annual report 2003 - nrw.bank · 2003 nrw.bank annual report 2003 2003 2002 105,028 101,579 100,397...

Annual Report 2003

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2003

NR

W.B

AN

K

An

nu

al R

epor

t 20

03

2003 2002

105,028 101,579

100,397 94,052

49,152 43,212

4,919 6,715

6,224 6,198

356 306

11 8

73 78

88 69

199 164

– 1,746 97

– 1,770 86

25 63

1,796 0

0 21

32.5 32.0

862 760

€ millions

Total assets

Credit volume

Certificated liabilities

Equity Capital Pursuant to the German Commercial Code (HGB)

Liable capital in accordance with the German Banking Act (KWG)*

Net interest income

Net commission income

Personnel expenses

Operating expenses

Operating profit before risk provisions/result of evaluation

Operating profit after risk provisions/result of evaluation

Net income/Loss for the year

Allocation to state housing construction funds

Withdrawals from capital reserves

Profit

Principle I ratio in %*

Staff

Long-term rating

Short-term rating

Individual1)/ Financial Strength2)

Pfandbrief rating

Fitch Ratings

AAA

F1+

C/D1)

AAA

Moody’s

Aa2

P-1

D+2)

–

Standard & Poor’s

AA

A-1+

–*

AAA

Ratings

Key Figures

* not prepared by Standard & Poor’s Status: April 15, 2004

* before approval of the annual accounts

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Introducing NRW.BANK 2

Foreword of the Managing Board 4

Report of the Supervisory Board 8

New Perspectives for the State and Its People:NRW.BANK

Customised Economic Development for the SME Sector 12

Blueprint for Growth – Infrastructure Development 20

Social Responsibility in the Housing Market –Housing Promotion 24

Partnering with Local Authorities – Municipal Finance 28

Capital Market Expertise – Treasury 30

Steering a New Course

Planning and Shaping the Future – Internal Services 36

Performance and Responsibility – Staff Report 40

Annual Accounts 2003

Statement of Financial Condition of NRW.BANK 46

Balance Sheet 80

Statement of Income 84

Notes to the Annual Accounts 86

Glossary 111

Organisation Chart of NRW.BANK 118

Contents

Development Gets a New Name:NRW.BANK

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Annual Report 2003NRW.BANK – Well-Positioned for New Challenges

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IntroducingNRW.BANK

2 Introduction


Introduction 3

NRW.BANK is the development bank for the State of North Rhine-Westphalia.Established on August 1, 2002 as Landes-bank NRW, it supports its owners – theState of North Rhine-Westphalia (43.2%),the Savings Banks and Giro Associations ofthe Rhineland and Westphalia-Lippe (each16.7%) and the Regional Associations ofthe Rhineland and Westphalia-Lippe (each11.7%) – with regard to important structuraltasks. Operating as a competition-neutraldevelopment bank, NRW.BANK uses the fullrange of financial development products infour areas of competence – EconomicDevelopment, Infrastructure Development,Social Housing Promotion and MunicipalFinance.

NRW.BANK has a share capital (subscribedcapital) of EUR 500 million (December 31,2003) and holds a full bank licence. It has the legal status of an institution under public law. Its statutory governingbodies are the Guarantors’ Meeting, the Supervisory Board and the ManagingBoard. It employs approximately 860 peopleat its registered offices in Düsseldorf andMünster.

As a development bank, NRW.BANK willcontinue to benefit from institutionalliability and guarantor liability. Under the“Act on the Reorganisation of LandesbankNordrhein-Westfalen into the DevelopmentBank of the State of North Rhine-Westphaliaand on the Amendment of Other Laws”, theBank’s guarantors have also granted anexplicit guarantee.

NRW.BANK is a regular member of the Association of Public-Sector Banks(VÖB) and an extraordinary member of the German Savings Banks and GiroAssociation (DSGV).


Foreword of the Managing Board

The Bank’s biggest and most important goal since its foundation on August 1, 2002was reached on March 31, 2004. This wasthe day when the Act on the Reorganisationof Landesbank Nordrhein-Westfalen cameinto force. It has set the course for ourBank’s future as the development bank for the State of North Rhine-Westphalia. The future positioning of the Bank is alsoreflected in its new name. Landesbank NRWhas become NRW.BANK.

Together with our owners and in closecoordination with the European Commission,we began to work towards this goal at anearly stage. Now we will have to expand

The Managing Board of NRW.BANK(from left):Ernst GerlachDr. Bernd LüthjeDr. Ulrich Schröder

4 Foreword of the Managing Board



NRW.BANK further – into the centraldevelopment platform for North Rhine-Westphalia.

Adopted in a broad political consensus byall parties in the North Rhine-WestphalianParliament, the “Act on the Reorganisationof Landesbank Nordrhein-Westfalen intothe Development Bank of the State of NorthRhine-Westphalia and on the Amendment ofOther Laws” implements the framework forlegally independent development bankspermissible under EU law. NRW.BANK hasbeen granted the status of a competition-neutral development bank building on theso-called “house bank principle”. In this

capacity, the Bank will continue to benefitfrom institutional liability and guarantorliability in accordance with the so-called“Verständigung II” reached between theFederal Government and the EuropeanCommission on March 1, 2002.

Under the Reorganisation Act, the ownershave additionally granted an explicitguarantee. As a consequence of this legallyimposed joint and several liability, issues by Landesbank NRW have a solvencyweighting of “zero”. This means that bankswhich provide NRW.BANK with debt capitalno longer have to back these claims withliable capital.


the European Commission’s demand toabolish the state guarantee system for allGermany’s commercial public-law banks.

The European Commission then opened a second route for non-commerciallyoperating development banks namely the above-mentioned “Verständigung II” of March 1, 2002.

This route has led to a development bank that can take advantage of idealfunding conditions and use its know-howand capital to the benefit of the recipients of development funds in North Rhine-Westphalia.

We are aiming to contribute to North Rhine-Westphalia’s transformation into a modern service and knowledge society and strengthen local companies’ ability toinnovate. Our development activities focuson small and medium-sized enterprises.Today NRW.BANK is an indispensableplayer in the economic development sector, as the Bank, in its capacity as statedevelopment institution and state bank,handles the state programmes for all bankgroups. In the publicly-assisted housingconstruction sector, the Bank’s Wfa unit(Wohnungsbauförderungsanstalt (Wfa)) is the only direct provider of developmentfunds in North Rhine-Westphalia. Wfa isinvolved in some 22 per cent of all homesbuilt in North Rhine-Westphalia.

We will continue to expand this market andthe leadership which NRW.BANK alreadyenjoys in many areas.

NRW.BANK thus benefits from optimumconditions on the funding side, which theBank will use for an important goal – toensure effective and efficient economic and structural development in North Rhine-Westphalia.

The new name, NRW.BANK, highlights thedifference to the commercially operatingLandesbanks. Established under the nameof Landesbank Nordrhein-Westfalen onAugust 1, 2002, the Bank was establishedfrom the split-up of the former West-deutsche Landesbank Girozentrale into two legally independent banks. This split-upled to a separation between the commercialoperations (performed by WestLB AG under private law) and the public missionactivities (performed by Landesbank NRWunder public law). In the context of theparent-subsidiary model, WestLB AGbecame a wholly owned subsidiary ofLandesbank NRW.

Due to the timing of the developmentprocess that led to the parent-subsidiarystructure, both Landesbank NRW andWestLB AG were initially subject to the so-called “Verständigung I”, although, at this time, the business activities of Landes-bank NRW did not compete directly withthose of other banks. “Verständigung I” wasreached between the Federal Governmentand the European Commission on July 17,2001 and governs the staggered abolition ofinstitutional liability and guarantor liabilityfor Germany’s commercially operatingpublic-law banks. The reason for this was

6 Foreword of the Managing Board



Dr. Bernd Lüthje Chairman of the Managing Board

Ernst Gerlach Dr. Ulrich Schröder

We will do this in our four areas ofcompetence:

Economic Development

Infrastructure Development

Social Housing Promotion

Municipal Finance

We have also aligned our organisationalstructure with the new framework in whichwe operate. INVESTITIONS-BANK NRW (IB)has been integrated into the EconomicDevelopment and Infrastructure Financeunits. These units are responsible forproduct development and productmanagement with customers, manage thedevelopment programmes and provideadvice to their clients, mainly the stateministries. The economic developmentactivities focus on the individual companies,while the Infrastructure Finance unitpromotes structures in which companiesparticipate such as the environment, education and social affairs.

North Rhine-Westphalia’s local authoritiesare offered favourable financing solutions.

These units share the same umbrella, the Development Consulting unit, whichserves as our bridge into the market. Itmanages the relationships with the housebanks and acts as a compact sales unit – for all financial institutions, across the full product range and all developmentprogrammes.

Efficient internal structures, ideal external conditions – NRW.BANK offerscost-efficient management of developmentprogrammes and the competent development of new products meetingtoday’s market requirements.

An important goal has been achieved. We would like to thank everybody whosecommitment and team spirit contributed to this achievement – especially ouremployees.

New goals lie ahead. We look forward toworking towards them together with you.


8 Report of the Supervisory Board

Report of the Supervisory Board


Report of the Supervisory Board 9

In accordance with its legal and statutorytasks, the Supervisory Board held fivemeetings in fiscal 2003. The Committeescomposed of the members of theSupervisory Board – which werecomplemented by a new BuildingCommittee – held thirteen meetings.

The Supervisory Board received regularreports about the situation of the companyand major business transactions. Transactions requiring the SupervisoryBoard’s approval were discussed andagreed by the latter. Important businesspolicy matters were addressed in detail.

PwC Deutsche Revision Wirtschafts-prüfungsgesellschaft carried out the auditof the financial statements for 2003 and the statement of financial condition ofLandesbank NRW. The financial statementsreceived the auditor’s unqualified auditopinion. The Supervisory Board and theAudit Committee formed from among itsmembers discussed in detail the reports ofthe external auditors on the results of theiraudit. Following the final result of the audit,they raised no objections.

The Supervisory Board approved thefinancial statements of Landesbank NRWprepared by the Managing Board at itsmeeting on May 10, 2004 and proposes thatthe Guarantors’ Meeting approve thefinancial statements for fiscal year 2003.

The Supervisory Board has taken notice ofthe consolidated financial statements andthe Group Statement of Financial Conditionof Landesbank NRW.

Düsseldorf/Münster,May 10, 2004

Harald SchartauChairman of the Supervisory Board


New Perspectives for the State and Its People: NRW.BANK


12 Economic Development

Customised Economic Developmentfor the SME Sector


13Economic Development

NRW.BANK supports the North Rhine-Westphalian economy in many ways. Thefocus of the Bank’s activities is on medium-sized companies, as they are of primaryimportance for the federal state’s economicstructure. However, access to equity capitalhas increasingly emerged as a limitingfactor for medium-sized companies’ growth.This is where NRW.BANK comes in. TheBank’s Economic Development and EquityInvestment units are ideally placed toleverage the full range of development andequity financing tools.

INVESTITIONS-BANK NRWIn the context of the reorganisation, theformer INVESTITIONS-BANK NRW (IB) was integrated into NRW.BANK’s newEconomic Development and InfrastructureFinance units with effect from April 1, 2004.NRW.BANK aims to make optimum use of public financing aid for North Rhine-Westphalia’s economy and environment andto refine them in accordance with changingrequirements. The Bank’s Economic Development unit administers North Rhine-Westphalia’s major developmentprogrammes, most of which are channelledthrough local banks. These programmesinclude Regional Economic Development,Business Start-up and Growth Financingand the Promotion of EnvironmentalProtection. The Economic Development unitalso pools the federal programmes of theKfW banking group (KfW) for the savingsbanks in North Rhine-Westphalia andBrandenburg. The unit also performsmanagement and consulting tasks forindividual projects on behalf of the State of North Rhine-Westphalia.

Development Business on the IncreaseAt € 3.1 billion, new business in the unitsrepresenting the former IB was up 9% onthe previous year despite the unfavourableeconomic environment. At just under48,000 (+25%), the number of new creditcommitments reached the 1999 recordlevel. € 2.9 billion were accounted for bylow-interest loans and € 242 million bysubsidies. At € 17.6 billion, the loanportfolio remained steady at the previousyear’s level. Of the total, € 15.7 billion wereaccounted for by own loans and € 1.9 billionby trustee loans.

Changing Development SceneTypical development instruments includesubsidies, i.e. non-repayable grants andinterest-subsidised loans. Subsidies arecharacterised by a particularly highdevelopment intensity and are thereforelinked to special development conditions.They are primarily used for regionaleconomic development, which focuses onstructurally weak regions in North Rhine-Westphalia.

With public budget funds becomingincreasingly scarce, extensive developmentusing subsidies is gradually becomingimpossible. Loans are therefore gaining inimportance. Recent developments in themarkets have shown, however, thattraditional loan finance is no longersufficient, especially for medium-sizedcompanies.


Promoting sustainability

Lightweight thirst-quenchers– Römerwall products such asRheinfels Quelle, Römerwalland Burgwallbronn mineralwaters and Sinalco lemonadeare bottled in environmentallyfriendly PET bottles. Thecompany’s production andbottling facilities were nolonger sufficient to handle the booming sales. To finance the construction of a new production hall and warehouse as well as a newbottling plant, the companyobtained a grant under theRegional Business PromotionProgramme as well as adevelopment loan from the state’s IW environmentalprogramme. This investmentwill help the Hövelmann company, which will celebrateits 100th anniversary togetherwith the Sinalco brand in2005, to expand its position in the market, while at thesame time benefiting contractors and suppliers inthe region.


other debt capital. Ultimately, the subordinated loan also has a positive effect on the rating, as it strengthens the company’s economic equity.

Improving SME Access to Loans in North Rhine-WestphaliaOn behalf of the North Rhine-WestphalianFinance Ministry, NRW.BANK, togetherwith the KfW banking group and WestLBAG, has examined banks’ use of assetbacked securities (ABS). For this purpose, a product enabling active loan portfoliomanagement has been devised. The reduction of existing industry concentrationsand risk clusters within a bank’s loanportfolio creates new lending possibilities.Apart from general questions on loantrading and securitisation, the marketanalysis, which covered 23 banks, alsoexamined the feasibility aspect. Overallresponse to the product idea was positive.Loan trading and securitisation were ofparticular importance under risk aspects.Together with KfW and WestLB AG,NRW.BANK will develop an implementationstrategy by next year.

Well-Founded Development AdviceIn addition to processing developmentprogrammes, NRW.BANK offers well-founded development advice. This includes special customer events, mailingcampaigns, in-house training, seminars and personal advice. The Bank’s consultantshave excellent contacts to local authorities,banks, chambers of industry and commerce,chambers of handicraft and economicdevelopment institutions. NRW.BANK’sdevelopment advice builds an important

This must be seen against the backgroundof the historically very low equity ratios ofGermany’s small and medium-sizedcompanies. These disadvantages have beenaggravated by the weak economy and thefundamental changes in the financingenvironment.

For this reason, financing solutions comprising equity elements have beengaining in importance. Loans which includea release from liability are particularly interesting in this context. The unique factor about this type of financing is that the recipient of the development funds does not need to provide any collateral and thatbanks value these loans like equity capital.

NRW.BANK believes that such releases from liability provide a fast and effectivecontribution to improved SME funding.Together with the North Rhine-WestphalianMinistry of Labour and Economics (MWA),NRW.BANK has therefore developedpromotion products for the SME sectorwhich have a positive effect on companies’equity structures. Under the North Rhine-Westphalian “Business Start-up and Growth Financing” programme and the”Objective 2 Programme NRW (2000–2006)”of NRW and the EU, subordinated long-term bullet loans are made available atattractive terms. The special feature of theseloans is that the borrower’s relationshipbank is fully released from liability. Most ofthe credit risk is borne by the State of NorthRhine-Westphalia. Due to the subordinationand the long term, the loan qualifies asequity. The financing scope is enlarged andexisting collateral can be used to secure



bridge between the decision-makers ofdevelopment programmes and therecipients of the development funds.

Direct advice provided to new businessstart-ups and existing companies increasedsharply in 2003. Demand for advice oncomplex investment projects remained high.

Employee Participation Project OfficeThe participation of employees asshareholders or partners is another element in the Bank’s range of services for medium-sized companies. Back inSeptember 2001, an internal project officeentitled “Employee Participation” was setup on behalf of the Ministry of Labour andEconomics of North Rhine-Westphalia aspart of the latter’s “Income of the Future”initiative. Co-financed by the EuropeanSocial Fund, the project office seeks tocreate awareness of employee participationmodels by way of information events,counselling sessions and coordinationservices. These efforts are designed toidentify potential solutions and to removeobstacles to implementation.

The project office has since presented theinitiative at some 50 events, most of which were organised in conjunction withchambers of trade and industry and industryassociations. Some 1,500 interested parties– mostly representing medium-sizedcompanies from NRW – have soughtinformation from the project office.Approximately 140 companies have takenup the offer of a free initial counsellingsession. The initiative has already resultedin 15 companies instituting an employeeparticipation scheme.

The first phase of the project was concluded at year-end 2003. Interest inemployee participation schemes on the part of medium-sized companies rosesignificantly in the two preceding years. At the beginning of 2004, the Ministry of Labour and Economics instructedNRW.BANK to continue this activity foranother two years. Amongst other things,this project will focus on the question ofhow employee participation schemes canhelp solve the (equity) financing problemsencountered by medium-sized companies.

A spring 2003 survey conducted by theproject office identified substantial potential in this regard; the 200 or morecompanies which had already implementedan employee participation scheme werefound to have an above-average equitycapital ratio. This shows that appropriatelydesigned employee participation schemescan make a significant contribution tocompany funding.


While other federal states such as Bavaria,Baden-Württemberg and the Saarland havealso been promoting employee participationschemes, no other federal state has offeredmedium-sized companies such acomprehensive and effective range ofservices as North Rhine-Westphalia.

Kapitalbeteiligungsgesellschaft NRWOn instruction by the state government,NRW.BANK raised its interest in Kapitalbe-teiligungsgesellschaft für die mittelstän-dische Wirtschaft in Nordrhein-WestfalenmbH (KBG) to 77%. The purpose of thiscompany is to help ease medium-sizedcompanies’ equity capital problems.NRW.BANK’s increased interest will enableKBG to expand its field of activity and toprovide medium-sized companies with up to € 1 million in equity capital.

Environmental PromotionEnvironmental promotion is an importantelement in the state’s development andpromotion activities. Handling environ-

mental promotion on behalf of the stategovernment, NRW.BANK is committed to the principle of sustainability. Under the Ecological and Sustainable WaterManagement Initiative, municipal andprivate-sector water protection measuresare supported by way of loans carryingattractive interest rates. Subsidies areavailable for innovative private-sectorprojects. On the municipal side, eligibleprojects include sewage modernisation,new construction and conversions, theexpansion or improvement of sewagetreatment facilities, cost-efficient provisionof sewage systems as well as rain watercollection facilities. The programme isfunded from the sewage charge levied by the state environment ministry. Thestate’s interest subsidies are combined with refinancing funds from KfW to form so-called liquidity pools supporting loanswith long maturities and very favourableinterest rates. As a special incentive, theState of North Rhine-Westphalia offersfurther improved lending terms formunicipalities which are willing to bringforward planned investments orimprovements.


Promoting growth

When demand grows, it istime to create new jobs andtap into new sources ofrevenues by way of swiftinvestment. This approachwas taken in 2003 byCologne-based Dr. Velte GolfGmbH & Co KG. The companyraised a subordinated loanunder the state’s “Start-upand Growth Financing”programme to add a club-house and restaurant to itsgolf course. The company’srelationship bank was fullyreleased from liability.



Equity InvestmentsThe Equity Investments unit develops equity capital solutions for all phases of a company’s life-cycle. Depending on a company’s individual needs, availablesolutions include equity investments,mezzanine financing as well as strategicadvice and support in matters related toequity capital. NRW.BANK’s services in thisregard focus on established medium-sizedcompanies as well as on young companieswhich are innovative and growth-oriented.Working in partnership with the state,investee companies, investment companies,venture capital companies and financialinstitutions in North Rhine-Westphalia,NRW.BANK seeks to devise equity capitalsolutions which integrate these partners as co-investors. The overriding goal is toactivate and further develop the equitycapital market in the state.

