is derived as follows:

107


Performance of the net present value of pen-sion obligations:

EUR ’000s 2011 2010


Current service expense 557 592


Actuarial gains and losses 1,645 1,690

Benefits paid -1,190 -1,089


Fair value of plan asset

EUR ’000s 2011 2010

Balance as of 1 January 680 624

Expected return 29 28

Actuarial gains and losses -29 -2

Employee contributions 30 30

Benefits paid 0 0

Balance as of 31 December 710 680

Change in the fair value of the plan asset and the reimbursement rights reported as an as-set:

The plan asset consists of reinsurance claims on an insurance company (so-called cover assets) that are backed by its investments. There is no right of recourse to specific invest-ments; it is therefore not possible to provide a breakdown by equities, debt instruments and other assets. The expected return on the plan asset is calculated using long-term yields in the market and observed past trends for information purposes. No reimbursement rights have been reported as assets.Actual returns on the plan asset in the year amounted to EUR 29,000 (2010: EUR 28,000).In the last five years, the net present value of

pension obligations, the fair value of the plan asset and the surplus/deficit in obligations as well as adjustments based on expectations changed as follows:

108

Since the 2012 financial year, no contributions to the reinsurance have been made.

The cost of pension obligations recognised on the income statement consists of the follow-ing:

EUR ’000s 2011 2010 2009 2008 2007

Net present value of pension obligations 24,107 21,945 19,609 19,795 21,213

Fair value of plan asset 710 680 624 571 641

Surplus/deficit in obligations 23,397 21,265 18,985 19,224 20,572

Expectation-based adjustments to value of obligations -73 -489 380 89 1,141

Expectation-based adjustments to value of plan asset -29 -2 -1 0 0

The current service expense and the expense from the effect of the upper limit in IAS 19.58 (b) (Asset Ceiling) is reported under adminis-trative expenses. Interest expense is offset against expected income from the plan as-set and reported under net interest income.

Actuarial profits are reported in other income.It is anticipated that pension provisions of EUR 1.3 million will be utilised in the follow-ing financial year.

EUR ’000s 2011 2010

Current service expense 557 592


Current return on plan asset 29 28

Actuarial gains and losses 30 314

Effect of upper limit in IAS 19.58 (b) (Asset Ceiling) 9 27

Total 1,657 1,420

Other provisions

Provisions for the credit business Other provisions

At individual transaction level

At portfolio level

EUR ’000s 2011 2010 2011 2010 2011 2010


Utilisations - 168 - - 1,068 6,691

Releases 708 919 1,069 1,741 733 881

Allocations 2,458 - 374 - 1,888 3,356


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The provisions in the credit business are cre-ated for contingent liabilities and irrevocable credit commitments.The other provisions are largely provisions for staff (length of service bonuses, provi-sions for pre-retirement part-time work-ing and early retirement) of EUR 1.8 million

(2010: EUR 2.5 million), and for legal costs of EUR 615,000 (2010: EUR 1.1 million). External expert reports form the basis of the staff provisions.Other provisions are not discounted, apart from those related to staff, as the cash outflows are expected to take place within one year.

EUR ’000s 2011 2010

Prepaid income 665 1,712

Other liabilities 31,657 34,548

Accruals 12,968 14,286

Total 45,290 50,546

EUR ’000s 2011 2010

Current income tax liabilities 2,884 1,434

Domestic 2,619 301


Deferred income tax liabilities 47,166 45,141

Domestic 47,166 44,520

International 0 621

Total 50,050 46,575

(56) CURRENT AND DEFERRED INCOME TAX LIABILITIES

Please see note 47 for a breakdown of the de-ferred tax liabilities and the deferred tax as-sets.

(57) OTHER LIABILITIES

Other liabilities mainly comprise the propor-tionate, not yet paid treatment of hybrid capital and permanent capital contributions of silent partners amounting to EUR 28.5 mil-lion (2010: EUR 33.1 million).The accruals consist of EUR 4.5 million (2010: EUR 5.0 million) in employee benefits due

in the short term, EUR 2.4 million (2010: EUR 2.6 million) in taxes unrelated to income and EUR 5.0 million (2010: EUR 5.9 million) in outstanding invoices.The intention is to realise other liabilities within the next twelve months.

110

(58) SUBORDINATED CAPITAL

Subordinated capital broken down by matu-rity:

EUR ’000s 2011 2010

Subordinated liabilities 145,362 145,331

Profit participation rights (debt components) 53,654 74,283

Capital contributions from silent partners (debt components) 152,871 193,355

Total 351,888 412,970

EUR ’000s 2011 2010


up to 3 months 0 67,256



more than 5 years 108,277 114,632

Total 351,888 412,970

As of 31 December 2011, expiring profit partici-pation rights in the amount of EUR 20 million will fall due on 1 July 2012 and will be reported in the maturity range of “more than 3 months and up to 1 year.”

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(59) SHAREHOLDERS’ EQUITY

EUR ’000s 2011 2010

Subscribed capital 169,114 169,114

Statutory share capital 132,114 132,114

of which:

Undated capital contributions from silent partners 37,000 37,000

Hybrid capital 104,258 114,909

Profit participation rights (equity component) 4,846 8,146

Dated silent partnership contributions (equity component) 99,412 106,763

Capital reserve 50,841 50,841

Retained earnings 137,108 116,800

Other retained earnings 137,108 116,800

Revaluation reserve -11,585 -16,233

Retained profit 11,324 13,396

Total 461,060 448,828

Hybrid capitalSilent partnership contributions with a fixed term or recallable by the lender and profit participation rights are compound financial instruments and have to be divided into their equity and debt components (split account-ing). The disclosure in equity takes place un-der hybrid capital instruments.

Capital reserveAdditional contributions by the sharehold-ers into shareholders’ equity are listed in the capital reserve.

Retained earningsAmounts allocated to reserves from the previ-ous year’s distributable earnings are booked under retained earnings.

Revaluation reserveThe item contains valuation gains and losses on AfS financial instruments as well as AfS financial instruments reclassified to LaR and HtM instruments, taken directly to equity, if they occurred during the categorisation as AfS.

112

The movements in the revaluation reserve were as follows:

EUR ’000s 2011 2010

Balance as of 1 January -16,233 -44,809

Measurement changes taken directly to equity 1,490 14,007

Changes in deferred taxes taken directly to equity -3,046 -11,208

Measurement changes taken to the income statement / recognition 6,204 25,777

Balance as of 31 December -11,585 -16,233

The revaluation reserve contains reclassi-fied securities (before deferred taxes) in the amount of EUR -4.9 million from the HtM cat-egory and EUR -19.7 million from LaR; these will be amortised over the expected remain-ing life of the underlying investments.

Retained profitThe retained profit was EUR 11.3 million (2010: EUR 13.4 million).The determinant figure under the German Commercial Code for the appropriation of profits is, as in 2010, EUR 0.00. No dividends were paid in 2011 for the 2010 financial year.

Timing differencesPlease see Note 47 for details of timing differ-ences that affect equity.

Capital management The supervisory requirements set out in the Solvency Ordinance are key for SaarLB when assessing and managing capital adequacy as well as maintaining economic risk-bearing ca-pacity.