Complementing the services already onoffer from other sources in North Rhine-Westphalia, the Bank’s expertise andproducts help close gaps in this form ofcompany funding, which continues to gainin importance.

Mittelstandsfonds NRWOn behalf of the State of North Rhine-Westphalia, NRW.BANK is currentlydevising the “Mittelstandsfonds NRW”, a fund designed to support medium-sizedcompanies mainly by way of mezzaninefinancing in the range between € 1 millionand € 7 million. The target group is mainlycomprised of established medium-sizedcompanies which seek to optimally exploittheir growth potential. The fund is plannedto be launched in the second half of 2004.

The Equity Capital Market in NRWWorking in conjunction with the Centre for European Economic Research (ZEW),NRW.BANK has prepared a comprehensivestudy on the North Rhine-Westphalianequity capital market. This study providesthe first-ever presentation of the demandand supply structures in the North Rhine-Westphalian equity capital market. Withregard to venture capital, the study notesthat the investment volumes offered inindividual cases remain clearly below thevolumes sought by the investee companies.The lack of suitable syndication conduitswas identified as an additional obstacle toventure capital funding.



Based in Dorsten, InjoyPrisma Sports Freizeit-anlagen GmbH expanded its gym and leisure centrethrough the addition of a500 square-metre wellnessarea. Given that Dorsten ispart of NRW’s designated“Ziel 2” developmentregion, the project waseligible for funding underthe “Objective 2 Programme

NRW (2000–2006)”. The loanstructure was particularlyadvantageous in that a stateguarantee fully released thelocal relationship bank fromliability.

Promoting well-being


Equity Interests Held on Behalf of the StateNRW.BANK currently holds 26 interests on behalf of the State of North Rhine-Westphalia. Valued at approximately € 150million, these interests are managed with a view to maintaining and enhancing thevalue of the portfolio.

OutlookGoing forward, NRW.BANK will work withthe State of North Rhine-Westphalia tocomplement, expand and improve the range of development and promotionservices particularly for small and medium-sized companies, focusing in particular on such equity-enhancing instruments as subordinated loans, participation capitaland instruments releasing borrowers’relationship banks from liability. Theportfolio of equity finance products will also be expanded. NRW.BANK aims tomake its range of financing services formedium-sized companies more transparent,more well-known and more accessible.

19

The coming into force of the Basle II regulations may result in a further reductionin equity capital available to medium-sizedcompanies. Given that these rules will forcebanks to align their lending policies withborrowers’ individual risk profiles, theircoming into force will lead to increaseddemand for equity capital on the part ofmedium-sized companies. The results of the study provide NRW.BANK with a soundbasis for the further development, refinement and deployment of its equityfinancing products and services.

AdviceNRW.BANK offers comprehensive advice on all issues related to equity financing for medium-sized companies, innovativegrowth companies, the State of NorthRhine-Westphalia and municipal companies.In its first year of business, NRW.BANKadvised and supported a number ofcompanies at different stages of theirdevelopment. These advisory activitiesfocused on the preparation and review ofbusiness plans, crisis support, managementcoaching and plausibility checks of start-upplans.



20 Infrastructure Development

Through its Infrastructure Promotion andEquity Investments activities, NRW.BANKpromotes and finances investments in North Rhine-Westphalia’s infrastructure,including streets, canals, other traffic andtransportation structures, energy and watersupply, educational facilities, hospitals, IT and telecommunication projects. Theseactivities are conducted in partnership with local authorities as well as with stategovernment agencies, for example in the case of privatisations and the financingof structural projects in North Rhine-West-phalia. NRW.BANK prepares economicfeasibility studies which take into accountall available state promotion and develop-ment programmes. The Bank then developsequity and debt finance solutions based onthese studies. NRW.BANK is unique inNorth Rhine-Westphalia in that it can offerall requisite services and products from asingle source.

Equity and Debt Capital Solutions forStructural ProjectsOur Infrastructure Promotion and EquityInvestments units work together with, oralongside, other financial institutions inproviding and structuring debt or equity-based finance for structural developmentprojects.

Debt-based products include classicalfinancing instruments such as forfaiting,project finance or structured corporatefinance. One focus is on supporting publicprivate partnership (PPP) models in theconstruction and civil engineering sectors.

With regard to equity-based finance,NRW.BANK offers financing solutionsaligned with the respective structures of theinfrastructure projects as well as advice onissues related to privatisation and PPPmodels. The latter have steadily gained inimportance.

Trend towards Public Private PartnershipModelsA modern, well-functioning infrastructure is a vital prerequisite for the economicsuccess of a region. The coming decadeswill see a continued need for substantialinvestment in Germany’s infrastructure.

Blueprint for Growth –Infrastructure Development


Infrastructure Development 21

This expectation is borne out by a recentstudy by the Deutsches Institut für Urba-nistik, according to which local authoritieswill have to invest approximately € 686billion by the year 2009. In North Rhine-Westphalia, too, infrastructure investmenthelps secure the future of the economy.

However, strained public budgets haveincreasingly become a limiting factor toinfrastructure investment. This situationcalls for innovative ways of procuring funds through intelligent financingsolutions which are helpful in mastering the challenges that lie ahead.

In recent years, the federal government and its counterparts at state level haveincreasingly shown interest in alternativefinancing models involving the privatesector. Public private partnership modelshave emerged as a possible approach totaking some of the strain off public-sectorbudgets.

Under a PPP model, specific servicespreviously provided by the public sector are transferred to the private sector, whichassumes responsibility both for the initialconstruction and the future operation of a public asset. Under such a model, theprivate-sector operator is responsible for the construction, the financing and the operation within the framework ofpreviously agreed targets and profit levels.

For obvious reasons, the public sectorexpects a PPP model to result in lower costs compared to a budget-financedproject. Accordingly, the cost advantagesachieved through the private sectoroperator’s more efficient project planningand implementation must not be absorbedby high financing costs. It follows thatsuccessful PPP models require a balanceddistribution of risks between both parties.

The State of North Rhine-Westphalia hasinstalled a task force for the development ofPPP models. Attached to the state ministryof finance, this task force is developing aPPP strategy for North Rhine-Westphalia.The task force pools PPP expertise, advisespublic-sector authorities interested indeveloping such innovative business modelsand identifies suitable pilot projects.

Promoting innovation

Space for ideas – the BioMedizinZentrumDortmund(BMZ) offers start-ups andgrowth companies thepossibility to rent lab and lab equipment so that theycan contribute to economicprogress in North Rhine-Westphalia. Located in the vicinity of Max-Planck-Institut für MolekularePhysiologie, the centre isdesigned to accelerate thetransfer of R&D results in the fields of biotechnologyand micro texture technologyto the commercial sector. This has created a substantialbasis for the development of advanced new technologiesand new products in Dortmund. The BMZ received a grant under the Regional InfrastructureProgramme.


Advice and FinanceNRW.BANK will gladly become involved at the very early stages of a project, offeringcomprehensive advice on general strategy,on managing the bidding process and onoptimising the structure of the projectcontract. NRW.BANK seeks to build bridgesbetween the public sector and the privatesector by ensuring the best possibledistribution of risks between the two sides.

At the same time, NRW.BANK supports thestate in all PPP-related issues and isinstrumental in drafting guidelines designedto balance the public and private interests.In doing so, NRW.BANK contributestowards North Rhine-Westphalia’s goal ofbecoming the leading German state interms of PPP methodology and application.

NRW.BANK also partners with state andlocal government when it comes toimplementing privatisation programmes.Government agencies in North Rhine-Westphalia can avail themselves of theBank’s comprehensive financing expertise.

22 Infrastructure Development

Promoting infrastructure

200 acres of land at the heartof Europe - the former site ofthe Krupp-Hoesch iron worksin Duisburg-Rheinhausen is being converted into anestate for European logisticscompanies. A substantialsubsidy was funded fromstate, federal and EU promotion funding sourceswithin the Regional Infrastructure Programme,which also allows for the promotion of such large-scale projects.


Infrastructure Development 23

“Regional Business Promotion”The State of North Rhine-Westphalia’s“Regional Business Promotion” programmeis administered by NRW.BANK’sInfrastructure Financing unit. The purposeof this programme is to provide investmentgrants for infrastructure measures ineligible regions of North Rhine-Westphalia.In 2003, the former INVESTITIONS-BANKNRW committed € 129 million in funds to local authorities and their umbrellaorganisations as well as to non-profitentities. Many of these grants went towards major projects, including atechnology centre in Westphalia whichreceived a grant for the construction of a biomedical centre designed to facilitate the foundation of biomedical start-up companies.

OutlookThe coming years will see NRW.BANKstructure an increasing number of PPPtransactions in North-Rhine Westphalia.The PPP task force attached to the NorthRhine-Westphalian Finance Ministry hasalready identified several pilot projectswhich are to be implemented successively.These include the PPP-based constructionand operation of a correctional centre aswell as a number of municipal projects suchas the refurbishment of schools andadministrative buildings.


24 Housing Promotion

NRW.BANK ’s Wohnungsbauförderungs-anstalt (Wfa) unit is a key instrument ofNorth Rhine-Westphalia’s housing policy.The objective of social housing promotion is to provide low-interest loans enablinglow-income households to become home-owners and to ensure an appropriate

Social Responsibility in the Housing Market – Housing Promotion


Housing Promotion 25

housing supply to this section of the population. Acting on behalf of the stategovernment, Wfa administers the publicpromotion programmes for the housingsector. This includes the disbursement and management of loans, subsidies andguarantees. In addition, Wfa preparesregular reports on current developments in the North Rhine-Westphalian housingmarkets. These reports are based on Wfa’sconstant monitoring of these markets.

Administration of Promotion ProgrammesIn 2003, promotion funds were committedto new construction projects involving atotal of 15,057 new residential units as wellas to investments in existing housing stockinvolving 1,576 flats. While the record levelof the past year was not quite matched, thenumber of newly constructed residentialunits was 12% higher than originallyplanned.

The promotion of owner-occupied housing was particularly successful, risingto 10,937 units, i.e. by 22% compared to the previous year. It is worth noting thatnew construction and first-time purchasesof owner-occupied housing rose by 15% to8,113 units. This special trend was drivenabove all by the public debate surroundingthe scaling down or phasing out of thehome ownership subsidy, resulting in manygrant recipients bringing their propertypurchases forward in order to remaineligible for the more favourable 2003subsidy terms.

The promotion of purchases of existing residences also showed a significant upwardtrend, with the number of residencesinvolved rising to 2,824, up 48% comparedto the previous year. This trend is mainlythe result of the coming into force of theGerman Housing Promotion Act (WoFG) in 2002 and the resulting state-levelregulations adopted by North Rhine-West-phalia, which eliminated the distinctionpreviously made between purchases ofexisting residential property and purchases/construction of new residential property.

In contrast, promotion commitments todevelopers of rented flats and housingassociations declined by 38% to 3,521,while improvement and refurbishingactivities were down 23% to 1,576 units.

All told, more than € 1 billion in funds werecommitted under the various promotionprogrammes, which was only 2.1% below the previous year’s level. The totalinvestment volume triggered by thesepromotion funds amounts to approximately€ 2.9 billion.

Promoting quality of life

A sense of togetherness –families and single-parenthouseholds, singles andpensioners all live together inthe multi-generational housein downtown Hückelhoven.Architektur Galerie Greven, a local firm of architects,created 116 residential unitsin three wings enclosing aninterior yard. The residentialunits are designed to accommodate tenants of allages. The green interior yardserves both as a children’splayground and as acommunal meeting place.


26 Housing Promotion

2003 also saw the launch of a trial projectentitled “Regionale Wohnungsmarktbe-obachtung östliches Ruhrgebiet”(“Monitoring of the Housing Market in theEastern Ruhr”). This project aims to providea clearer view of the ongoing convergencebetween the individual municipalities in theEastern Ruhr region and their implicationsfor the housing market. Benefiting fromWfa’s organisational support and expertise,the 20 municipalities are expected topublish their first regional housing marketreport in autumn 2004.

At year-end 2003, five new members of the “Initiativkreis Kommunale Wohnungs-marktbeobachtung” presented their firstlocal housing market monitoring reports.This presentation was preceded by a year-long phase during which the fivemunicipalities benefited from expertsupport provided by Wfa.

Advice and ServicesBeing the centre of competence for theNorth Rhine-Westphalian housing market,Wfa is ideally placed to provide a widerange of expert services. Wfa advises theMinistry of Urban Development andHousing, Culture and Sport on the development and design of promotion tasks and processes, while at the same time organising seminars and workshops

Development of State Housing AssetsPromotion funds in excess of € 1.1 billionwere disbursed under the 2003 programmesand the previous years’ programmes. At thesame time, Wfa received € 1.1 billion ininterest payments, principal repaymentsand administrative cost contributions. Atyear-end, Wfa’s portfolio comprised justunder 400,000 loan accounts representing atotal loan volume of € 24,538 million, which was € 66 million below the level at year-end2002. The value of the state housing assetsrose by 2% to € 17,969 million. The balance sheet total remained almost steadyat € 21.7 billion.

Monitoring the Housing MarketFor several years Wfa has successfullymonitored the housing market both at thestate level and at the municipal level. Inaddition to the state-wide report, Wfa thisyear presented in-depth analyses of threeselected regions, namely Paderborn, theEastern Ruhr and Düsseldorf and the LowerRhine. The results of these sample studiesrevealed a number of significant differencesboth between and within these regions. The study thus highlighted the need for adifferentiated view to be taken of individualregions and municipalities when it comes to drafting housing policy and takinginvestment decisions for the North Rhine-Westphalian housing market.

Promoting self-determination

Barrier-free living – thisnewly-built residence inWetter comprises 10 completely barrier-free flatswhich allow pensioners to live self-determined liveswhile benefiting from communal living at the sametime. Communal spaces aswell as underground parkingare also provided. Planned bythe architect Ralf Hippenstiel,the residence was built byWohnstättengenossenschaftWetter eG.


Housing Promotion 27

eligibility for an owner-occupied housinggrant and even obtain a first (non-committal) indication of the likely level of funding available to them.

OutlookThe 2004 housing promotion programmewill be funded with approximately € 1billion, i.e. on par with the previous year’slevel. The changing patterns of demand as well as the different developmentsbetween regions may lead to shifts betweenthe funding segments (rented vs. owner-occupied, newly-built vs. existing stock). Inresponse to the demographic development,an additional funding option has beencreated to allow for the promotion of newforms of living for the elderly as well as forpeople requiring long-term care.

for the government agencies and financialinstitutions in charge of funding approval.Extensive advice is provided on a widerange of housing promotion-related issues.Within the framework of the municipalhousing market monitoring, municipalitiesare supported in the development andimplementation of their local monitoringresources and methodologies.

Wfa regularly publishes literature oncurrent trends in the North Rhine-West-phalian housing markets as well as in thefunded and rent-controlled housing stock.

In addition to these traditional servicechannels, Wfa has developed a web-based“Interactive Housing Promotion Advisor”.Prospective homebuyers can go toNRW.BANK’s website to check their


Partnering with Local Authorities – Municipal Finance

NRW.BANK’s remit includes supporting the funding and debt issuance efforts of themunicipalities in North Rhine-Westphalia.This task is handled by the Bank’s CapitalMarkets unit.

An Important Player in the MunicipalFinance MarketThe Bank already had a strong presence in the area of state and municipal finance in 2003, i.e. one year prior to its foundationas a development institution. Accounting forapproximately € 35 billion or roughly onethird of total assets, German state andmunicipal loans represented a substantialfield of business for the Bank. Including theindirect municipal finance activities handledthrough the local savings banks, this figureeven rises to € 45 billion.

2003 also saw NRW.BANK establish itself as an important player in direct municipalfinance. As a result, significant parts of theinterest rate adjustments were held withinthe porfolio during the course of the year.At the same time, direct loans extended toGerman municipalities rose to a volume of € 11 billion.

NRW.BANK’s share of the German municipal finance market continued toexpand as the year progressed, benefitingfrom cooperation with banks, savings banksand other intermediaries as well as fromNRW.BANK’s presence on “ekommunen”, a web-based platform.

28 Municipal Finance

Promoting local improvements

NRW.BANK supports theEmscher and Lippe rivermanagement associations inthe completion of theirmission, which includessewage treatment, floodprotection and rivermaintenance. In 2003 loansamounting to € 106 millionwere raised to fund themodernisation of sewageplants. This way NRW.BANKmade a significant contribution to keeping the state’s inland waterwaysclean and restoring theirnatural beauty. Theseactivities also help to raisethe recreational value of the tributaries to theEmscher.


29Municipal Finance

Innovative SolutionsIntegration with the Capital Markets unit allows for a fast, market-driven andflexible response to incoming inquiries. In 2003 the Bank leveraged a combinationof fixed and variable structures to makeinroads into the derivatives markets.NRW.BANK’s activities are instrumental infurther developing the German municipalfinance market. This is also apparent fromthe increasing number of capital market-oriented quotations for municipal financinginstruments. Apart from the actualfinancing, NRW.BANK offers support in allissues related to liquidity and interest ratemanagement both with regard to newissues and existing debt programmes.

OutlookThe state and municipal finance business is of strategic importance for NRW.BANK,whose direct municipal finance activitiesfocus on North Rhine-Westphalianmunicipalities. In addition, NRW.BANKtraditionally serves the financing needs ofthe federal government and other stategovernments in Germany.


30 Treasury

Capital Market Expertise – Treasury


Treasury 31

The remit of the Capital Markets unit also includes asset/liability management,funding and Treasury, which handle thecash management of the Bank and ensurecompliance with the regulatory Principle IIand minimum reserve requirements. TheTreasury unit is also in charge of managingthe portfolio of NRW.BANK.

Success in Public-Sector Pfandbrief BusinessIn 2003 NRW.BANK funded its operationsprimarily through the issue of coveredbonds. The Bank exclusively issued public-sector Pfandbriefe and was highlysuccessful in this segment of the capitalmarket. These securities continue to enjoygreat popularity among investors,particularly due to their inherent security.Public-sector Pfandbriefe are at least 100% collateralised by receivables from municipalities or other regionalgovernments. The excellent quality ofNRW.BANK’s public-sector Pfandbriefe is confirmed by the AAA ratings assignedby the rating agencies.


32 Treasury

NRW.BANK also issued registeredsecurities and Schuldscheindarlehen bothin covered and uncovered form.

In 2003 NRW.BANK’s gross issuancevolume amounted to € 31.5 billion and theaverage maturity was slightly over 4 years.The total issuance breaks down into 14%Jumbo Pfandbriefe, 33% traditional Pfand-briefe and 16% bearer bonds. Secured registered bonds and unsecured bondsamounted to 14% and 23%, respectively.NRW.BANK’s total outstanding issuanceamounts to a good € 80 billion.

The capital market portfolio makes asubstantial contribution to supportingNRW.BANK’s development mission in North Rhine-Westphalia.

NRW.BANK capitalised on the favourablecapital market environment by issuing four Jumbo Pfandbriefe. At the same time,the bulk of the issues continued to beaccounted for by traditional Pfandbriefecharacterised by lower volumes and more flexible structures. NRW.BANK’smanagement of its outstanding issuesensures an appropriate liquidity in themarket at all times.

Bearer Bonds and Registered Securities In addition the Bank increasingly issueduncovered debentures which are notsecured by an underlying asset pool but are instead guaranteed by the issuer. 2003 saw NRW.BANK attract new investorsand diversify its issuance into othercurrencies, as was illustrated by a SF 500million issue.


33Treasury

Outlook2004 will see a significant change inNRW.BANK’s funding activities. The newlyacquired status of a development bankdictates a shift away from Pfandbriefissuance, given that the guarantors’ explicitguarantee facilitates the issuance ofunsecured bonds. This guarantee providesthe basis for a solvency weighting of “zero”,meaning that financial institutions are notrequired to back their claims againstNRW.BANK with liable capital.

The Investor Relations department set up in 2003 plays a key role in communicatingthese new developments to the financial

markets. The objective is to establishNRW.BANK as a brand in the minds of new groups of investors in order to secure favourable funding conditions forNRW.BANK on a sustainable basis.