Regulatory capital SaarLB has applied the relevant rules on calcu-lating capital requirements under the Solven-cy Ordinance since obtaining approval from the German Federal Financial Supervisory Authority (BaFin) to use the Internal Ratings Based Approach (IRBA) from 1 January 2007. Regulatory capital – i.e. equity – comprises

core capital (essentially nominal capital, si-lent partner contributions and reserves, in-cluding the reserve under Section 340 g of the Commercial Code) plus supplementary capital (essentially profit participation rights and long-term subordinated liabilities) after deductible items.The overall ratio – the ratio of capital to risk positions calculated under Solvency Ordi-nance rules – must not fall below 8.0% from a regulatory point of view. SaarLB has specified a stricter target ratio of 10.0% for its Group figure and a core capital target ratio of 8.0% in its internal management. The latter is the ratio of core capital (after deductible items) to risk exposures.Target values are constantly maintained by means of medium-term planning over a five-year timeframe. The Corporate Development segment is responsible for the strategic plan-ning process. On the basis of the economic conditions determined in this process, each business area performs its own risk exposure planning for this time period. Their figures are then collated at the Group level by Control-ling – the department in charge of the quan-titative aspects of medium-term planning – and compared with the equity available in the planning period. Finally, the measures needed to procure capital or scale back proposed busi-ness area budgeting are defined to ensure the targets are met. An overview of the key Solvency Ordinance data at the balance sheet date of 31 December

113


2011 and the corresponding figures from the previous year are given below. SaarLB no long-er prepared regulatory group reports as of the middle of 2011. To this extent, the figures as of 31 December 2011 include only the single insti-tute (the figures from 2010 are on the Group level).

SaarLB’s equity remained almost unchanged year on year. SaarLB complied with the mini-mum regulatory ratio of 8.0% for the total ratio during the entire reporting period at all times as well as its stricter target ratios. Good overall capital adequacy ratios were also re-flected in the results of the required regula-tory stress tests: based on the assumption of economic weakness, the equity ratio at the Group level was 9.5% and the core capital ra-tio was 8.5% as of 31 December 2011.

Key Solvency Ordinance (SolvV) data 31 Dec. 2011 31 Dec. 2010

Risk exposure (EUR million) 7,618 7,434

Equity (EUR million) 865 869

of which: core capital (EUR million) 757 745

Equity ratio (Group level in %) 11.4% 11.7%

Core capital ratio (in %) 9.9% 10.0%

114

ECONOMIC CAPITAL (RISK BEARING CAPACITY)

The core aim of the SaarLB Group’s risk man-agement, aside from complying with regula-tory capital requirements, is to ensure that economic risk-bearing capacity, which is the difference between risk capital (risk cover funds) and risk capital needed, is adequate. Risk cover funds were fundamentally de-termined on the basis of IFRS accounting and indicate the maximum actual level of

unexpected losses from risks entered into that can be borne.8 In the reporting period, the division of the components of the risk cover funds according to their availability (liquidity) and the external impact of their changes (capital market effects) was discon-tinued with the systematic implementation of the liquidation approach:9

Components of the risk cover funds (EUR million) 31 Dec. 2011 31 Dec. 2010 Delta

Results after taxes (minimum YTD and Proj.) 11.1 21.6 -10.5

+ nominal capital 132.1 132.1 -

+ capital reserves 50.8 50.8 -

+ retained earnings 129.3 116.8 +12.5

+ undated silent partner contributions 137.0 137.0 -

+ dated silent partner contributions 252.3 300.1 -47.8

+ profit participation rights 38.5 82.4 -43.9

+ subordinated liabilities 133.8 143.4 -9.7

+ revaluation reserve -19.0 -16.2 -2.8

Risk cover funds 865.9 968.1 -102.2

less intangibles -2.1 -2.1 -

less balance of silent reserves and hidden charges from securities (LaR and HtM) -39.5 -42.1 +2.6

less excess of deferred tax assets -13.3 -12.9 -0.4

Liquidation cover funds +811.0 +910.9 -99.9

less buffer for business and strategic risks -46.7 -50.5 +3.7

less buffer for real estate risks -6.7 -7.7 +1.0

less Buffer for liquidity and reputation risks -17.7 -20.5 +2.8

Available cover funds +739.9 +832.3 -92.4

8 On account of the one-year period under consideration, the equity items as of 31 December 2011 are not reported in the risk cover funds, but rather the figures as of 31 December 2012 (if need be, reduced by maturities in the period under consideration).

9 The comparable figures as of 31 December 2010 were adjusted to the new system. The amount of the risk cover fund as of 31 December 2010 fell by EUR 11.5 million as compared to the system presented in the risk report for the 2010 consoli-dated financial statements due to the changes in the method of the result (previously a projection before taxes, now a minimum from the current figure and the projection after taxes).

115


The risk cover funds fell in comparison to the hearing primarily due to the declines in the dated silent reserves, profit participation rights and subordinated liabilities. On the one hand, these are maturities from the year 2011, on the other hand maturities from the year 2012 that are deducted in the risk cover funds at the reporting deadline on account of the one-year time horizon of the risk bearing capacity calculation.10 The available risk cover funds result from the risk cover funds due to the reductive consideration of other effects:• In the liquidity cover funds, elements are de-

ducted from the cover funds, which might not retain their value in the case of a liqui-dation.

• Additionally, buffers for risk types are used that are not explicitly taken into consid-eration in the framework of the further eco-nomic risk bearing capacity calculation.

As part of economic risk capital management, SaarLB monitors its risk profile and ensures its risk-bearing capacity is always adequate

by comparing each month the risk capital al-located to the available cover funds and risk capital needed. Risk capital needed is deter-mined by analysing risk types such as coun-terparty risk (incl. country risk), market price risk, investment risk and operational risk in a consistent manner. The risks from across the Group are collated into an overall assessment of the risk existing. In ICAAP, the value at risk (VaR) method based on a confidence level of 99.95% is used to determine risk capital needed. The limits are set at the level of the individual risk types. The assumptions and results of risk quantification are validated at least annually.The ICAAP risk-bearing capacity as of 31 De-cember 2011 is illustrated in the following overview.11

Economic RTF (ICAAP)(EUR million)

31 Dec. 2011 31 Dec. 2010

Capital needed

Limit Range Capital needed

Limit Range

Counterparty risk 168.8 230.0 73.4% 176.9 230.0 76.9%

of which default risk (136.5) (180.0) 75.8% (138.9) (180.0) 77.2%

of which credit spread risk (32.3) (50.0) 64.7% (38.0) (50.0) 76.0%

Market risk 7.4 40.0 18.6% 7.2 32.0 22.4%

Operational risk 22.8 27.0 84.4% 22.3 25.0 89.2%

Investment risk 3.4 10.0 34.0% 8.1 10.0 81.0%

Other risks 1.0 3.0 32.5% 1.2 3.0 40.0%

Total 203.4 310.0 65.6% 215.7 300.0 71.9%


10 In 2011, silent reserves of EUR 47.8 million and profit participation rights of EUR 23.9 million were paid back. In 2012, another EUR 20.0 million of profit participation rights and EUR 9.5 million of subordinated liabilities will fall due.

11 In comparison to the system outlined in the risk report for the 2010 consolidated financial statements, credit spread risks (EUR +12.4 million) and market risks (EUR +0.8 million) are quantified higher in the comparable figures as of 31 December 2010. The credit spread risks now include securities from all IFRS holding categories (previously only securities from available for sale and fair value option); market price risks are no longer scaled for a liquidation period of 126 days, but rather for a holding period of 10 days.

116

The SaarLB Group’s risk-bearing capacity was ensured at all times without limitations throughout the reporting period (both in total and on the level of individual types of risk). Besides the ICAAP risk capital needed, the risk capital needed in the case of serious economic weakness (ICAAP stress) is also determined. While the risk capital needed was initially cal-culated under “normal” market conditions, in this instance it reflects possible additional needs in various stress scenarios. With regard to counterparty risks, a general deterioration of the credit portfolio and a further increase in credit spreads are assumed, and for all other types of risk, more stringent assumptions also apply.

The further fading of the financial market crisis and the resulting improvement in the portfolio is reflected in the decline in capital needed for counterparty risks. Even under the assumption of serious economic weakness, the risk-bearing capacity of the SaarLB Group was present at all times in the reporting pe-riod.

Serious economic weakness (ICAAP stress)(EUR million)

31 Dec. 2011 31 Dec. 2010

Capital needed Capital needed

Counterparty risk 351.5 397.6

of which default risk (298.2) (333.8)

of which credit spread risk (53.3) (63.7)

Market risk 8.4 8.1

Operational risk 27.4 26.8

Investment risk 4.1 9.7

Other risks 1.2 1.4

Total capital needed 392.6 443.6


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The notes on the risks arising from financial instruments under IFRS 7 are contained in the risk report.

(60) FAIR VALUE OF FINANCIAL INSTRUMENTS

Overview

Notes on financial instruments

EUR ’000s Fair value Carrying value

Fair value Carrying value

2011 2011 2010 2010

Assets 19,753,804 19,644,612 19,353,672 18,942,235

Cash reserves 106,737 106,737 7,269 7,269

Loans and advances to banks1) 3,982,450 4,082,938 3,893,157 3,812,694

Loans and advances to customers1) 8,766,924 8,491,189 7,797,279 7,432,381

Assets held for trading 431,629 431,629 359,649 359,649

Investments 5,506,507 5,574,215 6,513,747 6,547,362

Securities repurchase transactions 955,850 954,197 779,431 779,740

Interests in entities valued at equity 2,762 2,762 2,493 2,493

Other assets 945 945 647 647

Liabilities 19,191,828 19,213,045 18,681,135 18,519,512

Liabilities to banks 7,936,097 8,008,089 7,741,490 7,692,416

Liabilities to customers 5,929,652 5,905,351 5,211,229 5,136,091

Securitised liabilities 4,353,621 4,329,445 4,775,841 4,749,283

Liabilities held for trading 544,131 544,131 461,208 461,208

Negative fair values from derivative financial instruments (hedge accounting) 32,585 32,585 20,010 20,010

Other liabilities 41,556 41,556 47,534 47,534

Subordinated capital 354,186 351,888 423,823 412,970

1) After the deduction of individual risk provisions, before the deduction of the portfolio risk provision. The carrying values as of 31 December 2010 were adjusted accordingly for loans and advances to banks and customers.

The difference between fair values and carrying values is EUR 109.2 million (2010: EUR 411.4 million) for assets and EUR -21.2 mil-lion (2010: EUR 161.6 million) for liabilities.It was not possible to determine reliably the

fair value for EUR 7.5 million (2010: EUR 6.3 mil-lion) of unlisted equity instruments under in-vestments. These are therefore stated at car-rying value.The maturities for the clearing and current accounts as well as the overnight and time deposits reported in receivables from and li-abilities to banks and customers are less than one year. The fair value was equated with the carrying value for reasons of simplicity.

118

For the purposes of the Notes, the fair value of loans measured at amortised cost and re-ported in loans and advances and liabilities to banks and customers as well as in subordinat-ed capital is determined using the net present value method. In the case of receivables, the discounting process uses:

• riskfree yield curves of the same maturity and in the same currency

• liquidity spreads• consistent administration cost premiums • riskadjusted spreads (credit risk) • ratingrelated cost of capital premiums.

Risk-adjusted spreads are calculated by tak-ing the rating, the fixed interest period and the size of capital repayments.In the case of liabilities, risk-adjusted spreads and rating-related cost of equity premiums are not used.The cash reserves, the other accounts in-cluded in loans and advances and liabilities to banks and customers as well as the items reported in other assets and liabilities are dis-closed at their nominal amounts.The fair values for the liabilities are based on the prices that the Bank determined itself as issuer.See Note 6 on the methods and assumptions for the fair value calculation in assets and li-abilities held for trading (including the nega-tive market value from derivative financial instruments from hedge accounting) and financial assets (including securities repur-chase transactions).

119


FAIR VALUES BY CLASSES

Assets

EUR ’000s Fair value Fair value

2011 2010

Cash reserves 106,737 7,269

Loans and advances to banks 3,982,450 3,893,157

Clearing and current accounts 241,178 121,835

Overnight and time deposits 2,037,720 1,291,785

Loans 1,696,630 2,394,449

Other loans and advances 6,922 85,088

Loans and advances to customers 8,766,924 7,797,279


Overnight and time deposits 576,270 436,934

Loans 8,073,880 7,244,258

Other loans and advances 16,469 -8,157

Assets held for trading 431,629 359,649

Interest rate-related transactions 427,264 353,588

Equity-related transactions 1,257 1,221

Currency-related transactions 3,108 4,785

Credit derivatives 0 55

Investments 5,506,507 6,513,747

Bonds, notes and other fixed-interest securities 5,445,374 6,382,375

Money market instruments 894,143 1,108,069

Bonds and notes 4,551,231 5,274,306

Equities and other non-fixed-interest securities 9,077 30,740

Equities 1,136 7,377

Investment fund units 7,061 21,728

Other non-fixed-interest securities 880 1,636

Interest in subsidiaries 1,920 1,968

Associates not consolidated 2,292 1,142

Other investments 47,844 97,521


Interests in entities valued at equity 2,762 2,493

Other assets 945 647

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Liabilities

EUR ’000s Fair value Fair value

2011 2010

Liabilities to banks 7,936,097 7,741,490



Loans 3,599,579 3,470,876


Liabilities to customers 5,929,652 5,211,229



Loans 2,287,790 2,047,467

Home loan savings deposits and savings deposits 506,417 497,267

Other liabilities 12,847 0

Securitised liabilities 4,353,621 4,775,841

Liabilities held for trading 544,131 461,208


Equity-related transactions 1,257 1,268

Currency-related transactions 12,522 8,990

Credit derivatives 6,145 4,187

Negative fair values from derivative financial instruments (hedge accounting) 32,585 20,010



Subordinated capital 354,186 423,823

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(61) LEVEL INFORMATION FOR FINANCIAL INSTRUMENTS MEASURED AT FAIR VALUE

General level information

EUR ’000s Level 1 Level 2 Level 3 Total

2011 2010 2011 2010 2011 2010 2011 2010

Assets held for trading 5,622 4,268 426,007 355,337 0 44 431,629 359,649

Interest rate-related transactions 4,365 3,047 422,899 350,541 0 0 427,264 353,588

Equity-related transactions 1,257 1,221 0 0 0 0 1,257 1,221

Currency-related transactions 0 0 3,108 4,785 0 0 3,108 4,785

Credit derivatives 0 0 0 11 0 44 0 55

Investments 435,582 366,708 2,902,162 3,118,164 1,014,246 1,378,547 4,351,990 4,863,419