Steering a New Course


Planning and Shaping the Future – Internal Services

36 Internal Services


Internal Services 37

NRW.BANK’s internal services are in charge of shaping and performing allinternal processes while at the same timeensuring compliance with statutory and legal requirements. The year 2003confronted many internal service units withcomprehensive projects such as the Bank’sevolution into a development bank underthe “Verständigung II” agreement as well asthe planning of the buildings and facilitiesfor the dual head offices in Düsseldorf andMünster.

The following chapter offers some insightinto the activities of several internal serviceunits.

Finance/Controlling/Bank TaxationFollowing the successful implementation of all accounting-specific and regulatoryfunctions, 2003 saw the unit concentrate onconceptual and project-related issues. Inparticular, the unit led the Bank’s IAS/IFRSproject and was involved in the Basle II/minimum lending requirements (MaK)projects as well as in the project dealingwith the replacement of the securitiessettlement system. The IAS/IFRS project, in particular, required effective cooperationwith numerous other units in order toprepare specific accounting concepts for all units affected. Thanks to this effort, theBank will be able to comply with theIAS/IFRS requirements both in terms ofaccounting practice and in terms of itstechnical systems on schedule, i.e. from2005 onwards.

Risk ControllingEfficient and forward-looking risk controlling is a key function at NRW.BANK.

The unit is in charge of managing theBank’s entire risk potential which is brokendown by business units and risk types.

Risks are controlled through the allocationand monitoring of risk limits, the ongoinganalysis of the Bank’s risk positions and theimplementation of the risk managementguidelines and recommendations issued bysupervisory authorities. Risk positions aresubject to daily reappraisal particularly in the case of counterparty default risks and market price risks. The underlyingassumptions are regularly reviewed andadjusted in the light of market developments.

All risk management functions report to the same member of the Managing Board.This organisational set-up facilitates thenetworking of all risk information andallows for an early response to any changes in the relevant risk profiles.Working in close conjunction with theCredit Management unit and the other units of NRW.BANK, the Risk Controllingunit constantly works on the furtherdevelopment of unified systems for riskanalysis and risk limit management. The Risk Controlling unit also plays animportant role in the introduction of newproducts, developing risk measurementprocesses, accounting procedures and risk management processes in conjunctionwith the respective units. All such newprocesses are subject to approval by theRisk Controlling unit before they aredeployed and integrated into the existingrisk limit structures.


38 Internal Services

The Risk Controlling unit is in charge ofensuring the implementation of therequirements under Basle II as well asunder MaK (minimum requirements to bemet by financial institutions).

The Back Office monitors the operatingbusiness primarily with regard to the timelysettlement of capital market transactionswhile at the same time being responsiblefor compliance with all relevant supervisoryrequirements. The Back Office sees itself as a central platform serving internal andexternal customers across the entiresettlement process.

Credit ManagementCredit Management is an independent risk assessment unit attached to the back office. 2003 saw the unit work on such projects as the implementation ofrequirements under Basle II and MaK. The latter, in particular, serve to limit thecredit risks and are therefore reflected inappropriate organisational structures of the lending business, in the use of risk classification processes and in theidentification, management and monitoringof risks in the credit business. Due to thehigh quality of its risk appraisals, the CreditManagement unit plays an important role as a link between the market units and the Risk Controlling unit.

Internal AuditThe key task of this unit is to audit alloperational and business processes withinNRW.BANK. Building on its cross-discipli-nary expertise as well as on its independentstatus within the organisation, the unit alsosupported a number of significant projectsand commented on various banking-relatedissues during 2003. In mid-2003, the unitintroduced an IT tool which automates thedocumentation of audit findings, providinga continuous Bank-wide overview of theprogress made in the rectification of suchfindings.

Legal/Compliance/Anti-Money LaunderingThis unit advises the Bank’s owners, theManaging Board and the individual units ofthe Bank in legal issues of every type. TheCompliance Office, anti-money launderingand Data protection also fall within itsremit. Essential tasks in 2003 includedadvising an legislation in connection withthe restructuring of NRW.BANK into the State of North Rhine-Westphalia’sdevelopment bank, as part of which theBank’s legal framework was aligned withthe requirements defined in the “Verstän-digung II” agreement. The unit was alsoinstrumental in the drafting of the newinstitutional charter of NRW.BANK whichcame into force on March 31, 2004,concurrently with the “Act on the Reorgan-isation of Landesbank Nordrhein-Westfalen


Internal Services 39

into the Development Bank of the State of North Rhine-Westphalia and on theAmendment of Other Laws”.

Office of the Managing BoardThis unit supports the work of the Managing Board. Essential tasks in 2003included the conceptual planning in thecontext of the implementation of the“Verständigung II” agreement. Working inclose conjunction with the Legal unit, theExecutive Services unit assisted in therestructuring of the Bank. The Marketingunit developed the Bank’s new name andled the implementation at the operationallevel. The unit is also in charge of theongoing development of NRW.BANK’swebsite (www.nrwbank.de) into a saleschannel. The Press and Communicationsunit is in charge of communicating all relatedchanges both internally and externally.

IT, Organisation and Internal ServicesIn the course of last year, NRW.BANKreviewed the organisational structures taken over from the former WestdeutscheLandesbank Girozentrale at the time ofincorporation on August 1, 2002. During2003 these structures were aligned with the objectives and requirements of adevelopment bank. These changes centredaround the question of how the salesstructures could be optimised while at the same time ensuring more extensiveadvice and support for the Bank’s clients.The new organisational structureimplemented on April 1, 2004 was devisedin close conjunction with the ManagingBoard and the units handling thedevelopment and promotion activities.

To operate efficiently, a bank needs efficientstructures. Short lines of communication aswell as direct contacts between employeesare an important prerequisite for suchstructures. The Bank’s dual head offices inDüsseldorf and Münster are currentlyspread over three buildings. It has thereforebeen decided to pool the Düsseldorf andMünster offices into a single building each.In 2003 the Bank selected the locations forthese centralised head offices. In Düsseldorf,NRW.BANK will be the sole tenant of thebuilding which has still to be constructed;the move is scheduled for 2006. The buildingin Münster has still to be refurbished andwill be ready for occupation from 2006. Aninternal project structure has beeninstituted to monitor and manage theseproperty projects.

While the IT systems taken over from the former Westdeutsche Landesbank Girozentrale largely cover NRW.BANK’sbusiness needs, they are too comprehensiveand expensive for a compact developmentbank such as NRW.BANK. In 2003 the Bankadopted an IT strategy which will reducethe complexity of its IT environment,entailing a medium to long-term reductionin IT expenses. At the same time, the new IT structure takes the new legalrequirements under IAS/IFRS and Basle IIinto account.

Substantial savings were already initiated in 2003 through insourcing of previouslyoutsourced services, newly tenderedcontracts and changes of suppliers as wellas through the internal optimisation ofprocesses at NRW.BANK.


Performance and Responsibility – Staff Report

40 Staff Report


Staff Report 41

The transformation of NRW.BANK into the State of North Rhine-Westphalia’sdevelopment bank entails a number ofchanges both in terms of its organisationalstructure and its human resources manage-ment. The most important objective is topromote employees’ performance and their readiness to assume responsibilities. A number of important prerequisites wereput in place in 2003.

Going forward, NRW.BANK will reward itsemployees’ dedication and commitmentmore individually by way of a transparent,performance-oriented and flexibleremuneration system both at the collectivelyagreed and at the individually agreed level.

A newly introduced working time modelcalled EVA (a German acronym for “self-managed working time”) has eliminated the need for central recording and administration. Responsibility for working time-related issues now liesdirectly with the employees themselves and their superiors.

2004 will see the introduction of the“flexible staffing structure” at thecollectively agreed level. This new staffingstructure is designed to strengthen executive responsibility and promoteemployees’ performance orientation. It facilitates the alignment of individualpositions with organisational, environmentaland product-related changes, enabling notonly a swifter and more flexible response to such changes but also a compensation


42 Staff Report

women across all salary levels, managementtiers and age brackets. The plan providesfor appropriate use of equal opportunityappointment policies and personneldevelopment tools. In addition, the Bankmaintains a number of “family-friendly”programmes designed to help employeesreconcile the demands of working life andfamily life. These include flexible workingtime arrangements and supporting childcare services.

Developing Junior StaffNRW.BANK’s first intake of trainees andapprentices began their traineeships inDüsseldorf on September 1, 2003. Sevenyoung people are being trained as officecommunication specialists in the field of banking and as “Betriebswirt BA”specialists. The latter career path is part of an integrated course combining practicalin-house training with college attendance.2004 will see the launch of the samecourses in Münster as well as the additionof IT apprenticeships.

which more appropriately reflects thenature of the tasks involved in a givenposition as well as the employee’s actualperformance.

Qualification and DevelopmentNRW.BANK sees the transformation into a development bank as well as the resultingchanges within the organisation and itshuman resources as an opportunity for the personal and professional developmentof its workforce. The Bank’s employeesbenefit from professional qualificationmeasures as well as from training measuresspecifically devised to prepare them forchanges in their working environment. Thedevelopment and promotion of junior staffis also included in this range of activities.

These and other measures have beencompiled into an overall human resourcesdevelopment concept which will be specifiedin more detail in the course of 2004.

Promotion of WomenThe Promotion Plan for Women adopted in2003 aims to strengthen equal opportunitiesand to achieve a balanced distribution of


Staff Report 43

recruitment efforts build on its intensivecontacts with selected academic chairs inNorth Rhine-Westphalia and benefit fromthe use of state-of-the-art communicationmedia.

AcknowledgementWe would like to thank our employees inDüsseldorf and Münster for their specialcommitment and achievements. Our thanksalso extend to the members of the staffcouncil for their constructive cooperation inan atmosphere of mutual trust.

Two university graduates are currentlycompleting a trainee programme whichenables them to familiarise themselves withNRW.BANK’s internal process chains frommarket, back office and service units.Starting in 2004, this form of qualificationwill be increasingly offered to internalemployees as well.

Staff NumbersThe staffing of NRW.BANK is now largelycompleted, with the total headcount risingby 102 to 862 during the year under review.28 IT staff were hired at the Münster officeeffective January 1, 2004.

The female share in the total workforce is51%. At the second management level, fivefemale and eight male executives reportdirectly to the Managing Board.

NRW.BANK will continue to hire newemployees, attaching great importance torecruiting both experienced specialists andqualified junior employees. The Bank’s

862

576

286

49/51

Active employees of Landesbank NRW as at December 31, 2003

– Düsseldorf

Münster

– Male/female staff (in %)


Annual Accounts 2003


46 Management Report

Landesbank NRW: The Infrastructure andEconomic Development Bank of the Stateof North Rhine-Westphalia

On March 31, 2004, Landesbank Nordrhein-Westfalen will become NRW.BANK. Thename change reflects the Bank’s ongoingtransformation into a non-competitively-oriented infrastructure and economicdevelopment bank for the State of NorthRhine-Westphalia.

With the owners’ cooperation, and in closeconcert with the European Commission, theManaging Board has worked to make themost of the terms allowed under Europeanlaw for legally autonomous banks thatsupport economic development. Thegroundwork for this evolution has been laidout in the “Act to Restructure LandesbankNordrhein-Westfalen as the EconomicDevelopment Bank of the State of NorthRhine-Westphalia, and to Amend other Laws”(the “Restructuring Act”, or Umstrukturie-rungsgesetz), which was adopted on itssecond reading in the lower house of theNorth Rhine-Westphalian state legislatureon March 11, 2004.

NRW.BANK will have the legal status of aninfrastructure and economic developmentbank that does not engage in competition.It will work through borrower’s banks, andretain institutional and guarantor liabilityunder what is known as “Understanding II”

of March 1, 2002, between the FederalRepublic of Germany and the EuropeanCommission. It will also have an explicitrefinancing guarantee under § 4 (3) of thenew Act. Consequently, securities issued byNRW.BANK will have a solvency weightingof zero, meaning that NRW.BANK’s creditorbanks do not have to back their lendings toit with liable equity. NRW.BANK will employthe resulting refinancing advantages for thebenefit of recipients of assistance in NorthRhine-Westphalia.

The new name NRW.BANK highlights thedistinction against competitively orientedstate banks in the Landesbank form. The Bank was established as LandesbankNordrhein-Westfalen when the formerWestdeutsche Landesbank Girozentrale was split up into two legally independentfinancial institutions on August 1, 2002. Thenew structure draws a clear line between thecommercial business (WestLB AG, whichoperates under private law) and publicsector operations (Landesbank NRW, whichoperates under public law). Under a parent-subsidiary model, WestLB AG became awholly owned subsidiary of LandesbankNRW. Landesbank NRW has its registeredoffices in Düsseldorf and Münster.

Landesbank NRW’s guarantors (owners) arethe State of North Rhine-Westphalia (43.2%),the Savings Banks and Giro Associations of the Rhineland and of Westphalia-Lippe

Management Report of Landesbank Nordrhein-Westfalen at December 31, 2003

46-79 Lagebericht eg 13.05.2004 11:22 Uhr Seite 46

Management Report 47

(16.7% each) and the Regional Associationsof the Rhineland and Westphalia-Lippe(11.7% each).

The parent-subsidiary model developed byWestdeutsche Landesbank Girozentrale inautumn 2001 took account of what is knownas “Understanding I”, reached between theFederal Republic of Germany and theEuropean Commission on July 17, 2001.That understanding covers the gradualelimination of institutional and guarantorliability for public-sector banks that engagein commercial business in Germany. TheCommission had insisted that the traditionalliability system must be eliminated for suchbanks if they compete.

Understanding I stipulates that banks canstill be structured as public-law banks. Butinstitutional and guarantor liability will beeliminated after a transition period that endson July 18, 2005. The new liability structureswill be more akin to the relationship betweena private shareholder and a corporationorganised under private law.

The rules and transitional periods set forthin Understanding I with the Commissionare as follows:

All liabilities incurred by July 18, 2001,remain fully covered by institutional andguarantor liability until the time they mature.For creditors of banks that were supported

by institutional and guarantor liability, thismeans that there will be no changes forliabilities assumed before July 18, 2001 (i.e. these claims are grandfathered in).

Institutional liability and guarantor liabilitywill remain in effect in their present formduring the transitional period from July 19,2001, through July 18, 2005.

Any liabilities incurred during this transitionalperiod are completely covered by guarantorliability so long as they mature no laterthan December 31, 2015.

Because of the timing of the process fordeveloping the parent-subsidiary structure,originally Landesbank NRW and WestLBAG were both subject to Understanding I,even though at that point LandesbankNRW’s articles and bylaws already forbadeit from competing directly with other banks.

In a later agreement from March 1, 2002 – the “Understanding II” already mentionedabove – the Commission established rulesfor legally independent banks that do notengage in competition and whose businessfocuses on infrastructure and economicdevelopment. The traditional liabilitymechanisms remain in place for thesebanks. The advantages the banks reap fromthese guarantees must be used solely fordefined developmental measures. In thecase of NRW.BANK, these fall within the



Bank’s core competencies of sustainableeconomic development, infrastructuredevelopment, development of publicly fundedhousing, and public-sector financing.Additionally, these duties must be specifiedby law no later than March 31, 2004.Among the lines of business transferred to Landesbank NRW as part of the divisionof WestLB GZ, private real-estate financingis a competitive business. NRW.BANK willhave to shed this operation by July 18,2005. The portfolio in question is valued atroughly € 2 billion. Moreover, NRW.BANKwill no longer be able to issue mortgagebonds (Pfandbriefe). The Bank is reviewingwhether any other operations must beterminated or spun off, and to what extent.

Landesbank NRW is already an indispensableplayer in the region’s economic development.As a bank for regional economic developmentand a state bank, it handles the localprogrammes for all banking groups. Slightlyless than 40% of the federal supportprovided through the KfW bank group goesto North Rhine-Westphalia. Here LandesbankNRW performs its assigned duties as a central savings bank. In housing construction,the Wohnungsbauförderungsanstalt (Wfa)business unit is the only direct provider of state support in North Rhine-Westphalia. Wfais involved with some 22% of all residentialunits completed in North Rhine-Westphalia.

Economic Climate

Despite signs of impending improvement,economic conditions in Germany weregenerally sluggish in 2003. Real grossdomestic product (GDP) decreased for thefirst time since 1993 – albeit only slightly, by0.1%. Unemployment gained 0.7 percentagepoints, to average 10.5% for the year. Theprimary causes behind the situation wereadverse conditions external to the economyitself. Foreign trade was slowed by anxietiesabout the war in Iraq, and by the risingeuro. Nor did domestic demand furnish anynew impetus for the economy. Disposableincome rose only slightly, while Germanhouseholds remained intent on saving, notleast because of nagging doubts about thefuture of the country’s social insurancesystems. Business’s expectations were alsogloomy, and capital expenditures recededfurther.

Beginning in mid-2003 – for the first timein three years – there were increasing signsof a revival in economic activity. The foreign-trade crises of the first half were past,exports accelerated – especially thanks tostrong demand from the U.S. – and businessconfidence indicators began pointingupwards. The financial markets saw arecovery as well. Stock indexes rose.Monetary policy remained on an expansivefooting, supporting the recovery process.



Economic Development in North Rhine-WestphaliaNorth Rhine-Westphalia, the largest federalstate in Germany, went through comparablechanges. According to preliminary reportsfrom the State Office for Data Processingand Statistics, real GDP dropped 0.4%. Downturns in manufacturing, in construction,and in mining and quarrying were responsiblefor the state’s persistent economic slump.Power and water utilities countered thistrend by growing in real terms. The servicesector had a stabilising effect.

Employment was also down in the state, by 1.1%, to approximately 8.2 millionindividuals. Most of the decline was inmanufacturing. Nor was the service sectorable to maintain its upward trend of previousyears. This, the state’s strongest economicsector in terms of numbers of individuals,remained steady at the previous year’slevel, with 5.9 million people employed.Unemployment in the state was up 0.8percentage points, to an average of 10.0%for the year.

Development Lending in North Rhine-WestphaliaThe public development loan business inNorth Rhine-Westphalia expanded againagainst the previous year. Total developmentlending, at € 6.5 billion, was roughly 23%above the 2002 level. The development loansector continued to evolve. As public budgetsremained mired in difficulties, government

subsidies represented a shrinking percentageof total development funds. Conventionalloan financing did expand, but borrowers’banks are more concerned about risk thanthey once were, especially when financingsmall and medium enterprises (SMEs).Consequently, there was an expansion infinancing that includes an equity componentand a liability exemption for these banks.The reviving economy will not affect thistrend for a good while longer. SMEs, manyof which are undercapitalised, are havingproblems getting advance financing for neworders amid the current economic conditions.The anticipated effects of Basle II on banks’risk policies also make it more difficult toborrow – which many companies with ratingspoorer than 3 already find high. The changein the public lending environment was alsoevident in loan consultation services: directconsulting picked up for those going intobusiness for themselves and for companies,in part because the private-sector lendingenvironment remained rather tight. Demandfor consulting on complex capital expenditureprojects remained high.

Development in the Housing MarketIn the German housing market, debateabout the homeowner’s tax subsidy ledowners to act early if they had plans forowner-occupied residential property.Housing completions in 2003 declined an estimated 8%, to 265,000 units. Thenumber of building permits was up 8% for the year, to 297,000. There is at least a



year’s time lag before a building permit isreflected in the completion statistics. Thebuilding permits from 2003 will not showup in the figures for completions until2004. Some 280,000 units are expected to be completed.

The debate about the homeowner’s subsidycaused the housing market to pick up inNorth Rhine-Westphalia as well, as ownerstook action early before conditions changed.Building permits were up 2.9% in 2003, to 57,900. Housing completions declined in2003 as they did on the national scale, by3.6% to 53,100 units.

As in past years, housing development withpublic funding was an important support forthe generally weak construction industry in North Rhine-Westphalia during 2003.New records were set in support for owner-occupied housing: at roughly 11,000 units,the number of units receiving assistancewas up 21.8% from the year before. Theresults for rental units, by contrast, weredown. This market saw anticipative effectsin 2002, in part because of the debate atthat time about changing the tax treatmentof these properties, and in part because ofthe elimination of support provided under

the principle that rent increases werepermitted only in order to cover costs. Asexpected, development lending in 2003 wasconsiderably less as a consequence. In all,the state housing construction programmeprovided € 955 million (2002: € 959 million).