Bonds, notes and other fixed-interest securities 427,385 360,275 2,901,282 3,093,856 969,687 1,284,375 4,298,354 4,738,506

Money market instruments 0 0 197,669 367,177 696,474 740,892 894,143 1,108,069

Bonds and notes 427,385 360,275 2,703,613 2,726,679 273,213 543,483 3,404,211 3,630,437

Equities and other non-fixed-interest securities 8,197 6,433 880 24,308 0 0 9,077 30,741

Equities 1,136 6,433 0 944 0 0 1,136 7,377

Investment fund units 7,061 0 0 21,728 0 0 7,061 21,728

Other non-fixed-interest securities 0 0 880 1,636 0 0 880 1,636

Associates not consolidated 0 0 0 0 2,000 850 2,000 850

Other investments 0 0 0 0 42,559 93,322 42,559 93,322

Securities repurchase transactions 0 36,757 486,225 299,964 0 0 486,225 336,721

Liabilities held for trading 5,622 4,314 537,789 455,854 720 1,040 544,131 461,208

Interest rate-related transactions 4,365 3,047 519,842 443,717 0 0 524,207 446,764

Equity-related transactions 1,257 1,267 0 0 0 0 1,257 1,268

Currency-related transactions 0 0 12,522 8,990 0 0 12,522 8,990

Credit derivatives 0 0 5,425 3,147 720 1,040 6,145 4,187

Negative fair values from derivative financial instruments (hedge accounting)

0 0 32,585 20,010 0 0 32,585 20,010

Interest rate-related transactions 0 0 32,585 20,010 0 0 32,585 20,010

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Level 1:Level 1 consists of those financial instruments for which a transaction-based price could be determined on or shortly before or after the balance sheet date at a not insignificant trad-ing volume. For derivatives, these include in particular prices that were determined on the EUREX. Accordingly, the SaarLB Group pre-sents securities that have a price listed on an active market and derivatives traded on the stock exchange under level 1.

Level 2:Level 2 consists of financial instruments where the significant input parameters for the determination of the fair value are exclu-sively observed on the market. This relates in particular to derivatives not traded over-the-counter where valuation models with input parameters observable on the market are used to determine their fair value (primarily observable interest and spread curves). For securities that do not meet the criteria ac-cording to level 1 and whose courses are ob-servable on the market, allocation to level 2 takes place unless there are indications that an allocation to another level is appropriate.

Level 3:Level 3 consists of financial instruments where the criteria for allocation to level 1 or 2 were absent, i.e. where input parameters that are not observed on the market have a signifi-cant influence on the determination of the fair value. These include loans and debt se-curities for which only the indicative courses are present (counterparty prices that do not represent an offer). SaarLB derives spreads from internal ratings for CDS to a limited ex-tent; consequently, these derivatives are allo-cated to level 3 on account of the significant influence of credit spreads on the fair value. Furthermore, this level contains investments that are measured at fair value.

The so-called stress test led to the following:• If the spreads as an input parameter vary

by 10% for a CDS allocated to level 3, then the fair value changes by roughly 22%. The fair value of the CDS allocated to level 3 and valued in this way amounts to EUR -720,000 (2010: EUR -997,000). If the spreads rise by 10%, the negative market value rises accord-ingly to EUR -870,000 (2010: EUR -1.2 mil-lion).

• The investments are particularly valued on the basis of the so-called risk-free interest and a risk surcharge, which consists of the market risk premium and the beta factor (representation of sector volatility). If the input parameters are uniformly raised (re-duced) by 10%, the value of the investments of EUR 45.5 million (2010: EUR 94.2 mil-lion) measured at fair value rises (falls) by EUR 3.4 million (2010: EUR 10.0 million) or by EUR 4.4 million (2010: EUR 13.9 million). If only one input parameter varies by 10%, the change in the fair value is less.

• No stress test for the input parameters was made for level 3 financial instruments that were valued with an indicative price.

There were no significant reclassifications be-tween level 1 and 2.

123


Special disclosures on level 3

EUR ’000s Financial liabilities measured at fair value through profit or loss

Available for sale financial

assets

Financial liabilities measured

at fair value through profit

or loss

Assets held for trading

Investments Investments Liabilities held for trading

Start level 44 0 1,378,547 -1040

Total of profits or losses -44 0 4,296 320

on income statement -44 0 26,428 320

in revaluation reserve 0 0 -22,132 0

Purchases 0 0 1,165,927 0

Disposals 0 0 -51,262 0

Redemptions 0 0 -1,280,571 0

Exchange rate effects 0 0 -5,479 0

Transfers from level 3 0 0 -233,208 0

Transfers to level 3 0 0 36,900 0

End level 0 0 1,015,150 -720

Total of measurement profits/losses for assets that were in the portfolio at the end of the period 5,688 253

124

(62) FINANCIAL INSTRUMENT MEASUREMENT CATEGORIES

EUR ’000s 2011 2010

Assets

Financial assets measured at fair value through profit or loss 844,831 884,434

Fair value option 413,202 524,785

Investments 413,202 524,785

Financial assets held for trading 431,629 359,649


Investments held to maturity (held to maturity) 752,063 884,579



Loans and receivables 13,751,076 12,651,228

Cash reserves 106,737 7,269

Loans and advances to banks1) 4,105,613 3,834,459

Loans and advances to customers1) 8,607,193 7,572,791

Investments 930,639 1,236,062

Other assets 894 647

Available for sale financial assets (available for sale) 4,432,561 4,681,676

Investments 3,946,284 4,344,955


Other assets 51 0

Liabilities

Financial liabilities measured at fair value through profit or loss 544,131 461,208

Fair value option 0 0

Financial liabilities held for trading (held-for-trading) 544,131 461,208


Liabilities measured at amortised cost 18,626,650 18,038,294


Liabilities to customers 5,905,351 5,136,091




Negative fair values from derivative financial instruments (hedge accounting) 32,585 20,010

1) Before deducting risk provisions

125


(63) NET GAINS OR LOSSES ON FINANCIAL INSTRUMENTS

For each category, net gains or losses on fi-nancial instruments include both measure-ment gains and losses and gains or losses on disposal.

EUR ’000s Net interest income

Risk provisions Gains or losses on fair value

measurement

Gains or losses on hedge accounting

Gains or losses on investments

Total

2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010

Financial assets and liabilities measured at fair value through profit and loss

-14,231 -12,465 0 0 -16,150 7,323 -11,594 -7,112 0 0 -41,975 -12,254

Fair value option 17,141 16,588 0 0 -9,782 -2,942 0 0 0 0 7,359 13,646

Financial assets held for trading1) -31,372 -29,053 0 0 -6,368 10,265 -11,594 -7,112 0 0 -49,334 -25,900

Loans and receivables2) 399,399 373,821 -19,118 -22,324 0 0 11,392 7,591 -12,067 -1,471 379,606 357,617

Financial assets available for sale3) 104,333 82,540 0 0 0 0 245 0 11,441 -2,574 116,019 79,966

Investments held to maturity (held to maturity)

20,785 21,364 0 - 0 - 0 - 118 106 20,903 21,470

Liabilities measured at amortised cost -388,059 -355,793 0 0 0 0 0 0 0 0 -388,059 -355,793

1 ) Including gains/losses on currency conversion 2) Including financial assets in the loans and receivables category 3) Including shares of profits in associated companies accounted for using the equity method

Gains amounting to EUR 1.5 million (2010: EUR 20.8 million) on fair value measurement of available for sale financial assets was taken straight to the revaluation reserve in equity (see Note 59).