Capital MarketsThe capital markets saw high volatility andsubstantially smaller credit spreads duringthe year, a reflection of extensive uncertaintyabout the market. This was one of the mainreasons why investor demand for public-sector Pfandbriefe was strong, since theyoffer such high levels of security. Demandwas further supported by attractive yields,higher than those for government bonds.But the consequence was that the interestpremium on Pfandbriefe narrowedsubstantially compared to swaps andgovernment bonds – likewise as a result ofstrong demand. In public-sector financing,local governments had an increasing needto borrow. At the same time, the number oflenders to the public sector shrank becauseof changes in legal form, a shortage ofrefinancing options, and dwindling margins.The spreads widened moderately as aconsequence.



Business at Landesbank NRW

Fiscal 2003 was again dominated by theprocess of setting up Landesbank NRW. TheBank pushed ahead with its technical andorganisational build-up. At the same time, ithad to make the necessary preparations to position itself strategically as an infrastructureand economic development bank within theterms of Understanding II. Despite thesechallenges operating income before riskprovisions gained about one-fifth, to reach€ 199.2 million. A loss at WestLB AG thatthe Bank was unable to influence resultedin a write-down of WestLB’s carrying value,in accordance with an outside appraisalunder German accounting standard IDW RS

HFA 10. Consequently, Landesbank NRWshowed no distributable net income for theyear under report.

Because of the timing of the Bank’s founding,administrative expenses were not reportedfor all of fiscal 2002, but only for the period from August through December.Consequently, the figures given below foradministrative expenses, operating incomeand net income for the year are not entirelycomparable with the year before.

At December 31, 2003, total assets were € 105.0 billion, a gain of 3.4% from 2002.Total loans (credit volume) gained 6.7%, to € 100.4 billion.

Credit Volume

Dec. 31, 2002 Dec. 31, 2003 Change

€ millions € millions € millions in %

Due from banks 40,225.2 37,627.4 – 2,597.8 – 6.5

Due from customers 27,119.0 28,027.0 908.0 3.3

Contingent liabilities 672.0 1,116.1 444.1 66.1

Irrevocable loan commitments 1,845.6 2,220.8 375.2 20.3

Credit Volume narrowly defined 69,861.8 68,991.3 – 870.5 – 1.2

Amounts for derivatives (credit risk equivalents) 266.0 378.0 112.0 42.1

Notes and other interest-bearing securities 23,394.8 30,441.1 7,046.3 30.1

Equity investments 85.6 105.4 19.8 23.1

Other assets 443.8 480.9 37.1 8.4

Credit Volume broadly defined 94,052.0 100,396.7 6,344.7 6.7



Off-balance-sheet derivatives increased34.1%, to € 64,075 million. Credit riskequivalents as per banking regulationswere only € 378.0 million.

Economic Development and Assistancefor Housing Construction In housing construction, the Wohnungsbau-förderungsanstalt Nordrhein-Westfalen (Wfa)business unit is the key financing instrumentfor state housing policy in North Rhine-Westphalia. Wfa helps finance state-of-the-art homes through low-interest loansand guarantees, primarily for low-incomehouseholds. It supports the constructionand purchase of owner-occupied housing,and the creation of rental or cooperativehousing. It also subsidises projects tomodernise and improve the energy efficiency of existing properties. In fiscal 2003, loans forprojects financed by the Wfa had a nominalvalue of € 20.7 billion. Assistance againfocused on financial support for buildingand buying owner-occupied housing.Loans in this sector reached levels that hadnot been seen since the mid-1980s, as thedebate about changing the homeowner’stax subsidy led many households to actearly so as to make sure they would still be able to receive the old subsidy levels.Funding of € 1.0 billion was promised forWfa-backed projects, triggering a totalinvestment of € 2.9 billion. Out of the Wfafunds promised in 2003 – and from loansapproved in previous years – just under

€ 1.1 billion was paid out to beneficiariesduring the year under review. This representsa gain of 17% from the year before in loanfunds drawn. Support for owner-occupiedhousing was lively during the year, gaining21.8% to reach 10,937 units. A growingportion of this figure was for purchases ofexisting housing stock. Here the number of units receiving assistance, at 2,824, wasup 48.0% from 2002. By contrast, loans forrental housing were sluggish. In all, theresidential construction programme providedsupport for 15,057 units, a slight decreaseof 2.1% from the year before. There wasappreciably less activity in modernisations,improvements and additions during theyear. The number of renovated units wasdown slightly less than a quarter, to 1,576.

INVESTITIONS-BANK NRW (IB) businessunit carries out assistance programmes for the State of North Rhine-Westphalia, the German Federal Government and theEuropean Union, in the form of grants,Euroloans and “trustee” loans under publicprogrammes in which the Bank itself doesnot assume the lending risk. IB also providesadvice for beneficiaries and intermediariesabout their projects. In handling theselending programmes, IB works with allbanks, savings banks and credit unions,without influencing competition, in what isknown as the “borrower’s bank” method,under which it enables the borrower’s bankto extend a lower-interest-rate loan.



During the year, the IB business unit did € 3.1 billion in new business, a 9% gainfrom the 2002 figure. New transactions wereparticularly dynamic in federal support forhome-ownership, which is managed throughIB. No doubt the debate about changing thehomeowner’s subsidy played an importantrole here. By contrast, although support for SMEs and technology still accounts forsome 40% of the total loan portfolio, theslack economy caused new business in this segment to drop 16% against the year before.

Tight government budgets also causedtrustee loans for development to taper offappreciably, as government entities cutback available funds significantly in theirefforts to economise. Despite strong newbusiness, the total portfolio of assistanceloans grew only slightly, from € 17.3 billionto € 17.6 billion. An important contributingfactor here was historically low interestrates, which led borrowers to pay backmore loans ahead of schedule.

Development of promotion business of INVESTITIONS-BANK NRW€ billions

Trustee loansEuroloans

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

20

18

16

14

12

10

8

6

4

2

0


the securities themselves and their prices.In refinancing operations, the Bank profitsfrom its good ratings with Fitch, Moody’sand Standard & Poor’s.

In 2003, Landesbank NRW’s issues totalled€ 32.0 billion. Redemptions came to € 21.8billion. Of the new issues, 60% were public-sector Pfandbriefe. These included four jumbobonds (Jumbopfandbriefe) with a combinedvolume of € 4.5 billion. One-quarter of theissued securities were borrower’s note loans.The Bank also operated in the foreign-exchange market, and sold some structuredissues to investors as private placements.

The aggregate total for outstanding securitiesis € 68.8 billion, a 10.0% gain from theprevious year’s figure. As before, the bulkwas in public-sector Pfandbriefe. For marketsupport, the Bank bought back about itsown issues with a volume of € 7 billion.


Equity InvestmentsThe Equity Investments business unitoversees the investments Landesbank NRWholds by public mandate. It also developsborrowing and equity solutions for everyphase of a company’s development. Duringthe year, Landesbank NRW expanded itsstake in Kapitalbeteiligungsgesellschaft fürdie mittelständische Wirtschaft in Nordrhein-Westfalen mbH. It also acquired a silentinterest in Ströer Out-of-Home Media AG.

Refinancing Landesbank NRW is an important player in the capital markets. It is one of Europe’sleaders in issuing public-sector Pfandbriefe.Major international investors, such asmutual funds, central banks and insurancecompanies, are buying increasing amountsof securities from German Landesbanks. Here they take advantage of the Landesbanks’active market support, which benefits both

A summary of current ratings (status: march 2004)

Fitch Ratings Moody’s Standard

& Poor’s

Long-term rating AAA Aa2 AA

Short-term rating F1+ P– 1 A–1+

Individual1)/Financial strength2) C/D1) D+2) –*

Pfandbrief rating AAA n.r. AAA

* not offered by S&P



In-House ServicesLandesbank NRW has appointed severalinterdepartmental project teams to beginthe processing today for the regulatoryrequirements of tomorrow, and to continueevolving its technical and organisationalstructures. The main focuses here were the upcoming transition to reporting underInternational Financial Reporting Standards(IFRS) and International AccountingStandards (IAS), and preparations for thenew equity requirements under the latestBasle Capital Accord (Basle II). The Bank ison the right track for further technical andorganisational modifications. Many servicesthat had to be outsourced while the Bankwas still getting established are now handledin-house. At year’s end, of the roughly 180original service agreements with outsideproviders – mainly WestLB AG – only about120 were still in effect. The Bank also made progress in reconfiguring the IT infrastructureit inherited from Westdeutsche LandesbankGirozentrale to better suit its own needs.The earlier system was unable to providethe breadth and depth of programmingrequirements that an international banktypically needs. Landesbank NRW will nowbe transitioning its IT environment to SAP-based systems.

Personnel Ever-expanding regulatory requirementsand the increasing complexity of bankingproducts make ongoing staff training andcontinuing education a must. The Bank sets

a particularly high priority on encouragingits employees’ development, both personallyand professionally. It offers a wide range of seminars, tailored to specific needs,along with programmes to earn advancedprofessional qualifications. The nextgeneration of management is systematicallyassigned to gradually take over their futureduties at the Bank.

The Bank’s first crop of vocational trainees began their course of studies on September 1,2003. The seven young people are preparingfor certification as businesspeople in office communications (specialising in banking), andfor bank-specific jobs in in-house trainingprogrammes as part of a degree in businessadministration. The Bank also offers a specialtrainee programme for university graduates,to acquaint them with the various operationsand processes of a bank.

At December 31, 2003, the Landesbank’sstaff had grown to 862 (+ 13.4%).

Revenues – Net Interest Income and Net Commission IncomeThe Bank’s chief source of revenue is interestincome. The net figure for the year was € 355.8 million, 16.4% above the 2002figure. Wfa contributed half of this amount,€ 178.9 million. But the gain in net interestincome was driven mainly by the CapitalMarkets business unit, which profited fromthe upswing in money-market interest ratesduring the year.



Commission income is not as important asource of revenue for a development bankas for other banks. This, too, is the case atLandesbank NRW. The figure was up justunder one-third, to € 10.7 million, mainlyas a result of higher income on credit

derivatives. There were gains both in thetrust and administration business and in non-recurring administrative costcontributions for processing developmentloan applications. Moreover, lower costs forsecurities administration reduced expenses.

Statement of Income

2002* Dec. 31, 2003 Change

€ millions € millions € millions in %

Net interest income 305.6 355.8 50.2 16.4

Net commission income 8.3 10.7 2.4 28.9

Other operating expenses/income, net – 3.5 – 6.6 – 3.1 > – 100

Administrative expenses – 146.8 – 160.7 13.9 9.5

– Personnel expenses – 77.7 – 72.6 – 5.1 – 6.6

– Operating expenditure – 69.1 – 88.1 19.0 27.5

Operating income before risk provisions/

revaluation adjustments 163.6 199.2 35.6 21.8

Risk provisions/revaluation adjustments – 66.7 – 1,945.6 1,878.9 > 100

Operating income after risk provisions/

revaluation adjustments 96.9 – 1,746.4 – 1,843.3 > – 100

Extraordinary income/expense – 6.4 – 6.2 – 0.2 – 3.1

Net income for the year before taxes 90.5 – 1,752.6 – 1,843.1 > – 100

Taxes on income and revenues – 4.2 – 17.6 13.4 > 100

Net income for the year after taxes 86.3 – 1,770.1 – 1,856.4 > – 100

Allocation to reserve per articles and bylaws – 2.4 0 2.4 > 100

Withdrawals from capital reserves 0 1,795.5 1,795.5 > 100

Allocation to state housing construction funds – 63.1 – 25.4 – 37.7 – 59.7

Distributable net income 20.8 0 – 20.8 > – 100

* Previous year’s figures have been adjusted



Other Operating Expenses/IncomeOther operating expenses came to € – 6.6million, an appreciable deterioration from 2002. Most of the change resulted from higherallocations to provisions for assistance toWestLB AG employees who have either acontractual entitlement or a future right todisability, retirement or survivors’ pensionsunder civil service regulations. These pensioncommitments were transferred by law toLandesbank NRW when it was split off fromits predecessor. Such a large allocation(around € 20 million) is expected to be anon-recurring expense. It arose when thecalculation parameters were adjusted forcurrent changes in costs in the healthcaresector.

Administrative ExpensesAdministrative expenses increased 9.5%,to € 160.7 million. They were influenced by two contrary effects during the year. The above-average 27.5% rise in operatingexpense, to € 88.1 million, had an adverseimpact. But here it must be borne in mindthat because the Bank was founded in the course of 2002, only a fraction of theusual operating expense was incurred thatyear, and thus the present rise gives anexaggerated impression of the actual change.The operating expense was affected by

the large number of projects that wereinaugurated and pursued during the year,for example in preparation for Basle II orfor reporting under IFRS/IAS. These effortswere even more expensive because thenecessary work could not begin until afterthe Bank had been established, and thus onlya very short time was available to preparefor the new requirements. There were alsoa number of outside services that must be viewed in association with the Bank’sbecoming established. In this regard, thefoundation process kept costs high in 2003.

Personnel expenses were down 6.6% duringthe year, to € 72.6 million. This declineresulted from a steep drop in requirementsfor allocations to pension and assistanceprovisions, especially in the Wfa businessunit. That decrease more than made up forthe increase in staff size and higher payrollcosts. Expenses for wages and salariescame to € 52.1 million. Social-securitycontributions, pensions and assistancecame to € 20.5 million.

The cost-income ratio (CIR) for the year was44.7%. It is the Bank’s declared goal toimprove this ratio substantially, and to makeeven more efficient use of its resources inthe future.



Under its public mandate, LandesbankNRW grants development loans, and canassume risks where legal requirements andinternal guidelines impede business banksfrom making a commitment. Risk provisionsand revaluation adjustments came to € – 1.9 billion.

The deterioration was caused primarily bythe write-down of nearly € 1.8 billion onthe carrying value of the Bank’s interest inWestLB AG.

Wfa was mainly responsible for the higherallocations to risk provisioning in the lendingbusiness. The charges pertained primarilyto investors in rental housing constructionwho found themselves in financial difficulties.Net allocations at Wfa rose from the prioryear’s € 39.9 million to € 102.4 million.Based on a conservative evaluation of theloans extended, the Bank has adequatelycovered all discernible and latent risksusing individual and global allowances.

The net allocation for revaluation adjustmentson securities came to € 6.3 million (2002: € – 23.2 million). Losses resulted again this year from special redemptions on Landesbankissues that were retired as part of marketsupport measures. However, gains on thesale of securities more than made up forthese losses.

The fund for general bank risks wasendowed this year for the first time, at € 35.0 million.

Operating IncomeAlthough operating income grew by a fifth, to € 199.2 million, the write-down onWestLB AG reduced the figure after riskprovisioning and revaluation adjustments to € – 1.7 billion. After the extraordinaryexpense of € – 6.2 million that includes the restructuring charges for Wfa, and afterincome taxes of € 17.6 million, the net lossfor the year is € 1,770.1 million. Pursuant to § 17 of the German Housing Promotion

Risk provisions/revaluation adjustments

2002 2003 Change

€ millions € millions € millions

Adjustment on lending operations – 43.4 – 121.2 – 77.8

Adjustment on equity investments – 0.1 – 1,795.7 – 1,795.6

Adjustment on securities – 23.2 6.3 + 29.5

Fund for general bank risks 0 – 35.0 – 35.0

Total – 66.7 – 1,945.6 – 1,878.9


50,000

40,000

30,000

20,000

10,000

0


Act (WBFG) in conjunction with § 27 ofLandesbank NRW’s articles and bylaws, € 25.4 million is being allocated to state housing construction funds. After withdrawalsfrom capital reserves, the resulting netdistributable income is zero.

Volume Total assets increased 3.4%, to € 105.0billion. The expansion was largely driven by growth in fixed-income securities, whichwere up 30.1% to € 30.4 billion and nowaccount for more than one-quarter of totalassets. The growth resulted from setting up a guarantee fund that the Bank needs in order to issue public-sector Pfandbriefe.Receivables from customers were up slightly,by 3.3%, to € 28.0 billion. The gain resultedmainly from the acquisition of notes, whichare included under this balance sheet item.Receivables from banks were down slightly,by 6.5%, to € 37.6 billion.

The item of € 3.6 billion for equityinvestments in affiliated companies (2002:€ 5.3 billion) includes shares in WestLB AG,with a carrying value of € 3.4 billion (2002:€ 5.2 billion). WestLB AG’s large loss – forthe second year in a row – necessitated awrite-down of nearly € 1.8 billion on thatbank’s carrying value.

On the equity and liabilities side, refinancingvia certificated liabilities expanded 13.7%, to€ 49.2 billion. Together with non-negotiableinstruments among the payables to banks and customers in the amount of € 27.3 billion,

Dec. 31, 2003Dec. 31, 2002

Certificated Liabilities to Liabilities to liabilities Customers Banks

Bonds and other Receivables from Receivables fromfixed-interest securities customers Banks

Development of selective balance sheet items

€ millions

€ millions

40,000

30,000

20,000

10,000

0



Regional Association of Westphalia-LippeRegional Association of the RhinelandSavings Banks and Giro Association of Westphalia-LippeSavings Banks and Giro Association of the RhinelandState of North Rhine-Westphalia

11.7

11.7

43.2 16.7

16.7

Landesbank NRW issues are covered primarilyby public-sector loans (€ 54.2 billion),mortgage-backed loans (€ 1.6 billion) andsecurities (€ 21.5 billion).

The Bank obtained refinancing of € 12.4billion (+ 7.5%) from customers. Liabilities to banks were reduced 5.4 % to € 33.9 billion.

Equity CapitalEquity capital (excluding profit) for 2003was € 4,919.0 million, and was pulled downby revaluation adjustments. This figureincludes reserves of € 2.4 million stipulatedin the articles and bylaws, and a capital

Landesbank NRW’s owners shares ofsubscribed capital

As before, the guarantors participating inLandesbank NRW’s subscribed capital of€ 500 million are:

reserve of € 4,416.6 million (2002: € 6,212.1million). The reduction in the latter since2002 is the consequence of the write-downon West LB AG.

The Bank increased subordinated liabilitiesby € 25.0 million, to € 349.6 million at thereporting date. Of these, securities worth a total of € 249.6 million have remainingmaturities of less than two years. Profitparticipation capital remained unchangedat € 250.0 million. Prior to adoption of thebalance sheet, liable capital in accordancewith the German Banking Act (KWG) was € 6,223.8 million.



After adoption of the balance sheet and therequisite write-down of the carrying valueof WestLB AG, Landesbank NRW as a singleentity would have a core capital ratio ofapproximately 23% and a Principle I ratiototal of approximately 26% at December 31,2003.

Risk Report

Assuming risks is a natural part of thebanking business. Managing these risksadequately is crucial to a bank’s businesssuccess. For that reason, Landesbank NRWsystematically refined and expanded its riskmanagement and risk controlling again in 2003. In the lending business, it refinedits use of rating systems with an eye to the changes resulting from the regulatoryMinimum Requirements for LendingOperations (MaK) and the new capitalrequirements of the Basle Committee onBanking Supervision (Basle II for short).

Risks from Banking OperationsLandesbank NRW defines risk in accordancewith the sector-specific standards Nos. 5–10of the German Accounting Standards Board(Deutscher Standardisierungsrat, DSR). Itdistinguishes among the following categoriesof risk in its analyses and processes:

counterparty default risk (including country risk)market price riskliquidity riskparticipation riskoperational/other risk

Counterparty default risk refers to the threatof loss or lower profits due to default by a counterparty. Market price risk refers tothe risk of unfavourable moves in the valueof the Bank’s portfolio caused by price-determining market parameters like interestrates, index performance, exchange rates,stock prices, and so on. Liquidity risk refers

Capital ratios

Dec. 31, 2002 Dec. 31, 2003*

in % in %

Landesbank NRW – Single entity

– Principle I ratio – Total figure 32.0 32.5

– Core capital ratio 29.6 30.0

Landesbank NRW – Group

– Principle I ratio – Total figure 10.5 12.7

– Core capital ratio 6.3 8.6

* Prior to withdrawal from capital reserves



to the risk that a shortage of liquid funds ormarket disruptions might render LandesbankNRW unable to meet its payment obligationson time, or allow it to meet them only byincurring a loss. Participation risk is the riskthat losses may result from making equityavailable to third parties. In accordancewith the now generally accepted definitionfrom the Basle Committee on BankingSupervision, Landesbank NRW defines itsoperational risk as “the risk of loss resultingfrom inadequate or failed internal processes,people, and systems, or from externalevents”.