(64) DERIVATIVE TRANSACTIONS

Interest and foreign currency-related and other forward transactions and credit deriva-tives not settled at the balance sheet date are shown in the tables below. Most of the deals were concluded to hedge fluctuations in in-terest rates, exchange rates or market prices and trading on behalf of customers.

126

Volumes

EUR ’000s Nominal value Market valuepositive

Market valuenegative

2011 2010 2011 2011

Interest-rate risks

Interest rate swaps 13,324,482 12,518,338 415,520 -545,201

of which interest rate swaps under hedge ac-counting 70,365 130,079 0 -32,585

FRAs 100,000 300,000 151 0

Caps, floors 1,350,483 1,208,370 7,227 -7,225

Futures 810,060 1,732,133 4,365 -4,365

Total interest rate risk 15,585,025 15,758,841 427,263 -556,791

Currency risks

Forward foreign exchange transactions 584,137 528,441 2,105 -9,886

Currency swaps, currency/interest swaps 29,893 33,793 1,003 -2,636

Foreign exchange options 40,400 167,400 0 0

- Purchases 20,200 83,700 0 0

- Sales 20,200 83,700 0 0

Total currency risks 654,430 729,634 3,108 -12,522

Equity and other price risks

Index options 122,191 338,948 329 -329

- Purchases 61,095 100,831 329 0

- Sales 61,096 238,117 0 -329

Equity options 8,191 10,930 279 -279

- Purchases 4,095 5,465 279 0

- Sales 4,096 5,465 0 -279

Futures 32,543 71,796 649 -649

Total equity and other price risks 162,925 421,674 1,257 -1,257

Credit derivative risks

Protection buyer 0 0 0 0

Protection seller 135,000 165,000 0 -6,145

Total credit derivative risks 135,000 165,000 0 -6,145

Total 16,537,380 17,075,149 431,628 -576,715

127


Breakdown of maturities

The information is based on contractual re-sidual maturities.

Breakdown by counterparty

Nominal value

Interest-rate risks Currency risks Other price risks Credit derivative risks

EUR ’000s 2011 2010 2011 2010 2011 2010 2011 2010

Residual terms

up to 3 months 573,302 942,546 540,087 603,694 160,230 417,545 15,000 10,000

up to 1 year 1,480,866 1,492,784 84,450 96,223 2,395 3,504 55,000 10,000

up to 5 years 8,514,597 8,776,619 29,893 29,717 300 625 35,000 90,000

more than 5 years 5,016,260 4,546,892 0 0 0 0 30,000 55,000

Total 15,585,025 15,758,841 654,430 729,634 162,925 421,674 135,000 165,000

Nominal value Positive fair value Negative fair value

EUR ’000s 2011 2010 2011 2010 2011 2010

OECD banks 14,007,156 14,445,083 327,157 291,886 -561,744 -468,853

Public-sector entities within the OECD 807,960 100,019 86 0 0 0

Other counterparties 1,722,264 2,530,047 104,385 67,763 -14,971 -12,364

Total 16,537,380 17,075,149 431,628 359,649 -576,715 -481,217

128

(65) NOTES TO ITEMS IN THE CASH FLOW STATEMENT

The cash flow statement shows the cash flows resulting from operating activities, in-vesting activities and financing activities for the financial year.Cash and cash equivalents reported is equal to the cash reserves item on the balance sheet, which comprises cash on hand and de-posits at central banks.Cash and cash equivalents are not subject to any restrictions on the right of disposal.Payments from loans and advances to banks/customers, securities (unless investments), derivatives and other assets are shown as cash flows from operating activities. Pay-ments from liabilities to banks/customers, securitised liabilities and other liabilities are also assigned to operating activities. Interest and dividend payments from operating activi-ties are also included under cash flows from operating activities.Cash flows from investing activities shows payments for investments and property, plant and equipment (including intangibles). The cash flow from financing activities in-cludes payments to silent partners and hold-ers of profit participation rights and changes in subordinated capital.

Notes to the cash flow statement

129


(66) SUBORDINATED ASSETS

The following balance sheet items contain subordinated assets:

(67) ASSETS AND LIABILITIES IN FOREIGN CURRENCIES

(68) ASSETS PLEDGED AS COLLATERAL

The collateral pledged relates to securities repurchase transactions, tender transactions with the European Central Bank (ECB), trans-actions on the European Exchange (EUREX), with Clearstream Banking of Frankfurt am Main and Clearstream Banking Luxembourg.In these cases substantially all risks and re-wards associated with ownership of the trans-ferred assets remain with the SaarLB Group.

Other notes

EUR ’000s 2011 2010



Total 20,841 35,091

EUR ’000s 2011 2010

Foreign currency assets 1,022,037 1,037,132

CAD 26,661 26,718

CHF 261,228 274,811

GBP 65,529 66,203

HKD 1 0

JPY 8,100 7,654

USD 579,907 552,681

Other currencies 80,611 109,065

Foreign currency liabilities 500,277 755,989

CAD 2,807 2,520

CHF 89,004 249,160

GBP 59,617 70,601

JPY 14 350

USD 328,827 430,501

Other currencies 20,008 2,857

130

Assets pledged as collateral relate to the fol-lowing balance sheet items:

The transferred assets back liabilities in the amount of EUR 2.3 billion (2010: EUR 2.2 bil-lion).These transactions were executed at stand-ard market conditions.

(69) COLLATERAL RECEIVED THAT MAY BE SOLD ON OR PLEDGED ON

As part of securities repurchase transactions and securities lending transactions, we re-ceive assets lodged as collateral that may be sold on or pledged on without the collateral provider defaulting. We held no such securi-ties on 31 December 2010 or 31 December 2011.

EUR ’000s 2011 2010

Loans and advances to banks and customers 223,894 4,097,244

Investments 2,431,272 4,097,244

of which:Collateral that may be sold on or pledged on by the recipient 954,197 779,740

Total 2,655,166 4,097,244

131


(70) LEASING TRANSACTIONS

Operating leasesThe SaarLB Group as lessor:

EUR ’000s 2011 2010

Lease agreements (residual maturities) 5,708 7,018

up to 1 year 1,214 1,382


more than 5 years 1,248 1,430

EUR ’000s 2011 2010

Future minimum leasing payments from noncallable lease agreements (residual maturities)

1,385 1,469

up to 1 year 662 627

more than 1 year and up to 5 years 723 842

more than 5 years 0 0

The leased assets are real estate. The leasing agreements include some with fixed maturi-ties and some that are open-ended. The long-est fixed maturity expires on 30 September 2025. In some cases on expiry, the lessee has

the unilateral option to extend the agreement or the option to a contractually agreed exten-sion provided the other party does not object. There are no conditional payments.

The SaarLB Group as lessee:

The leasing agreements mainly relate to the rental of fixtures and fittings. They have fixed terms of three to five years. There are no op-tions or conditional payments.