Risk StrategyLandesbank NRW’s risk strategy is attunedto the Bank’s core lines of business (marketsegments): economic development, public-sector financing and treasury, special lendingand equity investments. Wohnungsbau-förderungsanstalt has been integrated incompliance with the special provisions under§ 19 and § 21 of the German HousingPromotion Act (WBFG), which govern the state’s special liability for the Wfa’sobligations. The Managing Board adopted a credit risk strategy for 2003. This strategywas expanded at the beginning of 2004 into a comprehensive risk strategy takingaccount of market price risks and operatingrisks. To a large degree, this strategy hasalready been brought into compliance withthe MaK, which are to go into effect onJune 30, 2004.

The Managing Board of Landesbank NRWsets risk policy annually and reviews it on anongoing basis. Most risks the Bank assumesare counterparty default risks, and in thisregard it pursues a conservative risk policyso as to preserve its good risk structure.Risk policy reviews also examine the Bank’smaximum willingness to incur risk – inother words, its maximum loss limit. Thereare also limits for various loan types, sectors,maturities, rating categories, size categoriesand geographical distribution.

Organisation of Risk Management The Managing Board bears the overallresponsibility for managing risk at Landesbank NRW. The Supervisory Board monitors the Managing Board’smanagement performance. The CreditCommittee, a committee of the SupervisoryBoard, receives quarterly reports on theBank’s credit risk exposure. To take dueaccount of the strategic importance of riskcontrol, the Credit Committee is evolvinginto a Risk Committee.

The Guarantors’ Meeting decides on suchmatters as the principles of business policyand risk policy.

In keeping with the Minimum Requirementsfor Engagement in Trading Operations (MaH)and the MaK, the units that supervise risks(Risk Controlling and Credit Management)are functionally independent from front-officeunits, up to the level of the Managing Board.



Supervisory Board

The front-office units enter into a variety ofrisks in the course of their operations, andare responsible for managing these risksthemselves at the operations level. In doingso, they must conform to a corporate systemof limits and guidelines that is monitoredand refined by the Risk Controlling andCredit Management units. These two unitsreport directly to the relevant member of

the Managing Board. The separation offunctions between front-office and back-office up to the level of the Managing Board,as required by the MaK, was implementedin 2003. Large portions of the remainingrequirements that banks will have to meetby 2004 or 2005, as the case may be, werealready met during 2003 as part of theinterdepartmental Basle II/MaK project.

Shareholders’ Assembly

Credit Committee

RiskControlling

CreditProcessing

Market Units

Risk Strategy

Risk Types

Audit

Risk Monitoring

Managing Board


Credit Management is responsible forapproving individual credit decisions,including the rating of the commitment. Itis also responsible for regularly monitoringloans.

Risk Controlling is responsible for riskmeasurement methods, processes andprocedures, along with daily measurementand monitoring of risks and limits throughoutthe Bank, as well as non-commercialvaluation under the MaH. This unit alsodefines, approves and monitors countrylimits and prepares suggestions on portfoliomanagement for the Managing Board.

Internal Auditing regularly reviews riskstrategy, risk structure and risk managementfor adequacy and effectiveness. In itscapacity as an independent supervisorybody, Internal Auditing reports directly tothe Managing Board on the results of itstests and analyses.

Risk Management ProcessThe Bank’s risk management process iscomprehensively documented and madeaccessible to all the Bank’s business units.It comprises the following main components:

Early risk recognition is intended todetect developments that could adverselyaffect the Bank’s business relations,commitments and processes either nowor in future. It embraces all the Bank’sbusiness units and all risk categories. Incounterparty default risks, it is concernedmainly with jeopardised loan repaymentsor potential nonperformance ofobligations under loan transactions.

In market price risks, it deals withmarket movements that would reducethe value of the portfolio. If suchchanges occur, the risk must be re-analysed and reappraised. In recognisingrisk, Landesbank NRW applies anextensive range of measuring techniques,sensitivity analyses, scenario and stresscomputations, and portfolio analyses.

In risk analysis, Landesbank NRWemploys mathematical models in linewith the current market standard. Themodel computations are supplementedwith comprehensive re-checks andfurther analyses. Counterparty defaultrisks are analysed on the basis ofdetailed, meaningful documentation.For its relevant client groups, the Bankapplies internal rating procedureswhich it supplements with analysesand the credit ratings from majorrating agencies (Moody’s, Standard & Poor’s, Fitch Ratings).

Risk management is handled withinapproved limits and predefined guide-lines on responsibility. The entities incharge of risk management are theoperating units themselves – CapitalMarkets, INVESTITIONS-BANK NRW,Wfa, Special Lending and EquityInvestments – which conduct their riskmanagement on the basis of establishedregulations. As an overall bound forrisk management above and beyondthe various risk categories, LandesbankNRW regularly checks to make surethat its exposure remains within amaximum loss limit.



16

74

20

5

3


During the year under review, proceduresfor introducing new products wereextended to include all credit products.These expanded procedures ensurethat the Bank’s operations comply withits internal risk assessments, and thatample data is available about theBank’s exposure at all times.

For purposes of risk communication,the Managing Board is informed about the Bank’s current counterpartydefault and market price risks daily. Of particular importance are any limitsor rules that may have been exceeded.

The Managing Board also receives adetailed monthly report on the Bank’soverall risk position, including ananalysis of the rating categories, sectorweightings, volume categories andmaturities applicable to the Bank’sportfolios. Any market changes withinthe period under review are alsoanalysed.

Counterparty Default RiskLandesbank NRW’s policy on risk is tomaintain the sound risk structure that isalready in place. For that reason, Landes-bank NRW limits its credit exposure mainlyto first-rate counterparties.

Economic developmentPublic-sector financing and treasury Real estate financeSpecial financingEquity investments Wohnungsbauförderungsanstalt (Wfa)

Breakdown of the Bank’s credit exposureas at December 31, 2003 (in %)


Each credit decision is based on a loanapplication file that contains an estimate of the exposure risk of the associatedcommitment. As a rule, the applicationmust be approved by two officers, onerepresenting the front office and onerepresenting the back office, before thecredit line can be set up. The ManagingBoard decides in the event of a disagreement.For loans above a certain volume, theManaging Board must generally also approvethe commitment. The Managing Board isanswerable to the Credit Committee andthe Supervisory Board. A credit monitoringfile is prepared at least once a year on everysubstantial commitment. Commitments withhigher exposure risk receive especially closescrutiny and support.

When measuring and monitoring counterpartydefault risks, the Bank distinguishes amongcredit, issuer, money market and derivativelines. In the case of derivative lines, thereplacement value depends on market pricemovements. For that reason, the Bank alsotakes potential replacement costs intoaccount when dealing in derivatives.

Landesbank NRW’s portfolio currently standsat € 105,324 million; the Wfa’s operationsaccount for € 5,727 million in assets(respective values from 2002: € 99,826million and € 5,722 million). The Wfa’sportfolio is secured not only by Wfa’sassets, but also under the provisions of § 19 and § 21 of the German HousingPromotion Act (WBFG). Of Landesbank


Credit exposure by line of business

2002 2003

€ millions € millions

Public-sector financing and treasury* 70,816 77,238

Economic development 15,459 16,398

Real estate finance 2,485 2,121

Special financing 0 272

Equity investments** 5,344 3,568

Wohnungsbauförderungsanstalt (Wfa)*** 5,722 5,727

Total 99,826 105,324

* Capital market products are marked to market. All other commitments are carried at their remaining principal balances plus payout obligations.

** Including WestLB AG*** Net present value



NRW’s remaining assets, over 90%comprise loans to debtors that are internallyrated as very good to satisfactory, or areloans secured under the Public-SectorPfandbriefe Act (ÖPG) or the MortgageBanking Act (Hypothekenbankgesetz). The

percentage of commitments to borrowerswith weak credit scores is less than 1% ofthe total loan exposure. The majority of loansare to central, regional or local authoritiesand public-law banks in Germany.

Breakdown of Landesbank NRW’s credit exposure by rating at December 31, 2003

Risk Category/Type of Transaction Commitment Percentage 2002

€ millions in % € millions

1/Secured 67,624 64.2 72,706

2 21,134 20.1 2,026

3 2,598 2.5 1,165

3/4 1,425 1.4 877

4 218 0.2 87

4/5 0 0.0 0

5 1 0.0 0

6 0 0.0 0

Unrated* 908 0.8 9,414

Real estate finance 2,121 2.0 2,485

Equity investments** 3,568 3.4 5,344

Wfa*** 5,727 5.4 5,722

Total 105,324 100.0 99,826

* The majority of commitments for which no internal rating is available are for public-sector debtors.** Including WestLB AG*** Net present value

Legend for internal risk categoriesRisk Category 1 Very good credit risk Risk Category 4 Adequate credit riskRisk Category 2 Good credit risk Risk Category 4/5 Adequate credit risk, with reservationsRisk Category 3 Satisfactory credit risk Risk Category 5 Poor credit riskRisk Category 3/4 Satisfactory to adequate Risk Category 6 Very poor credit risk

credit risk


Landesbank NRW currently engages inderivative transactions with only a fewselect partners. The derivatives serve asmicrohedges for specific transactions or asmacrohedges for overall exposure exclusivelyin Landesbank NRW’s proprietary business.To reduce credit risks, the Bank has enteredinto standardised netting and collateralagreements. The volume of interest-ratederivatives stood at € 64,075 million as ofyear-end 2003 (2002: € 47,797 million). Theaverage during 2003 was € 54,129 million(2002: € 42,698.0 million).

Defaults, Allowances for DoubtfulAccounts and Problem LoansOutside of Wfa commitments, LandesbankNRW has placed € 64.6 million in loans(2002: € 49.8 million) under closer scrutiny,for which the aggregate amounts in arrearsare € 4.1 million (2002: € 2.8 million).Some of these loans are secured. Specificallowances and provisions total € 8.2 million(2002: € 2.8 million). In the case of Wfa,whose portfolio is secured under § 19 and§ 21 of the German Housing Promotion Act (WBFG), loans in the amount of € 533.1million (2002: € 487 million) have beenplaced under closer watch. The amount in arrears is € 44.2 million (2002: € 36.5million). Allowances for specific accountsand doubtful debt provisions total € 227.7million (2002: 156.3 million).

Total risk provisioning in the lendingbusiness for 2003 was € 121,2 million(2002: € 43.4 million).

Basle IIMindful of the new Basle Capital Accord(Basle II), in 2002 the Bank initiated theBank-wide Basle II/MaK Project tocoordinate the implementation of these newrules and regulations. The project completedits preliminary study on schedule in mid-2003, and identified the necessarymethodological, organisational andprocedural adjustments on the basis of thecurrent Basle II discussion paper. Now thenecessary adjustments and modificationswithin the Bank are under way as part ofthe main body of the project.

Landesbank NRW will implement the newregulatory requirements in its businessstrategy and risk structure. It will take thestandardised approach in its weighting ofcounterparty default risks.

As part of its credit risk management, theBank is expanding its internal credit ratingsystem to include all relevant customergroups, so as to ensure adequate supportfor the credit decision-making process. The Bank’s own internal risk evaluationgoes beyond the planned application of thestandardised approach under Basle II.




Country RiskA country risk exists if the Bank approves orprovides a loan to a borrower located outsideGermany, and there is no collateralisationof a type that enables the credit risk to becategorised as a domestic risk.

At the suggestion of Risk Controlling, theManaging Board specifies a country limitfor each country of relevance. For eachcountry with no transfer risk – i.e. themember states of the European MonetaryUnion (not including the Federal Republicof Germany) – the Management establisheswhat is known as a country “cap”. Theindividual country limits and country capsare the upper limit for business activitieswith and within the country concerned.

As it did in 2002, Landesbank NRWconducts more than 99% of its business in countries within the euro area (includingINVESTITIONS-BANK NRW and Wfa); 88%of its business (2002: 92%) is in Germanyalone. At the reporting date, 1% of theBank’s commitments entailed transfer risks.As a result, country risk is not a majorfactor for the Bank.

Market Price RiskThe Bank exposes itself to interest-raterisks only on a limited basis. Depending onits assessment of the interest-rate or market

situation at hand, it will make lendingswithout matching funds or issue mortgagepaper without matching lending transactions,as a rule of thumb doing so when themargins are positive or when the marketsituation has changed. The resulting assetsand liabilities with matching maturities aremaintained in the investment portfolio.

The Bank has assumed no stock risks thus far; at the moment it assumes foreignexchange risks only to a very limiteddegree. For internal purposes, value-at-riskcalculations at Landesbank NRW assume aholding period of one day and a confidencelevel of 95%. The historical period observedconsists of 250 days. The holding period islimited to one day because portfolio risks(particularly mismatches) can be hedgedwith derivative instruments within one day,and because the portfolio is under activeportfolio management.

Interest-rate risks are subject to limitsdefined by the Managing Board whichapply both to individual portfolios and tothe portfolios in the aggregate. A separatelimit is used to monitor mismatches in theinvestment portfolio. The following graphshows Landesbank NRW’s aggregate valueat risk over the course of 2003.


The substantial increase in exposure inmid-June is the result of a planned newrelease on methods, not an abrupt increasein risk itself.

The value at risk fluctuated between € 8.3million and € 19.6 million (2002 average: € 9.9 million). Average exposure for thesecond half was € 17.1 million.

The value-at-risk calculations aresupplemented by monthly stress tests. The stress scenarios prescribed by theregulatory authorities indicated an averageexposure of approximately € 15 million in 2003 (always under the worst casescenarios).

Regular back testing ensures the quality ofthe risk model.

Liquidity RiskThe Capital Markets unit is in charge of the Bank’s liquidity management, which isfounded on continuous analyses of incomingand outgoing cash flows. Short-term liquidityis managed using daily reports of the next three days’ net cash flows. Similarly, medium-term liquidity is managed using dailyanalyses of cash flows for the next sixmonths. The Bank has access to all money-market and capital-market products for this purpose. The Bank also has a sizeableportfolio of available-for-sale securities andsecurities that can be deposited with the


Overview of Interest-Rate RisksValue-at-risk movement from Jan. 1 to Dec. 31, 2003

€ millions

25

15

10

5

2/1/03 2/2/03 2/3/03 2/4/03 2/5/03 2/6/03 2/7/03 2/8/03 2/9/03 2/10/03 2/11/03 2/12/03 30/12/03

20



European Central Bank, which put it in aposition to generate substantial amounts of cash on short notice.

Capital Markets is in charge of monitoringthe Bank’s compliance with the liquidityrequirements set forth in the GermanBanking Act (KWG). In fiscal 2003, theBank’s liquidity ratio was above the 1.0regulatory minimum at all times (end ofDecember: 1.3).

Participation RisksLandesbank NRW’s portfolio of equityinvestments falls into three groups. Strategicinvestments are held by public mandate, or to support the Bank’s own business. Inequity financing, the Bank furnishes equityto North-Rhine Westphalian firms as part of its mission as an infrastructure andeconomic development bank. The Bank’s

investment in WestLB AG occupies a specialposition; it is the consequence of the split-up of WestLB under the parent-subsidiary model.

Normally, from Landesbank NRW’sviewpoint, counterparty default risks – i.e.(partial) failures of the held companies –must be taken into consideration andmanaged in association with equityinvestments; so must market price risks resulting from the refinancing of theseinvestments. Both types of risk can beevaluated adequately only if the risks aremonitored and (where possible) managedat the level of the equity holding itself.

As of December 31, 2003, the total carryingvalue of strategic equity investments and equity financing was € 169.6 million(2002: € 148.7 million). The largest equityinvestments are shown below.

Book value Dec. 31, 2002 Dec. 31, 2003


InvestitionsBank des Landes Brandenburg (ILB) 51.1 51.1

LEG Landesentwicklungsgesellschaft NRW GmbH 32.3 32.3

Westdeutsche Lotterie-Gruppe 25.6 25.6

Westdeutsche Spielbanken-Gruppe 37.5 37.5

Ströer Out-of-Home Media AG 0.0 20.0

Others 2.2 3.1

Total 148.7 169.6


The carrying value of the equity holding in WestLB AG is € 3,400 million (2002: € 5,195.5 million). Because of the size ofthis investment, WestLB AG represents acluster risk within Landesbank NRW, and istherefore reported and discussed separately.

Risk Management for Equity InvestmentsNormally, risks resulting from equityinvestments are covered by the RiskManagement process as described above.The Equity Investments business unitrecognises and manages risks specific to a given investment at the time of itsacquisition and as long as it is held, as partof the chain of procedures. The foundationfor later risk recognition and control is laidduring the contract negotiations prior to the acquisition – for example, by includingregular reporting requirements or specifyingthat certain matters will be subject to the Bank’s consent. The risks in questionare primarily strategic, such as the givencompany’s strategic orientation. Butdepending on the company, there may alsobe market price risks, operating risks andcounterparty default risks.

The Managing Board and the Bank’s othergoverning bodies receive reports on theentire portfolio of equity investments threeto four times a year. The timing depends on the various bodies’ meeting schedules.The Equity Investments unit is in constantcontact with the affiliates in which theinvestments are held, and thus becomesaware of changes promptly. If major

developments occur, the Bank’s decision-makers are notified on an ad hoc basis.Equity investments whose current situationcalls for closer attention are put on a watchlist. One company is on this list at present.If problems arise, reporting may be steppedup to as often as once a month. Controllingof the investment can be adapted tochanging circumstances with similar speed.Additionally, each year a “short report” isproduced that analyses the most recentannual financial statements, offers strategicprojections, and calculates profitability. Theshort report not only informs the ManagingBoard in detail about developments inequity investments, but also serves to meetthe requirements of § 18 of the GermanBanking Act. In addition, the portfolio isanalysed regularly for cluster risks, in termsof both segments and size categories.

New or expanded equity investments mustbe approved by the full Managing Boardand approved by the Guarantors’ Meeting.Risk is assessed in a due diligence processthat takes account of business, legal and taxrisks. For larger investments, this is done in consultation with an outside accountingand auditing company. On the basis of thewritten evaluation of the results of the due diligence process, the Equity Investments unitprepares an investment recommendation forthe Managing Board. This recommendationis reviewed by the Credit Management unit,which adds its own independent vote on theproposal. The Bank meets MaK requirementsthrough this procedure.




Strategic InvestmentsIn the case of WestLB AG, Landesbank NRWperforms its duties as a shareholder withinthe WestLB AG shareholders’ meeting.Landesbank NRW’s articles and bylawsstipulate that all decisions made at WestLBAG shareholders’ meetings must be approvedby Landesbank NRW’s guarantors.

In 2003, WestLB’s operating income beforerisk provisions and revaluation adjustmentswas up € 30.2 million from the year before,to € 414.2 million. Thus operations remainedstable year-on-year. The loss of € – 2,320 onthe year was primarily a consequence ofthe sharply increased item of € – 2,364.6million for risk provisioning and revaluationadjustments. This risk provisioning (€ 1,495.1more than in 2002) and the exceptionalaudits by the Federal Financial SupervisoryAuthority (BaFin) lead the WestLB AGmanagement to believe that adjustmentshave now been taken for all major risks.

The losses of the past two years havelowered the core capital ratio. At present,Landesbank NRW’s guarantors are innegotiations about a capital increase forWestLB AG.

For some of the other strategic equityinvestments, the counterparty default risk is limited either directly or indirectly by astrong involvement of public funding. Apartfrom holding management positions withinthe affiliated company, public entities alsoreduce counterparty default risk by such

measures as directly or indirectly furnishingindemnity bonds. In the case of LEGLandesentwicklungsgesellschaft NRW GmbH,public-sector entities actually hold a majority.In equity investments in gaming operations,the Bank is the sole shareholder, butrepresentatives from the state are includedin the managing bodies because it is thestate that grants the concession. This ensuresthat the shareholder’s business interests canbe coordinated with the state’s regulatoryinterests at an early stage – a critical factorin promptly recognising potential conflictsof interest that might otherwise jeopardisethe companies’ concessions. Strategic risksmay exist if management or shareholdersfail to recognise material trends in pertinentlines of business on time, or misjudge them,resulting in disadvantageous decisions aboutbasic principles. Such matters cannot bemeasured or managed with quantitativemethods. For that reason, strategy workshopsare held at least once a year among thecompany, the shareholders and the state asgranter of the concession.

Equity FinancingThe risk-limiting measures taken at thetime of new commitments include limitingthe amount of individual commitments and, if applicable, syndicating portions ofthe commitment. Additionally, the equityinvestment agreements may includerequirements that the borrower must obtainLandesbank NRW’s consent for certaintransactions.


The equity financing business is stillbecoming established. In 2003, the Bankacquired a dormant interest in Ströer Out-of-Home Media AG. This involvementis developing as planned, in terms ofexpected future earnings.

Operating Risks/Other RisksLandesbank NRW monitors operating risks and continuously expands its existingmonitoring systems and procedures.

As part of its project activities, the Bankhas taken a significant step forward inwatching operating risk systematically,Bank-wide. Landesbank NRW has developeda comprehensive management concept for operating risks. Among the majorcomponents of the approach are recognisingrisk events and loss events, conductingstructured self-assessments, and monitoringrisk indicators. Uniform categorisation is a prerequisite for being able to pool andcompare results from these procedures. Inthis the Bank follows the Basle “event typecategories”.

The results of the first self-assessmentswere used to conduct an extensive riskinventory of the Bank’s operating risks. The results of that study are still beinganalysed. Additionally, operating risks wereintegrated as an explicit component of theprocess for introducing new products,which will be expanded to the lendingbusiness.

A comprehensive, customised strategyalready exists for analysing and reportingoperating risks at Wfa.

Landesbank NRW procures its IT services,as well as many other internal services,through service agreements, chiefly withWestLB AG and WestLB AG’s subsidiaries.Such arrangements are gradually beingpared back, as Landesbank NRW takescharge of these services itself. In 2003 theBank re-insourced services from a consi-derable number of service agreements withWestLB AG. The operating risks associatedwith such services are managed by theproviders and then monitored internally by Landesbank NRW.

Landesbank NRW intends to use the BasicIndicator Approach in determining thecapital to hold for its operating risks underBasle II. This figure is calculated as a fixedpercentage of average gross revenues.

Landesbank NRW minimises its legal risksfrom transactions by using standardisedcontracts. When special questions of lawarise, the Bank seeks the advice of outsidelegal counsel. There are currently nosignificant proceedings pending whichinvolve the Bank.




Overall Risk AssessmentLandesbank NRW’s risk structure ischaracterised by counterparty default risks,and by an issuer structure with almostexclusively good to very good creditstanding. Commitments involving risk fromassistance for housing construction areguaranteed by the state, under the terms of § 19 and § 21 of the German HousingPromotion Act (WBFG).

The risk situation is continuously monitoredand analysed in detail, within the maximumloss limit set by the Bank.

A project was initiated in 2003 to refinemethods for analysing the amount of risk theBank can assume. It is to be implementedand applied in practical management by thesecond quarter of 2004.

Landesbank NRW’s equity ratio, referred to the activities of the Banking group, was12.7% at year-end (2002: 10.5%).

Continuous improvement and expansion of risk management in all key risk areasensures that Landesbank NRW will retainthe ability to recognise any adversedevelopments early enough to takeappropriate countermeasures.

Outlook

The economy can be expected to recoveronly slowly in 2004. As in 2003, domesticdemand will remain weak for the timebeing. Any impetus will come primarilyfrom the reviving world economy. Grossdomestic product will increase barely 2%.Unemployment will stagnate at a high10.6%, though the situation will improveslowly in the second half.

During 2005, consumer spending isexpected to revive further, and companieswill be more willing to make capitalexpenditures. Gross domestic product willremain at a level similar to 2004, or growslightly.

The reviving world economy is generating a moderate rise in returns on the capitalmarket. The phase of key lending rate cutsis coming to an end. The American FederalReserve and the European Central Bankhave already signalled this to the capitalmarkets. Changes in money-market rateswill affect yields. However, movement willbe substantially less dynamic than in earliercycles, and there will be a considerabletransatlantic gradient. The low risk ofinflation is a particularly strong indicator



of this development. In Europe, the sharprise of the euro will provide additionalrelief. Yields on 10-year government bondsare not likely to stay above 4.75% for anyextended time.

The stock markets will be buoyed by theimproving overall economic prospects.Additionally, companies have been able toimprove their profitability on a sustainablebasis by restructuring. The projectedincrease in yields on the bond market is not substantial enough to dampen the mood.It will not have adverse effects. Hence thereis much to argue that the three-year bearmarket is over, with prospects for furtherprice gains.

The Bank expects expansion to be moderatein 2004. Total assets will grow about 3%each for this year and next. Operatingincome for 2004 will match the 2003 level. Gains in net interest income and netcommission income will be slightly lowerthan in 2003, but lower costs will improvethe picture all the same. Since the Bank’sstaff expansion will then be complete,personnel expenses will rise only slightly.Administrative expenses will recedesomewhat under rigorous cost management,combined with the expiration of servicecontracts with WestLB AG that helpedLandesbank NRW get established. Theinvestment interest in WestLB AG couldalso have a substantial effect on the Bank’snet income – in both a negative and apositive sense. Preserving the proportional

interests of Landesbank NRW’s guarantors,and subject to the conditions precedent thatthe Restructuring Act (Umstrukturierungs-gesetz) must take effect and that theguarantors must service the resulting newshares of WestLB AG, the Managing Boardhas decided to increase the capital stock by € 33 million out of authorised capital, in the form of a contribution in kind, to € 533 million. The Guarantors’ Meeting of March 3, 2004, approved the associatedamendment of the articles and bylaws. The conditionally authorised capital willconsequently be reduced by the same amount.

The Bank expects that new business ineconomic development will expand slightly.The incipient economic revival leads theBank to assume that capital spending willincrease, with a consequent rise in demandfor development funds. The reconception ofthe state’s programme for Financing NewCompanies and Growth (GuW), currentlybeing prepared in cooperation with the KfW’sbanking group, will lend further impetus.Additionally, since the beginning of 2004the Bank has handled the development loansof the Landwirtschaftliche Rentenbank onbehalf of the savings banks in North Rhine-Westphalia and Brandenburg.

In the promotion of home-ownership, thereduction in the homeowner’s subsidy andthe early action homeowners took in previousyears will presumably keep growth slight.The housing stock modernisation programme



adopted by the federal government in spring2003 will provide positive momentum. Allin all, the amount of development fundingdisbursed for this purpose is expected toremain unchanged, since high repaymentlevels are also expected.

In financing for equity investments, the Bankwill expand its range of equity financingoptions for small and medium enterprisesin North Rhine-Westphalia, consistentlywith the EU’s requirements for aid and inaccordance with Understanding II. To thisend, the Bank is planning to set up an “SMEFund” with € 75 million in resources. It isto be used to finance equity solutions forSMEs in North Rhine-Westphalia withinindividual limits of 1 to 7 million €, primarilyin the form of mezzanine capital. This is amixed form of financing that may includecharacteristics of both equity and borrowings.Depending on its structuring, mezzaninecapital may be equity – for example, a silentinterest or equity represented by participationcertificates – or debt, such as a subordinatedloan. Mezzanine capital is a flexiblefinancing tool that falls part way betweenequity and debt in terms of reporting.

In infrastructure financing, NRW.BANKexpects that transactions in North Rhine-Westphalia will gain substantially in thenext few years. The PPP Task Force of the NRW Ministry of Finance has alreadyidentified a number of pilot projects thatare gradually to be implemented. Severalmunicipal projects will be carried out

to upgrade and restore schools andadministrative buildings. NRW.BANK willcontribute its expertise to private-publicpartnerships in North Rhine-Westphalia.

Refinancing activities will be brought into line with the requirements of aninfrastructure and economic development bank during 2004. As part of Understanding IIregarding development banks, the Bank willbenefit from institutional and guarantorliability beyond 2005. And the Bank’sguarantors will furnish it with an explicitrefinancing guarantee for its liabilities. TheBank will apply the advantages resultingfrom these tools entirely without influencingcompetition, within the developmentbusiness. In this connection, the range ofuncovered bonds will expand substantially.Depending on how the market performs, investors will also be offered bondsdenominated in foreign currencies. Toexpand the product range further andenable the Bank to meet investor needsflexibly, a Debt Issuance programme and a short-maturity Commercial Paperprogramme are planned for the first half of the year. For the year as a whole, totalnew issues are likely to remain at the levelof the previous year.

In order to be able to invest directly inWestLB AG, Landesbank NRW’s guarantorsreached an agreement on a direct investmentoption that was also incorporated into theBank Redefining Act (Neuregelungsgesetz).The direct investment option gives the



Savings Banks and Giro Associations, as wellas the Regional Associations, the right towithdraw as Landesbank NRW guarantorsby transferring their rights and obligationsto Landesbank NRW. If they exercise thisoption, the guarantors will receive a stake inthe equity capital of WestLB AG equivalentto the value of their guarantorship inLandesbank NRW. In that case, LandesbankNRW’s stake in WestLB AG would bereduced accordingly to 50.002%. In aneffort to set forth the specific details of thisstatutory provision, the guarantors enteredinto an agreement among themselves onDecember 12, 2001, which stipulates theterms and conditions of the change in theirparticipations. This agreement became partof a framework agreement executed betweenthe guarantors and Landesbank NRW onDecember 11, 2002.

If the option is exercised in full, the State of North Rhine-Westphalia will be the sole owner of Landesbank NRW. The consequencewill be a disproportionate reduction ofLandesbank NRW’s equity capital. Thiswould have a lasting adverse effect onLandesbank NRW’s earnings. To date, oneguarantor has indicated an intention toexercise the option.

Strategic Orientation The Restructuring Act (Umstrukturierungs-gesetz) that will take effect on March 31,2004, establishes the legal framework forthe further expansion of NRW.BANK as themain development platform for the State of North Rhine-Westphalia. The Act clearlydescribes NRW.BANK’s duties:

To provide financingfor safeguarding and improving the small and medium enterpriseinfrastructure of the economy,especially by providing funding to helpestablish or stabilise such businessesfor the promotion of public housingas risk capitalfor construction development in citiesand smaller municipalitiesas funding for central, regional andlocal authoritiesfor infrastructure developmentfor agricultural and forestryprogrammes, and for programmes in rural areasfor programmes to supportenvironmental protection, technologyand innovationfor social, cultural and scientificprogrammesfor projects in the public interest



NRW.BANK will also act even moreextensively than before as an advisor andinitiator for development programmes, andwill remain the market leader in furnishinglending support for structural policyoperations in North Rhine-Westphalia.

This clearly defined course as the infra-structure and economic development bankfor the State of North Rhine-Westphalia willentail an even sharper focus on the stategovernment as a client. The NRW.BANK’snew location in Düsseldorf demonstrates itsproximity to the state’s operations. Planscall for the Bank to move in 2006 from

its current three buildings to a new singlebuilding on Kavalleriestraße, near the lowerhouse of the state’s legislature. NRW.BANKis the sole lessee of the building complex.

A potential solution for accommodating theentire staff in a single centralised buildingis also shaping up for the Münster location.NRW.BANK is in negotiations with WestLBAG to acquire significant properties inMünster (Friedrichstraße, WarendorferStraße, Elisabethstraße). This would make it possible to combine staff in one building,instead of the current three locations.


80 Balance Sheet

Balance Sheetof Landesbank Nordrhein-Westfalen as at December 31, 2003

see NotesAssetsNo. € €

Casha) cash on hand –.––b) balances with central banks 43,115,590.24

including:with Deutsche Bundesbank 43,115,590.24 €

Receivables from banks 1, 20a) payable on demand 614,460,564.97b) other 37,012,962,491.75

Receivables from customers 2, 3, 20thereof:secured by mortgages 1,590,607,453.69 €loans to public authorities and entities under public law 22,116,986,660.38 €

Bonds and other interest-bearing securities 4, 20, 22a) money market instruments

aa) of public institutions –.––thereof:eligible as collateral for Deutsche Bundesbank advances –.–– € –.––

b) bonds and notesba) of public institutions 19,645,010,464.04

thereof:eligible as collateral for Deutsche Bundesbank advances 18,228,648,329.12 €

bb) of other issuers 10,686,516,485.54thereof:eligible as collateral for Deutsche Bundesbank advances 10,346,445,193.02 € 30,331,526,949.58

c) bonds issued by the Bank 109,578,031.91principal amount 103,869,000.00 €

To be carried forward:

31. 12. 2002€ € thousands

(–)(–)

43,115,590.24 165

(838,444)(39,386,805)

37,627,423,056.72 40,225,249

28,027,040,080.20 27,118,998

(50,600)

(50,600)

(12,223,888)

(10,880,461)

(23,104,349)(239,825)

30,441,104,981.49 23,394,774

96,138,683,708.65 90,739,186

80-85 Bilanzen eg 13.05.2004 11:23 Uhr Seite 80

Balance Sheet 81

see NotesLiabilitiesNo. € €

Liabilities to banks 11, 20, 23a) payable on demand 33,363,819.37b) with agreed maturity or period of notice 33,847,149,152.95

Liabilities to customers 12a) other liabilities

aa) payable on demand 84,053,428.10ab) with agreed maturity

or period of notice 12,268,942,158.3312,352,995,586.43

Certificated liabilities 13, 20, 25a) bonds and notes issued by the Bank 49,151,948,805.36

Trust liabilities 14thereof:trust loans 2,691,208,155.70 €

Other liabilities 15

Deferred items 16, 20

Provisions 17a) for pensions and similar

obligations 592,695,047.82b) tax reserve 10,410,087.68c) other 200,770,445.61

Subordinated liabilities 18thereof:due in less than two years 249,561,567.22 €


31. 12. 2002€ € thousands

(23,843)(35,774,931)

33,880,512,972.32 35,798,774

(63,643)

(11,424,256)(11,487,899)

12,352,995,586.43 11,487,899

(43,212,157)49,151,948,805.36 43,212,157

2,691,208,155.70 2,721,215

74,661,878.53 63,514

519,219,015.99 270,000

(541,523)(3,943)

(169,925)803,875,581.11 715,391

349,561,567.22 324,562

99,823,983,562.66 94,593,512


82 Balance Sheet

Balance Sheetof Landesbank Nordrhein-Westfalen as at December 31, 2003

see NotesAssetsNo. € €


Equity investments in non-affiliated companies 5thereof: equity investments in banks 52,989,508.98 €

Equity investments in affiliated companies 5thereof:banks 3,400,000,000.00 €

Trust assets 6thereof:trust loans 2,691,208,155.70 €

Tangible fixed assets 8

Other assets 7

Deferred items 9, 20

Total assets 20

31. 12. 2002€ € thousands

96,138,683,708.65 90,739,186

105,378,917.03 85,640

3,464,241,662.12 5,258,622

2,691,208,155.70 2,721,215

11,187,241.31 2,918

478,763,150.44 443,803

2,138,564,556.33 2,327,475

105,028,027,391.58 101,578,859


Balance Sheet 83

see NotesLiabilitiesNo. € €


Capital with participation rights 18thereof:due in less than two years –.–– €

Fund for general banking risks

Equity capital 19a) subscribed capital 500,000,000.00b) capital reserves 4,416,622,099.06

thereof:special reserves pertaining to the Wohnungsbauförderungsanstalt 3,016,622,099.06 €

c) reserves from retained earningsca) reserves required by Landesbank NRW’s statutes 2,400,000.00

d) profit for the year –.––

Total liabilities 20

Contingent liabilities 21liabilities from guarantees andindemnity agreements

Other commitments 21irrevocable credit commitments

Administered funds

31. 12. 2002€ € thousands

99,823,983,562.66 94,593,512

250,021,729.86 250,022

35,000,000.00 –

(500,000)(6,212,125)

(2,400)(20,800)

4,919,022,099.06 6,735,325

105,028,027,391.58 101,578,859

1,116,142,998.69 671,985

2,220,833,157.60 1,845,640

243,915,555.23 282,153


84 Profit and Loss Account

Profit and Loss Accountof Landesbank Nordrhein-Westfalen for the Period January 1 – December 31, 2003

see NotesNo. € €

Interest income froma) lending and money market transactions 3,336,131,591.70b) interest-bearing securities and

book-entry securities 1,238,812,350.204,574,943,941.90

Interest expenses 4,234,060,260.30

Income froma) equity investments in non-affiliated companies 2,538,237.72b) equity investments in affiliated companies 9,997,382.58

Income from profit pooling, profit transfer and partial profit transfer agreements

Commission income 26 17,782,289.43

Commission expenses 7,041,147.38

Other operating income 27

General administrative expensesa) personnel expenses

aa) wages and salaries 28 52,075,609.62ab) Social security contributions and expenses

for pensions and other employee benefits 20,509,999.06thereof: 72,585,608.68for pensions 14,304,738.40 €

b) other administrative expenses 86,569,481.48

Depreciation and value adjustments onintangible and tangible fixed assets

Other operating expenses 27

Write-downs and value adjustmentson loans and certain securities as well as allocations to loan loss provisionsthereof:Transfer to fund for general banking risks 35,000,000.00 €


1.1.–31.12. 2002€ € thousands

(3,479,386)

(1,046,954)(4,526,340)

(4,240,229)340,883,681.60 286,111

(3,879)(12,658)

12,535,620.30 16,537

2,395,021.17 2,950

(14,500)

(6,234)10,741,142.05 8,266

14,188,281.82 4,010

(45,912)

(31,778)(77,690)(26,455)(68,093)

159,155,090.16 145,783

1,584,503.84 951

20,773,706.45 7,432

338,524,507.54 148,446

(–)

– 139,294,061.05 15,262


Profit and Loss Account 85

see NotesNo. € €


Depreciation and value adjustments on investments, shares in affiliated companies and securities treated as tangible fixed assets 29

Income from revaluation of equity investments in non-affiliated companies, equity investments in affiliated companies and securities treated as tangible fixed assets

Result from normal operations

Extraordinary expenses 28 6,195,841.95

Extraordinary result

Taxes on income and revenues 17,554,541.16

Other taxes not shown under other operating expenses 500.81

Result of the year

Allocation to capital of Wohnungsbauförderungsanstalt NRW

Transfer from capital reserves 30

Allocations of net income to reserves from retained earningsa) reserves required by Landesbank NRW’s statutes –.––

Profit for the year

1.1.–31.12. 2002€ € thousands

– 139,294,061.05 15,262

1,607,060,874.20 –

–.–– 81,707

– 1,746,354,935.25 96,969

(6,443)

– 6,195,841.95 – 6,443

(4,195)

(77)17,555,041.97 4,272

– 1,770,105,819.17 86,254

25,397,095.70 63,054

1,795,502,914.87 –

(2,400)–.–– 2,400

–.–– 20,800


86 Notes

Preparation of Landesbank NRW’s Annual Accounts

The annual accounts of LandesbankNordrhein-Westfalen (Landesbank NRW)were prepared in accordance with theprovisions of the German Commercial Code (HGB) and the Ordinance RegardingAccounting for Banks (RechKredV).Information that may appear either in the balance sheet or the Notes is includedin the Notes. Amounts in the Notes andStatement of Financial Condition are givenin € millions.

In accordance with § 4 of its articles andbylaws, Landesbank NRW transferred the registered capital and reserves of theWohnungsbaufördungsanstalt Nordrhein-Westfalen (Wfa), as well as the state housingpromotion assets, to the special reservespertaining to the Wohnungsbauförderungs-anstalt. Wfa’s profit of € 25.4 million (2002:€ 63.1 million) is to be allocated to the state housing promotion assets pursuant to § 17 of the German Housing PromotionAct (WBFG) in conjunction with § 27 ofLandesbank NRW’s articles and bylaws.

Wfa’s assets and liabilities are included inthe respective items of Landesbank NRW’sannual accounts. Claims and liabilities as well as income and expenses betweenLandesbank NRW and Wfa are netted.Wfa’s profit/loss for the year is included inLandesbank NRW’s results and is allocatedto the state housing promotion assets asmandated by law.

Accounting and Valuation Methods

Assets, liabilities and open positions arevalued in accordance with §§ 340 et seq. of the German Commercial Code (HGB), in conjunction with §§ 252 et seq. of theGerman Commercial Code (HGB).