132

(71) FIDUCIARY TRANSACTIONS

Fiduciary transactions break down as fol-lows:

(72) CONTINGENT LIABILITIES AND OTHER OBLIGATIONS

The provisions (Note 55) were established for guarantees and warranty agreements where an impairment was determined, since usage is viewed as probable.

EUR ’000s 2011 2010

Fiduciary assets 104,816 106,642



Other loans and advances 2,190 2,190

Fiduciary liabilities 104,816 106,642

Liabilities to banks 3,041 4,843



EUR ’000s 2011 2010

Contingent liabilities 290,170 271,455

Liabilities from guarantees and warranty agreements 290,170 271,455

Other obligations 756,707 737,190

Irrevocable credit commitments 756,707 737,190

Total 1,046,877 1,008,646

133


(73) OTHER FINANCIAL OBLIGATIONS

Furthermore, there are financial obligations under operating leases and in relation to rental, usage, service and maintenance agree-ments (see note 70). Moreover, under the articles of the deposit insurance fund run by the Landesbanks and giro associations, SaarLB has undertaken to indemnify the Deutscher Sparkassen- und Giroverband e. V. (German Savings Bank

EUR ’000s 2011 2010

Additional funding obligations to security reserve of the Landesbanks 18,221 20,094

Additional obligations and additional co-liability for other shareholders 7,012 7,012

Commitments not yet called 2,315 2,315

Obligations to acquire shares 6,043 6,317

Association), as the owner of the deposit se-curity reserve of the Landesbanks and giro associations, against any losses that may be incurred due to measures taken in favour of banks in which SaarLB holds shares. As members of deposit protection schemes, the branches are also liable under the provisions governing those schemes.

(74) LIST OF SHAREHOLDINGS OF LANDES-BANK SAAR (EXCERPT)

The following table includes the list of share-holdings for the parent company financial statements (except where these are of minor importance), pursuant to Section 285 (11) of the German Commercial Code, and for the consolidated financial statements of SaarLB pursuant to Section 315a in conjunction with Section 313 (2) of the German Commercial Code.

134

Name Notes Share in %

Equity/fund assets

Total assets Total liabilities

Income Net income

EUR ’000s3) EUR ’000s EUR ’000s EUR ’000s EUR ’000s4)

Special funds included in the consoli-dated financial statements

LB Immo Invest Saar-Fonds, Hamburg 1) 100.00 42,429 43,582 1,153 1,906 993

SaarLB 1-Fonds, Munich 2) 100.00 98,908 99,082 174 -5,774 -5,995

SaarLB 2-Fonds, Munich 2) 100.00 185,118 185,142 24 2,615 2,116

SBLB-Fonds, Munich 2) 100.00 64,801 64,801 0 3,588 3,551

SBLB-2-Fonds, Munich 2) 100.00 63,654 63,654 0 -63 -63

SBLBHALBS-Fonds, Munich 2) 100.00 30,049 30,049 0 1,291 1,222

Subsidiaries included in the consolidated financial statements

SaarLB-Bankenbeteiligungsgesellschaft mbH, Saarbrücken

5) 100.00 15,577 16,945 1,368 1,368 1,368

Associated companies included in the consolidated financial statements

Gekoba-Gesellschaft für Gewerbe- und Kommunalbauten mbH, Saarbrücken 38.00 6,091 25,910 19,819 1,136 590

GSW-Saarländische Wohnungsbau-gesellschaft mbH, Saarbrücken 28.57 7,990 18,913 10,923 2,302 164

Subsidiaries not included in the consoli-dated financial statements

ELGESA Beteiligungsgesellschaft mbH i.L., Saarbrücken

5) 100.00 1,790 1,796 6 0 4

LBS Immobilien GmbH, Saarbrücken 5) 100.00 105 675 570 2,690 26

LBS Vertriebs GmbH, Saarbrücken 5) 100.00 25 197 172 374 140

Associated companies

TEGES Grundstücksvermietungsgesell-schaft mbH, Berlin 50.00 19 23 4 40 1

TEGES Grundstücksvermietungsgesell-schaft mbH & Co. Objekt Berlin KG, Berlin 47.01 -7,437 10,813 18,249 1,554 70

Gesellschaft für Wirtschaftsförderung Untere Saar mbH, Saarlouis 33.33 325 390 65 0 -42

Saarländische Kapitalbeteiligungsgesell-schaft mbH, Saarbrücken 33.33 6,136 64,733 58,597 4,628 274

Saarländische Wagnisfinanzierungsge-sellschaft mbH, Saarbrücken (direct equity investment)

30.43 6,551 11,572 5,021 785 167

135


Notes:1) Income relates to rental income less admin-

istrative expenses2) Income relates to interest income, com-

mission income and gains or losses on fair value measurement less interest expense and commission expense

3) Shareholders’ funds as defined in Section 266 (3a) in conjunction with Section 272 of the German Commercial Code

4) Net income/loss for the year as defined in Section 275 (2) No. 20 of the German Com-mercial Code

5) There is a profit transfer agreement with these companies

An interest of less than 20% with voting rights of more than 5% is held in Saarländi-sche Investitionskreditbank AG.

136

Franz Josef SchumannPresidentSaar Association of Savings Banks, Saarbrücken, Deputy Chairman

Dr. Winfried FreygangSegment Manager for Accounting, Taxes and Controlling at Bayerische Landesbank, Munich

Dr. Christoph HartmannMinister (in retirement), Saarbrücken

Thomas KleinBank employeeLandesbank Saar, Saarbrücken

Fred MetzkenChief Financial OfficerCEO of Dillinger Hüttenwerke and Saarstahl AG, Dillingen

Thomas RoßBank employeeLandesbank Saar, Saarbrücken

(75) ADMINISTRATIVE BODIES OF SAARLB

Board of Administration

Jan-Christian DreesenMember of the Board of Management of Bayerische Landesbank, Munich, Chairman

Manfred FichterBank employeeLandesbank Saar, Saarbrücken

Dr. Rudolf FuchsChairman of the Board of ManagementSparkasse Mainfranken Würzburg, Würzburg

Peter Jacoby MinisterMinistry for Finance, Saarbrücken

Marcus KramerMember of the Board of Management of Bayerische Landesbank, Munich

Susanne RiesBank employeeLandesbank Saar, Saarbrücken

Representative of the supervisory bodies:

Iris JungUndersecretaryMinistry for economics and science, Saarbrücken

137


Board of Management

Thomas Christian BuchbinderChairman of the Board of Management

Frank EloyMember of the Board of Management

Werner SeverinDeputy Chairman of the Board of Management

Jürgen MüschMember of the Board of Management(until 30 June 2011)

138

(76) RELATED PARTY DISCLOSURES

Companies and persons are deemed to be re-lated where one party directly or indirectly controls the other or can exercise significant influence on its operating and business deci-sions. Related parties of the SaarLB Group as of 31 December 2011 include:• BayernLB and its subsidiaries and joint ven-

ture companies• Saarland and those companies in which

Saarland holds a majority investment,• the Free State of Bavaria,• BayernLB Holding AG,• the subsidiaries and associates of SaarLB;• people occupying key positions as well as

close members of their families, and compa-nies controlled or significantly influenced by these people or their close family members or in which they hold a significant share of the voting rights; people in key positions are those with direct and indirect responsibility for planning, managing and monitoring the activities of SaarLB. This includes members of the Board of Management and Board of Administration of SaarLB and their close family members,

• the fund management company for pension plans for SaarLB employees, which are used after the end of the employment relation-ship.

Changes in related party discourse as com-pared to 31 December 2010 result from the change in IAS 24 (see the explanations in the chapter Explanations to the consolidated fi-nancial statements).The SaarLB Group has business dealings with related companies and persons. Transactions with such persons and companies fall within the normal course of business and are always on the same terms (including interest rates and collateral) as for comparable transactions conducted at the same time with third par-ties. These transactions did not have unusu-ally high risks of recovery or other unfavour-able characteristics.Details of the subsidiaries and associated companies in which SaarLB holds an interest can be found in the list of shareholdings.

139


EUR ’000s 31 Dec. 2011 31 Dec. 2010

Loans and advances to banks 1,000,142 925,311

BayernLB 902,244 796,176

Subsidiary and joint venture company of BayernLB2) 73,033 99,122

Companies in which Saarland holds a majority stake2) 24,865 30,013



Saarland 522,094 382,779


Consolidated associated companies 6,279 7,832

Associated companies not consolidated 51,616 53,298


BayernLB 20,882 26,201



BayernLB 573,369 396,750

Subsidiary and joint venture company of BayernLB2) - 1,500

Saarland 72,700 71,025

EUR ’000s 31 Dec. 2011 31 Dec. 2010


BayernLB 2,020,052 1,811,083




Saarland 3,210 2,334


Subsidiaries 2,090 1,124

Consolidated associated companies 110 92

Associated companies not consolidated 5,711 4,063


BayernLB 2,325,000 2,359,991


BayernLB3) 92,002 392,354

Subsidiary and joint venture company of BayernLB2) - -


BayernLB 55,158 51,629

Hybrid capital 44,842 53,484

BayernLB 44,842 48,371

Subsidiary and joint venture company of BayernLB2) - 5,113

Financial assets and liabilities as well as hybrid capital with respect to related parties1):

1) Amounts not incl. accrued interest.2) Closely affiliated companies since 1 January 2011.3) Includes EUR 16.4 million of negative fair values from financial derivatives (hedge accounting)

140

There are no business relationships with the Free State of Bavaria or BayernLB Holding AG.The comparable figures as of 31 December 2010 were added for related parties since 1 January 2011.

Amounts due from/to ZVK

EUR ’000s 31 Dec. 2011 31 Dec. 2010

Receivables - -

Liabilities 33,287 31,718



Amounts due from/to members of the Board of Management and the Board of Administra-tion of SaarLB

The total amount of loans granted to and de-posits made by the members of the Board of Management or the Board of Administration at SaarLB (including their immediate family members) breaks down as follows:

EUR ’000s 31 Dec. 2011 31 Dec. 2010

Receivables 24 47

Members of the Board of Management of SaarLB - -

Members of the Board of Administration of SaarLB 24 47

Liabilities 403 1,250

Members of the Board of Management of SaarLB 158 983


SaarLB received deposits of EUR 45,000 from close family members (2010: EUR 25,000).

141


Remuneration paid to members of the Board of Management and the Board of Administra-tion of SaarLB

The interest accrued on pension provisions amounted to EUR 1.1 million (2010: EUR 1.1 mil-lion) and is reported as an interest expense.

(77) AUDITORS’ FEES

External auditor’s fees reported as an expense in the year under review are broken down as follows:

EUR ’000s 2011 2010

Members of the Board of Management of SaarLB 2,166 1,937

Benefits due in the short term 1,655 1,657

Benefits due after the end of the employment relationship 511 280

Expenses for defined benefit plans 511 280


Benefits due in the short term for supervisory board activities 154 99

Benefits due in the short term for work performance1) 234 220

Former members of the Board of Management of SaarLB and their dependants 1,190 1,088

Pension provisions established for members of the Board of Management of SaarLB 6,156 7,610

Pension provisions established for former members of the Board of Management of SaarLB and their dependants

17,337 11,215

1) First-time disclosure

EUR ’000s 2011 2010

Audit 975 789

Other audit and valuation services 153 150

Tax consulting services - 15

Other services 437 101

Total 1,565 1,055

142

(78) EMPLOYEES

The average number of people employed dur-ing the year was:

The average number of people employed in associates consolidated at equity during the year was 47 (previous year: 37).

EUR ’000s 2011 2010

Average number of employees in the year 514 516

of which full time employees 418 422

of which part time employees 79 76

of which trainees 17 18

Female 235 236

Male 279 280

143


We affirm that to the best of our knowledge and in accordance with the applicable re-porting principles, the consolidated financial statements give a true and fair view of the net assets, financial position and results of opera-tions of the Group and the management re-port of the Group includes a fair review of the development and performance of the busi-ness and the position of the Group, together with a description of the principal opportuni-ties and risks associated with the expected development of the Group.

Saarbrücken, 13 April 2012Landesbank Saar

Board of Management

Responsibility statement by the Board of Management

Thomas Christian Buchbinder Werner Severin Frank Eloy

144

We have audited the consolidated financial statements, comprising the consolidated bal-ance sheet, the Group statement of compre-hensive income, the schedule of changes in equity, the cash flow statement, the Group notes to the consolidated financial state-ments and the Group management report of Landesbank Saar, Saarbrücken for the finan-cial year from 1 January to 31 December 2011. It is the responsibility of the Board of Man-agement of the company to draw up the con-solidated financial statements and the Group management report in accordance with IFRS as applicable in the EU, the extra legal require-ments applicable under Section 315a (1) of the German Commercial Code and the additional provisions of the articles of association. Our responsibility is to express an opinion on the consolidated financial statements and the management report, based on the audit we have conducted.

We carried out our audit of the consolidated financial statements in accordance with Sec-tion 317 of the German Commercial Code and German generally accepted standards for the audit of financial statements promulgated by the Institut der Wirtschaftsprüfer (IDW). These require that we plan and perform the audit in such a way that misstatements ma-terially affecting the presentation of the net assets, financial position and results of operations in the consolidated financial statements under the applicable accounting standards and in the Group management re-port are detected with reasonable assurance. Knowledge of the business activities and the economic and legal environment and expecta-tions as to possible misstatements are taken into account in setting the audit procedures. In the audit, the effectiveness of the internal accounting control system and the evidence supporting the disclosures in the consolidat-ed financial statements and Group manage-ment report are examined primarily on a test basis. The audit includes examining the annu-al financial statements of consolidated com-panies, setting the scope of consolidation,

assessing the accounting policies used, evalu-ating significant estimates made by the Board of Management and considering the overall presentation of the consolidated financial statements and the Group management re-port. We believe that our audit provides a rea-sonable basis for our opinion.

Our audit has not led to any reservations.

In our opinion based on the findings of our audit, the consolidated financial statements are in accordance with IFRS as applicable in the EU, the extra legal requirements applica-ble under Section 315a (1) of the German Com-mercial Code and the additional provisions of the articles of association and present a true and fair view of the net assets, financial posi-tion and results of operations of the Group. The Group management report is consistent with the consolidated financial statements and, taken as a whole, provides an accurate view of the state of the Group and accurately presents the risks and opportunities of future developments.