Claims are reported at their amortised costless any discounts. Liabilities are carried attheir repayment amounts, with any relateddiscounts reported under deferred items.Premiums on claims and liabilities arereported under deferred items as an assetor liability respectively. The proportionateamount of interest on a claim or liability at year-end is generally included with the claim or liability to which it applies.Deferred items resulting from own bondsissued and the lending business are valuedaccording to the proportionate interestmethod. Non-interest-bearing loans toemployees are reported at their amortisedcost in accordance with tax regulations.The non-interest or low-interest-bearingloans of the Wohnungsbauförderungsanstalt(Wfa) are carried at their net present value.Zero-coupon bonds are carried as liabilitiesat their issue price plus interest accrued asof the reporting date.

Discernible risks in the lending businesswere adequately covered by individualvalue adjustments and provisions. A globalprovision was formed in accordance withtax valuation methods for latent risks fromclaims and contingent liabilities. Valueadjustments were deducted from assets.Non-performing loans were written off.

Notesto the Landesbank Nordrhein-Westfalen Annual Accounts at December 31, 2003

86-109 Anhang eg 13.05.2004 11:24 Uhr Seite 86

Notes 87

Securities held in the liquidity reserve andhedging transactions assigned thereto arevalued strictly at the lower of cost or market.

Securities held in the investment portfolio(financial assets) are valued at cost. Any difference between the cost and therepayment amount is recognised on a prorata basis in income. To the extent thatsecurities held in the investment portfolioare carried at values higher than their currentmarket value, these securities are shown in the Notes as valued as fixed assets. Thisinformation is subject to change over timebecause of portfolio changes, as well asmovements in interest rates and/or marketvalue.

The valuation results of derivative transactions,which are carried in the investment portfolioas microhedges for specific transactions or as macrohedges for the Bank’s overallexposure to interest-rate risks (almostexclusively euro interest-rate swaps), arenot recorded.

Equity investments in affiliated companiesand non-affiliated companies are carried atcost; where a loss of value is expected to bepermanent, they are written down to thelower fair value.

Tangible assets with a limited useful life aredepreciated in accordance with the applicabletax regulations. Low-value assets are writtenoff in full in their year of purchase.

Adequate provisions have been made for contingent liabilities and anticipatedlosses from open positions. A provision foranniversary expenses has been establishedin the amount permitted under tax law. The provision for pensions was establishedon the basis of actuarial principles in accordance with § 6 (a) of the GermanIncome Tax Act (EStG). On the basis of an expert opinion about a decision of theGerman Federal Tax Court (Bundesfinanzhof),a provision was again allocated in fiscal2003 for additional benefits guaranteed topensioners and current employees whenthey retire.

There are provisions for general bank risks pursuant to § 340 f of the GermanCommercial Code (HGB). Allocations weremade to these provisions in the year underreview.

In addition, a fund for general bank riskswas established in accordance with § 340 gof the German Commercial Code.

Foreign currency amounts have beentranslated in accordance with § 340 (h) of the German Commercial Code (HGB) and statement BFA 3/95 of the BankingCommittee of the IDW. Assets and liabilitiesdenominated in foreign currencies weretranslated using the reference rate of theEuropean System of Central Banks (ESCB)effective on December 30, 2003.


88 Notes

Balance Sheet

Claims on other banks include claims on affiliated companies in the amount of € 3,597.1 million(2002: € 4,500.8 million) and claims on companies in which equity investments are held inthe amount of € 2,549.6 million (2002: € 3,991.9 million).

Claims on Banks (1)

Breakdown by Maturity Dec. 31, 2003 Dec. 31, 2002


Payable on demand 614.5 838.4

With residual maturities of

– up to 3 months 3,849.4 4,792.6

– between 3 months and 1 year 3,353.4 3,517.9

– between 1 and 5 years 17,557.3 17,732.4

– more than 5 years 12,252.8 13,343.9

Total claims on banks 37,627.4 40,225.2

Claims on Customers (2)



With residual maturities of

– up to 3 months 949.2 1,175.9


– between 1 year and 5 years 9,861.5 8,819.1

– more than 5 years 14,938.3 15,514.1

Total claims on customers 28,027.0 27,119.0

including

– claims with indefinite maturities 13.4 7.5

– loans of the Wohnungsbauförderungsanstalt 4,746.1 4,615.8


Notes 89

Claims Secured by Mortgages (3)



Residual maturities of claims on customers

– up to 3 months 19.5 18.1

– between 3 months and 1 year 50.0 55.2

– between 1 year and 5 years 262.5 292.2

– more than 5 years 1,258.6 1,442.3

Total claims secured by mortgages 1,590.6 1,807.8

Bonds and Other Interest-Bearing Securities (4)

Marketability Dec. 31, 2003 Dec. 31, 2002


Bonds and other interest-bearing securities

– listed on a stock exchange 26,542.6 18,334.4

– not listed on a stock exchange 3,898.5 5,060.4

Total bonds and other interest-bearing securities 30,441.1 23,394.8

including:

amounts that will become due by December 31 of the following fiscal year 3,677.6 3,742.0

Claims on customers include claims on affiliated companies in the amount of € 11.6 million(2002: € 11.3 million) and claims on companies in which equity investments are held in theamount of € 130.1 million (2002: 139.2 million).

Bonds and other interest-bearing securities include € 124.9 million in securities of affiliatedcompanies (2002: € 0 million) and € 1,173.1 million in securities of companies in which equityinvestments are held (2002: € 1,536.4 million).


90 Notes

Of the total bonds and other interest-bearing securities, € 105.8 million (2002: 422.9 million)is held as part of the liquidity reserve and € 30,335.3 million (2002: € 22,971.9 million) is heldin the investment portfolio.

At December 31, 2003, Landesbank NRW carried € 5,440.7 million (2002: € 110.9 million) infinancial assets on its books that were funded at a fixed rate and valued as fixed assets.

Equity Investments in Affiliated and Non-Affiliated Companies (5)Landesbank NRW holds € 105.4 million (2002: € 85.6 million) in equity investments in non-affiliated companies and € 3,464.2 million (2002: € 5,258.6 million) in equity investmentsin affiliated companies, € 3,400.0 million (2002: € 5,195.5 million) of which is certificated asmarketable securities. None of the securities held are listed on a stock exchange.

The itemised list of Landesbank NRW’s holdings pursuant to § 285 No. 11 of the GermanCommercial Code (HGB) has been deposited with the Local Courts in Düsseldorf and Münster.

Affiliated and non-affiliated companies in which Landesbank NRW holds a substantial interest:

Company Interest Book Value Book Value

Dec. 31, 2003 Dec. 31, 2002

% € millions € millions

Banks

WestLB AG 100.0 3,400.0 5,195.5

InvestitionsBank des Landes Brandenburg (ILB) 50.0 51.1 51.1

Other Companies

Westdeutsche Lotterie GmbH & Co. OHG 100.0 25.5 25.5

Westdeutsche Spielbanken GmbH & Co. KG 100.0 25.6 25.6

Westdeutsche Spielcasino Service GmbH 100.0 6.8 6.8

LEG Landesentwicklungsgesellschaft NRW GmbH 22.3 32.3 32.3

Ströer Out-of-Home Media AG – 20.0 –


Notes 91

Other Assets (7)This position, totalling € 478.8 million (2002: € 443.8 million), includes the following majorcomponents:

Landesbank NRW is the general partner of Westdeutsche Lotterie GmbH & Co. OHG,Münster.

Trust Assets (6)

Breakdown by asset type Dec. 31, 2003 Dec. 31, 2002


Claims on banks 200.2 226.2

Claims on customers 2,491.0 2,494.9

Bonds and notes 0.0 0.1

Total trust assets 2,691.2 2,721.2

Dec. 31, 2003 Dec. 31, 2002


Claims on WestLB AG for reimbursement of pension obligations 453.6 413.5

Claims from profit and loss pooling agreements with

companies in which equity investments are held 13.9 16.4

Land and buildings acquired as part of bail-out transactions 4.2 2.5

Refund claims for corporate income tax and investment income tax

withheld on investment income and dividends 1.1 1.7

Paid premiums for options 1.8 2.6

Offsetting items with WestLB AG 0.9 4.9


Fixed Assets (8)

Schedule of Fixed Assets Acquisition Additions Retirements Depreciation Net Book Depreciation

Cost/Cost of Value

Production Total in the Fiscal Year

Jan. 1, 2003 Dec. 31, 2003

€ millions € millions € millions € millions € millions € millions

Bonds and other interest-bearing

securities forming part of fixed assets 22,518.8 29,726.4 0.0

Equity investments in affiliated companies 5,258.7 3,464.2 1,795.5

Equity investments in non-affiliated

companies 85.6 105.4 0.0

Office equipment 3.6 9.9 0.6 1.7 11.2 1.6

92 Notes

Pledged Assets (10)Of the assets shown, € 3,267.2 million was pledged as part of genuine repurchase transactions.

Net change pursuant to § 34 (3) sentence 2 RechKredV:

€ 5,432.9 million

Deferred Items (9)

Breakdown of deferred items Dec. 31, 2003 Dec. 31, 2002


Discounts from underwriting business 218.4 260.1

Discounts from liabilities 187.3 210.4

Prepayment from discount of promotion activities 1,658.9 1,847.3

Pre-paid swap fees 73.1 0.0

Other 0.8 9.7

Total deferred items 2,138.5 2,327.5


Notes 93

Liabilities to banks include liabilities of € 6,722.3 million (2002: € 13,398.8 million) toaffiliated companies and € 163.9 million (2002: € 108.6 million) to companies in whichequity investments are held.

Liabilities to Banks (11)

Breakdown by maturity Dec. 31, 2003 Dec. 31, 2002



With residual maturities of:

– up to 3 months 8,469.1 9,262.8



– more than 5 years 13,222.5 13,491.7

Total liabilities to banks 33,880.5 35,798.8

Liabilities to Customers (12)

Breakdown by maturity Dec. 31, 2003 Dec. 31, 2002



With residual maturities of:

– up to 3 months 461.3 535.0

– between 3 months and 1 year 369.2 359.8


– more than 5 years 8,548.5 7,411.6

Total liabilities to customers 12,353.0 11,487.9


94 Notes

Certificated Liabilities (13)Of the € 49,151.9 million (2002: € 43,212.2 million) in notes issued, € 11,786.8 million (2002:€ 9,953.7 million) is due in the following year. There are no certificated liabilities to affiliatedcompanies (2002: € 801.5 million).

Other Liabilities (15)This position, totalling € 74.7 million (2002: € 63.5 million), includes the following majorcomponents:

Trust Liabilities (14)

Breakdown according to balance sheet items: Dec. 31, 2003 Dec. 31, 2002


Liabilities to banks 131.4 158.4

Liabilities to customers 1,717.5 1,676.8

Other Liabilities 842.3 886.0

Total trust liabilities 2,691.2 2,721.2

Dec. 31, 2003 Dec. 31, 2002


Interest to be paid on existing profit participation rights and

subordinated liabilities once the annual accounts are approved 37.0 37.0

Funds from the State of North Rhine-Westphalia that have not yet

been disbursed 21.4 10.7

Offsetting items from valuation of foreign currencies 10.4

Variation margin 1.6

Premiums on swaptions 0.9

Taxes 0.9 4.5


Notes 95

Provisions (17)The provision for pensions includes € 453,6 million (2002: € 413.5 million) in pensionobligations to employees of WestLB AG who have claims for or are entitled to a pensionunder the laws relating to civil servants. Under Art. 1 § 4 (1) Sentence 4 of the BankRedefining Act, these obligations passed from Westdeutsche Landesbank Girozentrale toLandesbank NRW. Landesbank NRW is entitled to reimbursement from WestLB AG in thesame amount. The entitlement itself will be adjusted each year according to actual needs.

This also includes € 149.0 million (2002: € 135.4 million) for additional benefits.

Subordinated Liabilities and Profit Participation Rights (18)Of the subordinated liabilities of € 349.6 million (2002: € 324.6 million), the subordinatedbearer bond in the amount of € 236.8 million (due 2004; interest rate 7%) issued byWestdeutsche Landesbank Girozentrale in 1993 exceeds 10% of the total value of allsubordinated liabilities. There is no early repayment obligation. There is no existing orplanned agreement to convert these funds into capital or another form of debt.

Of the subordinated liabilities, an amount valued at € 249.6 million (2002: € 249.6 million)have a residual maturity of less than 2 years. The original maturities range between 11 and25 years.

Deferred Items (16)

Breakdown of deferred items Dec. 31, 2003 Dec. 31, 2002


Premiums from own bonds issued 129.8 66.9

Swap fees received in advance 317.4 107.0

Refinancing adjustments pertaining to Wfa 63.7 88.0

Other 8.3 8.1

Total deferred items 519.2 270.0


96 Notes

The amount of subordinated liabilities increased by € 25 million (2002: € 75 million) in fiscal2003 because of new issues. Taking these new issues into account, subordinated liabilitiesand profit participation rights closed the year at € 599.6 million (2002: € 574.6 million).

Capital with participation rights remaind unchanged at € 250.0 million.

Interest expense of € 23.1 million (2002: € 19.1 million) was incurred for subordinated liabilities.

There are no subordinated liabilities to affiliated companies.

Subordinated liabilities carried by Landesbank NRW comply with the requirements of § 10 (5 a) of the German Banking Act (KWG); a right to terminate without notice has notbeen agreed.

Capital and Reserves (19)At December 31, 2003, Landesbank NRW had a subscribed capital of € 500.0 million. The reserves totalled € 4,419.0 million (2002: € 6,214.5 million).

Landesbank NRW’s capital and reserves comprise the following:

Equity Capital pursuant to Commercial Code Dec. 31, 2003 Dec. 31, 2002


Subscribed capital 500.0 500.0

Capital reserves 4,416.6 6,212.1

including:

Special reserves pertaining to Wohnungsbauförderung (3,016.6) (3,016.6)

Reserves from retained earnings

– pursuant to articles and bylaws 2.4 2.4

– other 0.0 0.0

Total 4,919.0 6,714.5


Notes 97

Once the annual accounts are approved, the regulatory capital and reserves of LandesbankNRW under § 10 of the German Banking Act (KWG) will amount to € 4,477.1 million (2002: € 6,200.5 million).

Foreign Currency Assets/Foreign Currency Liabilities (20)At year-end, Landesbank NRW had foreign currency assets valued at € 136.4 million (2002:€ 4.0 million) and foreign currency liabilities valued at € 352.4 million (2002: € 4.0 million).

Contingent Liabilities and Other Commitments (21)The contingent liabilities of € 1,116.1 million (2002: € 672.0 million) stem from the currentlending business and from liquidity lines.

Of the € 2,220.8 million (2002: € 1,845.6 million) in irrevocable credit commitments, € 1,806.0 million (2002: € 1,793.7 million) were for commitments made in connection withthe Wohnungsbauförderungsanstalt.

Assets Used as Collateral (22)Bonds and notes totalling € 4,096.6 million (2002: € 518.6 million) were pledged toDeutsche Bundesbank as collateral for loans. In addition, securities with a par value of € 50.0 million (2002: € 50.0 million) were deposited as collateral for forward contracts withEUREX (euroexchange, electronic futures exchanges). In addition, securities in the amountof € 325.0 million were pledged as collateral in connection with repo transactions.

Collateral for Own Liabilities (23)There is € 9,788.0 million (2002: € 8,498.6 million) in collateral for Landesbank NRW’sliabilities to banks.

Other Financial Obligations (24)The annual long-term lease obligations amount to € 1.8 million.

Cover (25)All issues of Landesbank NRW requiring cover were covered in accordance with thestatutory provisions and the articles and bylaws of Landesbank NRW.


98 Notes

At December 31, 2003, the details of Landesbank NRW’s cover were as follows:

Statement of Income

Services Rendered for Third Parties (26)The net commission income includes € 9.4 million (2002: € 9.3 million) resulting from theadministration of loans and subsidies held in trust.

Other Operating Income and Expenses (27)The principal contribution towards other operating income is made up of € 1.1 million(2002: € 1.5 million) in cash payments and payments from settlements involving theimproper use of public housing and € 6.4 million (2002: € 0.7 million) in income fromreversal of other provisions.

Other operating expenses include € 20.4 million (2002: € 6.6 million) in allocations towardsthe reserve for additional benefits established for the employees of WestLB AG.

Cover Dec. 31, 2003 Dec. 31, 2002


Mortgage-backed bonds 609.3 1,404.2

Assets used for covering purposes

– claims on banks 0.0 0.9

– claims on customers 1,577.2 1,793.6

Excess cover 967.9 390.3

Bonds of public authorities and entities under public law 70,253.2 66,006.6

Assets used for covering purposes

– claims on banks 32,644.5 33,269.6

– claims on customers 21,552.9 20,702.2

– bonds and notes 21,457.5 20,568.5

Excess cover 5,401.7 8,533.7


Notes 99

Extraordinary Expenses (28)This item includes € 6.2 million (2002: € 6.4 million) in wages and salaries that arose inconnection with the release of employees at the Wohnungsbauförderungsanstalt from activeduty. The comparable number for the prior year (€ 6.4 million) was derived from generaladministrative expenses (personnel expenses).

Write-Downs on Investments, Shares of Affiliated Companies and Securities Treated as Assets (29)The write-down on the book value of WestLB AG in the amount of € 1,795.5 millioncompares with income from investment securities of € 188.5 million.

Withdrawals from Capital Reserves (30)The amount of € 1,795.5 million was withdrawn from the capital reserves. This amountcorresponds to the write-down on the book value of WestLB AG.

Miscellaneous

Other ObligationsLandesbank NRW has other obligations pursuant to Art. 1 § 3 Sentence 1 of the BankRedefining Act.

Landesbank NRW is liable for InvestitionsBank des Landes Brandenburg (ILB) in theamount of three times its capital contribution.

Deposit InsuranceAs resolved by the members of the German Savings Banks and Giro Association (DSGV) on November 28, 2002, with retroactive effect as of January 1, 2002, Landesbank NRW wasaccepted as a member into the security reserves of the Landesbanken/Girozentralen. Thesesecurity reserves constitute protection for contributing banks within the meaning of § 12 ofthe German Deposit Protection and Investor Compensation Act (Einlagensicherungs- undAnlageentschädigungsgesetz, EAG) and are associated in local statutes with the depositinsurance scheme of the savings banks.


100 Notes

The deposit insurance scheme of the German savings banks consists of twelve fundsbelonging to the regional savings banks and giro associations, the security reserves of theLandesbanks and the security fund of the Landesbausparkassen, which together form acommunity of joint liability and are linked by rules and regulations that provide for offsettingin cases where coverage is claimed (so-called overflow agreements).

Forward TransactionsThe total nominal value of derivative transactions was € 64,075 million (2002: € 47,797 million)and was spread out over the following interest-rate and currency-linked products:

Derivative Transactions – Volume

Nominal Credit Risks Replacement

Values Equivalents Costs

Dec. 31, 2003 Dec. 31, 2002 Dec. 31, 2003 Dec. 31, 2002 Dec. 31, 2003 Dec. 31, 2002


Interest-rate risks

Interest-rate swaps 53,574 46,027 364 263 1,219 995

Swaptions

– bought 128 39 – – 1 –

– sold 1,636 1,168 – – – –

Caps, Floors 719 231 1 – – –

Stock market contracts 7,081 – – – – –

Other Forward rate agreements 512 332 7 3 9 8

Total interest-rate risks 63,650 47,797 372 266 1,229 1,003

Currency risks

Interest rate/currency swap

Currency swap 425 – 6 – 8 –

Total currency risks 425 – 6 – 8 –

Total 64,075 47,797 378 266 1,237 1,003


Notes 101

The average total nominal value of the derivative and other forward transactions thatLandesbank NRW entered into between January 1 and December 31, 2003 was € 54,129million (2002: € 42,698 million).

The credit risk equivalents and replacement costs are calculated on the basis of the marketvaluation method in accordance with German banking regulatory requirements. The marketvalue is calculated only for those contracts for which the replacement transaction necessaryto regain the previous position in the event of a counterparty default would result in additionalexpenditure or lower income; profits and losses generated by replacement transactions arenot netted. In line with the above-mentioned banking regulatory requirements, a counterpartyweighting and percentage add-on are included when calculating the credit risk equivalentsfor all derivatives. There is no netting for the purpose of calculating average credit riskequivalents.