PricewaterhouseCoopersAktiengesellschaftWirtschaftsprüfungsgesellschaft

Burkhard Eckes ppa. Katja Rixecker Wirtschaftsprüfer Wirtschaftsprüferin(German Public Auditor) (German Public Auditor)

Independent Auditors’ Report

145


In the past year, the Board of Administration monitored the Board of Management’s con-ducting of business. The Board of Administra-tion and the Risk Committee have regularly received reports on the Bank’s performance and business situation as well as on impor-tant transactions and discussed them in de-tail with the Bank’s Board of Management. The Audit Committee addressed the audit of the financial statements and the internal con-trol processes of the bank and discussed them with the Board of Management. At the meet-ings of the Board of Administration, reports were regularly given on the meetings of the Risk Committee and the Audit Committee.

As part of confidential and close collabora-tion between the Board of Administration and the Board of Management, the meetings addressed the reduction of the Board of Man-agement from four to three members as of 1 July 2011, the divestitures of shares of Landes-banks in DekaBank, the full migration to the IT comprehensive bank solution OSPlus at FinanzInformatik effected in September 2011, the possible impact of the restructuring of WestLB on the bank and the consequences of Basel III and CRD IV for the equity plans of SaarLB. The Board of Administration and the Risk Committee have, to the extent provided by the articles of association, participated in the Bank’s business and passed the requisite resolutions.

At their meetings on 25 April 2012, the Bank’s corporate bodies discussed compliance with the company’s own corporate governance principles, to which SaarLB voluntarily bound itself, and recorded that there were no indica-tions of which they were aware that were in contradiction to compliance with these prin-ciples in the 2011 financial year.

The Board of Administration discussed with the Board of Management the management report, the annual financial statements, the

Group management report and the consoli-dated financial statements as of 31 December 2011 as well as the proposed appropriation of distributable earnings.

The annual financial statements and the man-agement report as well as the Group manage-ment report and the consolidated financial statements as of 31 December 2011 were au-dited by the auditors, PricewaterhouseCoop-ers AG Wirtschaftsprüfungsgesellschaft, and received an unqualified auditor’s opinion.

The Board of Administration has taken note of the audit findings and approved the annual financial statements in accordance with the German Commercial Code as of 31 December 2011, in which the company broke even, at its meeting on 25 April 2012. The IFRS consolidat-ed financial statements for the financial year that ended 31 December 2011 were approved by the Board of Administration. The Board of Management was granted discharge.


The Chairman of the Board of AdministrationJan-Christian DreesenMember of the Board of Management of Bayerische Landesbank

Report of the Board of Administration

146

MARKET 1

Frank Eloy

Corporate CustomersMichael Heß

∙ Corporate Customers Germany∙ Corporate Customers France - Branch of Landesbank Saar,

Metz - Centre d’affaires Entreprises,

Strasbourg∙ Foreign Trade∙ Payments

Real Estate and ProjectsManfred Thinnes

∙ Real Estate Germany∙ Real Estate France Roger Lang - Centre d’affaires Financement

Immobilier, Paris∙ Project Financing Daniel Koebnick∙ Branch Management

Central Sales Management

CORPORATE DEVELOPMENT/MARKET 2

Thomas Christian Buchbinder

Corporate DevelopmentDr. Matthias Böcker

∙ Communication and BoM Support

∙ Human Resources∙ Strategic Development∙ Legal Services

Savings Banks, Institutionals and High Net Worth IndividualsAndreas Hauck

∙ Savings Banks, Institutionals∙ High Net Worth Individuals∙ Savings Banks Relationship

Management∙ Interest and Currency

Management∙ Wealth Management Klaus Bingel

Treasury and Portfolio ManagementChristian Mathe

∙ Portfolio Management∙ Treasury

LBS MarketDirk Hoffmann

∙ Market and Sales∙ Service∙ LBS Immobilien GmbH

LBS Risk OfficeJörg Welter

∙ Bank Management∙ Risk Office

Internal AuditJörg Melde

MANAGEMENT / OPERATIONS

Werner Severin

Bank ManagementBernd Heublein

∙ Financing and Reporting∙ Controlling

Risk OfficeFrank-Oliver Groß

∙ Real Estate and Project Financing

∙ Portfolio Management: Real Estate

∙ SME Corporate Customers∙ Portfolio Management:

Financial Markets∙ Credit Consult∙ Area Coordination

ServicesBarbara Wagner

∙ IT∙ Organisation and Logistics∙ Performance Coordination∙ Customer and Accounts∙ Project and Process

Management

Compliance

Data Protection

Organisational chart

As of: 9 march 2012

147

CORPORATE REPORT 2011 | ORGANISATIONAL CHART & SHAREHOLDERS

As of: 30 January 2012

Shareholders

Bayerische Landesbank, Munich 49.9%

Saarland 35.2%

Sparkassenverband Saar, Saarbrücken 14.9%

Sparkassen-Finanzgruppe Saar

Aggregate total assets in bank businessEUR 35.7 billion

Staff 4,910

Aggregate premium volume in insurance business EUR 251.1 million

7 savings banks

Aggregate total assets EUR 15.9 billion Staff 3,814

Branches 264 Self-service branches 56 Advisory centres 42

Landesbank Saar

Total assets EUR 19.8 billion (IFRS) Staff 514

Landesbausparkasse Saar

Portfolio of contracts: 109,023 contracts

Savings contract total EUR 2.8 billion

SAARLAND Versicherungen

Staff 582 Premium volumes Non-life: EUR 109.6 million Life: EUR 141.5 million

Investments Feuerversicherung AG EUR 127.8 million Lebensversicherung AG EUR 1.1 billion

Sparkassenverband SaarAssociation members: 7 savings banks and their municipal owners, as well as Saarland and the Bayerische Landes-bank, owners of SaarLB.

149

CORPORATE REPORT 2011

149

Legal notice

Publisher Landesbank Saar Ursulinenstraße 2 66111 Saarbrücken

Editors Communication and BoM Support E-mail: [email protected] Design FBO Marketing-Kommunikation GmbH Heinrich-Barth-Straße 27 66115 Saarbrücken

Photos Uwe Bellhäuser, iStockphoto

Print repa druck Zum Gerlen 6 66131 Saarbrücken

address Landesbank Saar Ursulinenstraße 2 66111 Saarbrückenpo box 66104 Saarbrückenphone +49 681 383-01fax +49 681 383-1200internet www.saarlb.dee-mail [email protected]/swift SALADE55sort code 590 500 00

SaarLB France, Branch of Landesbank Saaraddress 2, place Raymond Mondon 57000 Metz France phone +33 387 6968-60fax +33 387 5708-91e-mail [email protected]

SaarLB France, Centre d’affaires Entreprisesaddress 9, rue du Maréchal Joffre 67000 Strasbourg France phone +33 388 3758-70fax +33 388 3693-78e-mail [email protected]

SaarLB France, Centre d’affaires Financement Immobilieraddress 203, rue du Faubourg Saint Honoré 75008 Paris Francephone +33 144 2114-60fax +33 144 2114-63e-mail [email protected]

address LBS Landesbausparkasse Saar Beethovenstraße 35-39 66111 Saarbrückenpo box Postfach 10 19 62 66019 Saarbrückenphone +49 681 383-290fax +49 681 383-2100internet www.lbs-saar.dee-mail [email protected]

Foresight - SaarLB · The Franco-German regional bank Die deutsch-französische Regionalbank

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