Close-out netting is used to calculate the credit risk equivalents for banking regulatorypurposes. As a result, the average credit risk equivalents declined by approx. 78.6% (2002: 88.9%). One of the principal causes of the decline was the large concentrationwithin interest-rate derivatives of transactions entered into with WestLB AG as thecounterparty; Landesbank NRW and WestLB AG have a netting agreement.

The breakdown of derivative transactions by counterparty is as follows:

Derivatives – Classification of Counterparties

Nominal Credit Risks Replacement

Values Equivalents Costs

Dec. 31, 2003 Dec. 31, 2002 Dec. 31, 2003 Dec. 31, 2002 Dec. 31, 2003 Dec. 31, 2002


OECD banks 53,390 47,715 371 265 1,227 1,002

Non-OECD banks – – – – – –

Customers 10,652 82 7 1 10 1

(incl. stock market contracts)

Public-sector entities 33 – – – – –

Total 64,075 47,797 378 266 1,237 1,003


102 Notes

The interest-rate derivatives are used as microhedges for specific transactions or asmacrohedges for overall exposure exclusively in Landesbank NRW’s proprietary business.The result is captured in net interest income.

The interest-rate contracts are spread across the entire spectrum of maturities, with approx. 38% (2002: 38%) having a residual maturity of more than five years.

The volume of credit derivatives where Landesbank NRW is the guarantee (buyer) amountedto € 1,025.4 million (previous year: € 1,157.9 million) at December 31, 2003. Those whereLandesbank NRW is the guarantor (seller) amounted to € 900 million (2002: € 500 million)and have been included in contingent liabilities.

Number of EmployeesOn average, Landesbank NRW employed 433 (previous year: 331) female staff and 431 (2002: 355) male staff in 2003, with a total staff of 862 at year end.

Derivatives - Classification by Maturity

Nominal values Interest-rate Currency

risks risks

Dec. 31, 2003 Dec. 31, 2002 Dec. 31, 2003 Dec. 31, 2002

€ millions € millions € millions € millions

Residual maturity

– up to 3 months 5,560 8,267 – –

– 3 months to 1 year 11,912 7,757 – –

– 1 to 5 years 22,132 13,532 321 –

– more than 5 years 24,046 18,241 104 –

Total 63,650 47,797 425 –


Notes 103

RemunerationThe total remuneration paid to members of the Managing Board was € 1.6 million (2002: € 0.8 million) in 2003. That paid to members of the Supervisory Board was € 0.3 million(2002: € 0.3 million). The Advisory Boards of INVESTITIONS-BANK NRW received € 0.1 million (2002: € 0.1 million) for their work.

Loans The members of the Managing Board and Supervisory Board received advances and loanstotalling € 4.7 million (2002: € 5.1 million).

Disclosure pursuant to § 340 a (4) of theGerman Commercial Code (HGB) of SeatsHeld

Seats held by members of the ManagingBoard

Dr. Bernd LüthjeLEG Landesentwicklungsgesellschaft NRW GmbHWestLB AG

Ernst GerlachBremer Spielcasino GmbH & Co. KG Casino Duisburg GmbH & Co. KG Georgsmarienhütte GmbHInvestitionsBank des Landes Brandenburg LEG Landesentwicklungsgesellschaft NRW GmbH Mannesmannröhren-Werke AGWestdeutsche Lotterie GmbH & Co. OHG Westdeutsche Spielbanken GmbH & Co. KG

Dr. Ulrich SchröderInvestitionsBank des Landes Brandenburg ProHealth AG (from May 26, 2003)WestLB Systems GmbH (until December 31, 2003)

Seats held by employees

Rainer HofmannAachener Siedlungs- undWohnungsgesellschaft mbHDeutsche Wohnungsgesellschaft mbH(DEWOG)Ruhr-Lippe Wohnungsgesellschaft mbH


104 Notes

Guarantors’ Meeting

Chairman and Deputy Chairmen

Harald Schartau, Chairman Minister of Economics and Labour of North Rhine-Westphalia, Düsseldorf

Jochen Dieckmann, MdL Deputy ChairmanMinister of Finance of North Rhine-Westphalia, Düsseldorf

Udo MolsbergerDeputy ChairmanRegional Director of the RegionalAssociation of the Rhineland, Cologne

Wolfgang SchäferDeputy ChairmanRegional Director of the RegionalAssociation of Westphalia-Lippe, Münster

Dr. Karlheinz BenteleDeputy ChairmanPresident of the Savings Banks and Giro Associationof the Rhineland, Düsseldorf

Dr. Rolf GerlachDeputy ChairmanPresident of the Savings Banks and Giro Associationof Westphalia-Lippe, Münster

Members Appointed by the Guarantors’ Meeting

Dr. Josef FischerUnder SecretaryMinistry of Economics and Labour of North Rhine-Westphalia, Düsseldorf

Dr. Thomas GrieseUnder SecretaryMinistry of the Environment and NatureConservation, Agriculture and ConsumerProtection of North Rhine-Westphalia,Düsseldorf

Jörg HennerkesUnder SecretaryMinistry of Transport, Energy and StatePlanning of North Rhine-Westphalia,Düsseldorf

Bernd KiesowSenior PrincipalMinistry of Finance of North Rhine-Westphalia, Düsseldorf

Wolfram KuschkeMinisterHead of the State Chancellery of North Rhine-Westphalia, Düsseldorf

Manfred MorgensternUnder SecretaryMinistry of Urban Development and Housing, Culture and Sport of North Rhine-Westphalia, Düsseldorf

Guarantors’ Meeting/Supervisory Board/Managing Board


Notes 105

Winfried Schittges, MdLChairman of the Regional Assembly of theRhineland, Cologne

Dr. Wolfgang KirschDistrict AdministratorChairman of the Regional Assembly of Westphalia-Lippe, Warendorf

Michael KranzChairman of the Managing Board of Sparkasse Bonn, Bonn

Dr. Hans-Christian VollertDistrict Administrator of the Viersen District, Viersen

Dr. Norbert EmmerichChairman of the Managing Board of Sparkasse Münsterland Ost, Münster

Hans PixaDistrict Administrator of the Coesfeld District, Coesfeld

Permanent Representatives of theChairman and Deputy Chairmen of theGuarantors’ Meeting

Maria Huesmann-KaiserDepartment HeadMinistry of Economics and Labour of North Rhine-Westphalia, Düsseldorf

Angelika Marienfeld(until March 25, 2003)Assistant SecretaryMinistry of Finance of North Rhine-Westphalia, Düsseldorf

Gerhard Heilgenberg(from March 26, 2003)Section HeadMinistry of Finance of North Rhine-Westphalia, Düsseldorf

Karl Bechtel(until April 30, 2003)Regional CouncillorRegional Association of the Rhineland,Cologne

Harry Voigtsberger(from May 1, 2003)Regional CouncillorRegional Association of the Rhineland,Cologne

Dr. Hans-Ulrich PredeickRegional CouncillorRegional Association of Westphalia-Lippe,Münster

Heinz BiesenbachAssociation DirectorSavings Banks and Giro Association of theRhineland, Düsseldorf

Dr. Klaus WienbergAssociation DirectorSavings Banks and Giro Association ofWestphalia-Lippe, Münster

Supervisory Board

Chairman and Deputy Chairmen

Harald Schartau, ChairmanMinister of Economics and Labour of North Rhine-Westphalia, Düsseldorf


Jochen Dieckmann, MdLDeputy ChairmanMinister of Finance of North Rhine-Westphalia, Düsseldorf

Udo MolsbergerDeputy ChairmanRegional Director of the RegionalAssociation of the Rhineland, Cologne

Wolfgang SchäferDeputy ChairmanRegional Director of the RegionalAssociation of Westphalia-Lippe, Münster

Dr. Karlheinz BenteleDeputy ChairmanPresident of the Savings Banks and GiroAssociation of the Rhineland, Düsseldorf

Dr. Rolf GerlachDeputy ChairmanPresident of the Savings Banks and GiroAssociation of Westphalia-Lippe, Münster

Members Appointed by the Guarantors’ Meeting

Walter HaasChairman, DGB District NRW, Düsseldorf

Dr. Helmut Linssen, MdLFirst Vice President of the State Assemblyof North Rhine-Westphalia, Düsseldorf

Edgar Moron, MdLChairman of the SPD Parliamentary Group,Düsseldorf

Dr. Michael VesperMinister of Urban Development and Housing, Culture and Sport of North Rhine-Westphalia, Düsseldorf

Paul HeidrichChairman of the CDU, Regional Assembly of the Rhineland,Mülheim an der Ruhr

Dr. Berthold TillmannLord Mayor of the City of Münster, Münster

Dieter PützhofenLord Mayor of the City of Krefeld, Krefeld

Hans PixaDistrict Administrator of the Coesfeld District,Coesfeld

Representatives of the Bank’s Staff

Martin Bösenberg(from January 16, 2003)Bank employeeLandesbank NRW, Münster

106 Notes


Notes 107

Fred EickeVice PresidentLandesbank NRW, Düsseldorf

Christian Gnegel(from January 16, 2003)Bank officerLandesbank NRW, Münster

Hannelore Heger-GolletzBank employeeLandesbank NRW, Münster

Gerd-Uwe Löschmann(until January 15, 2003)ProkuristWestLB AG, Düsseldorf

Manfred Matthewes(until January 15, 2003)Bank officerWestLB AG, Düsseldorf

Franz-Georg SchröermeyerSecretary, Financial Servicesver.di VereinteDienstleistungsgewerkschaft, MünsterRegional Office, Münster

Christiane StascheitDeputy Directorver.di VereinteDienstleistungsgewerkschaft, DüsseldorfRegional Office, Düsseldorf

Michael Tellmann(from January 16, 2003)Bank officerLandesbank NRW, Düsseldorf

Elisabeth Weber(until January 15, 2003)Bank officerWestLB AG, Düsseldorf

Permanent Representatives of theChairman and Deputy Chairmen of theSupervisory Board

Maria Huesmann-KaiserDepartment HeadMinistry of Economics and Labour of North Rhine-Westphalia, Düsseldorf

Angelika Marienfeld(until March 25, 2003)Assistant SecretaryMinistry of Finance of North Rhine-Westphalia, Düsseldorf

Gerhard Heilgenberg(from March 26, 2003)Section HeadMinistry of Finance of North Rhine-Westphalia, Düsseldorf

Karl Bechtel(until April 30, 2003)Regional CouncillorRegional Association of the Rhineland,Cologne


108 Notes

Harry Voigtsberger(from May 1, 2003)Regional CouncillorRegional Association of the Rhineland,Cologne

Dr. Hans-Ulrich PredeickRegional CouncillorRegional Association of Westphalia-Lippe,Münster

Heinz BiesenbachAssociation DirectorSavings Banks and Giro Association of theRhineland, Düsseldorf

Dr. Klaus WienbergAssociation DirectorSavings Banks and Giro Association ofWestphalia-Lippe, Münster

Managing Board

Dr. Bernd Lüthje (Chairman)Ernst GerlachDr. Ulrich Schröder

Düsseldorf, March 26, 2004

Landesbank NRW

The Managing BoardDr. Lüthje, Gerlach, Dr. Schröder


Notes 109

Auditor’s Opinion

We have audited the annual financialstatements, together with the bookkeepingsystem, and the management report of the Company Landesbank NRW, Düsseldorf/Münster, for the business year fromJanuary 1, 2003 to December 31, 2003. The maintenance of the books and recordsand the preparation of the annual financialstatements and management report inaccordance with German commercial lawand supplementary provisions in the articlesof incorporation are the responsibility of theCompany’s management. Our responsibilityis to express an opinion on the annualfinancial statements, together with thebookkeeping system, and the managementreport based on our audit.

We conducted our audit of the annualfinancial statements in accordance with § 317 HGB (“Handelsgesetzbuch”: “GermanCommercial Code”) and German generallyaccepted standards for the audit of financialstatements promulgated by the Institut derWirtschaftsprüfer in Deutschland (IDW).Those standards require that we plan andperform the audit such that misstatementsmaterially affecting the presentation of thenet assets, financial position and results ofoperations in the annual financial statementsin accordance with German principles ofproper accounting and in the management report are detected with reasonable assurance.Knowledge of the business activities andthe economic and legal environment of he Company and evaluations of possiblemisstatements are taken into account in

the determination of audit procedures. The effectiveness of the accounting-relatedinternal control system and the evidencesupporting the disclosures in the books andrecords, the annual financial statementsand the management report are examinedprimarily on a test basis within the frame-work of the audit. The audit include assess-ing the accounting principles used andsignificant estimates made by management,as well as evaluating the overall presentationof the annual financial statements andmanagement report. We believe that ouraudit provides a reasonable basis for ouropinion.

Our audit has not led to any reservations.

In our opinion, the annual financialstatements give a true and fair view of thenet assets, financial position and results ofoperations of the Company in accordancewith German principles of proper accounting.On the whole the management reportprovides a suitable understanding of theCompany’s position and suitably presentsthe risks of future development.

Düsseldorf, April 2, 2004

PwC Deutsche RevisionAktiengesellschaftWirtschaftsprüfungsgesellschaft

(Peters) (ppa. Meteling)Wirtschaftsprüfer Wirtschaftsprüfer(German Public (German Public Auditor) Auditor)


110 Notes

anhang110-120_E druck 27.05.2004 14:58 Uhr Seite 110

Notes 111

Glossary

Approval AuthoritiesAccording to section 3 of the FederalHousing Promotion Act, social housingpromotion is performed at state level andeach state government has to define its own approval procedures. By way ofsection 2 of the North Rhine-WestphalianState Housing Promotion Act, responsibilityfor the approval of social housing promotionfunds has been assigned to the various localgovernments (for towns with populationsover 60,000) and district governments.These communities have so-called approvalauthorities which are entitled to commitpromotion funds on behalf of Wohnungs-bauförderungsanstalt NRW (Wfa). Based onthese commitments under public law, Wfathen extends private-law loans to therecipients of the promotion funds.

BacktestingBacktesting is a statistical process forvalidating the accuracy of a ➔ VaR model.The values forecast by the VaR model arecompared with the actual changes in valueof a given portfolio. In a so-called “cleanbacktesting” process, this retrospectiveanalysis is performed on a “frozen”portfolio (i.e. on a like-for-like basis).

Basle IIUnder the Basle II regulations scheduled to take effect in 2007 (withsimilar frameworks to be introduced on an EU level), international banks will berequired to align their capital backing ofcredit risks with the actual and specific risks incurred (in contrast to current capitalbacking rules, which rather generalise theserisks). The required amount of capitalbacking will largely depend on a borrower’s

internal and/or external rating. (➔ Standardapproach ➔ IRB approach). Collateralprovided by the borrower is to be taken into account more specifically. Operationalrisks will have to be backed with equitycapital as well.

CIR Cost Income RatioThis ratio captures a financial institution’sadministrative expenses as a percentage ofinterest income, commission income andother operating income.

Confidence LevelDefines the probability of a potential lossactually remaining in the range defined as ➔ VaR.

Country CapA limit on the volume of Landesbank’sbusiness within the eurozone.

Credit CommitteeThe Supervisory Board has delegated a number of its members to the CreditCommittee, which decides on the approvalof loans to members of the Bank’s boardsunder section 15 of the German BankingAct. The Credit Committee receives regularreports on the development of the Bank’sloan portfolio from the Managing Board.

Credit Risk EquivalentsCredit risk equivalents are calculated usingthe market valuation method, taking intoaccount the potential cost of purchasing therequired securities based on a currentvaluation plus an add-on to reflect apotential future increase in the risk.


112 Notes

Derivative InstrumentsDerived from underlying values such asstocks, interest rates and indices, theseinstruments include swaps, options and futures which are traded on stockexchanges or in over-the-counter markets.

Employee ParticipationBased on a voluntary agreement between a company and its employees, the latter canparticipate in the capital of the company.This participation can be of a permanent or temporary nature and requires a formalagreement.

Equity Capital– Liable equity capital (acc. to section 10 of

the German Banking Act)The sum total of core capital andsupplementary capital subject to certaindiscounts.

– Commercial equity capital (acc. to section2 of the German RechKredV)The sum total of subscribed capital,capital reserves, profit reserves and net profit.

Event Type CategoriesA range of clearly defined events formeasuring operational risks under ➔ Basle II regulations.

Explicit Funding GuaranteeThis statutory guarantee means that the owners of a bank are jointly andseverally obliged to cover a bank’s funding(refinancing) requirements. All existing and future issues of a bank covered by sucha guarantee benefit from a “zero solvencyweighting” on their creditors’ books.

Guarantor LiabilityEnacted by way of a law or a directive,“Guarantor Liability” is a direct guaranteeextended by a public law entity (state,municipality or institution under public law)to the creditors of a German public-lawbank. It obliges the guarantors to indemnifythe creditors in case of an insolvency orliquidation of the bank. This guarantee isnot deemed to be a general principle ofGerman law but needs to be legallyinstituted in each specific case.

Guarantors’ MeetingThe guarantors of NRW.BANK represent the interests of the Bank’s owners. Thetasks and responsibilities of the Guarantors’Meeting are defined in the institutionalcharter of NRW.BANK, which can beviewed at www.nrwbank.de.

IAS/IFRSThe International Accounting Standardsand the International Financial AccountingStandards were drafted by an internationalprofessional body in order to facilitateglobal comparability of annual accounts.Accounts prepared to IAS are designed toprovide investors with relevant informationon companies’ assets, finances andprofitability as well as changes thereof over time. Section 292 of the GermanCommercial Code defines the possibleapplication of IAS on group accounts.

IFRSAccording to a decision by the InternationalAccounting Standards Board, all new publications relating to accountingstandards will use the wording


Notes 113

“International Financial ReportingStandards” instead of ➔ IAS. All current,previously published and revised standardswill continue to use the wording“International Accounting Standards” (IAS).

Institutional LiabilityInstitutional Liability (“Anstaltslast”)denotes the state’s obligation to keep a German public-sector institutionfunctioning and solvent at all times. As such, Institutional Liability constitutes a guarantee which is unlimited both interms of its amount and of its duration. It is deemed to be a general principle ofGerman law.

IRB ApproachInternal Ratings Based Approach(alternative: ➔ standard approach)Calculation of the credit risk based on a bank’s own credit risk model and itsinternal rating system. Certain parametershave been standardised. (➔ Basle II allowsfor two methods: the IRB approach and the advanced IRB approach.) Banks’internal systems are subject to supervisoryapproval.

Macro HedgeThese transactions are used by banks as a global hedge of all open risk positions(➔ micro hedge). The purpose of hedging is to compensate for risks.

MaHThe “Minimum Requirements for thePerformance of Trading Transactions” have been defined by Germany’s bankingsupervisory authority. They define the

functional and organisational frameworkswhich financial institutions need to have inplace. The term “trading transactions” isdefined more widely than in section 340cpara. 1 of the German Commercial Code.

MaIRThe “Minimum Requirements of FinancialInstitutions’ Internal Auditing Activities”have been defined by BaFin, the regulatorsupervising Germany’s financial servicessector. These rules govern the organisationand performance of banks’ internal auditfunctions. According to these rules, eachfinancial institution must have in place afunctional internal audit department which,acting independently on behalf of themanaging board, monitors the operationaland business processes within the financialinstitution, its risk management and riskcontrolling activities as well as its internalcontrol system. The rules also define theprinciples underlying internal auditing, theperformance of audits, the outsourcing ofauditing tasks and group auditing.

MaKMinimum Requirements for LendingOperationsFunctional and organisational regulationsfor the conduct of the lending business.

Micro HedgeThese transactions are used by Banks to hedge individual open risk positions (➔ macro hedge).


114 Notes

Mezzanine FinancingMezzanine capital is a hybrid form of capital combining characteristics of bothdebt capital and equity capital. Mezzaninefinancing structures can be flexiblydesigned as sources of economic capitaland as equity capital at the same time.Typical equity-type mezzanine structuresinclude the German “typische/atypischeStille Beteiligung”, participation certifi-cates, convertible bonds as well as capitalinjections which enable investors to benefitfrom an increase in the company’s value.

Netting AgreementTwo parties can agree to “net” their mutualclaims and receivables under certaincircumstances. A legally binding nettingagreement may result in a reduction of thecounterparty risk (reduced from the fullamount to the net amount); credit risks maybe involved in cross-border transactions. In the case of derivatives transactions,netting agreements may lead to reducedcapital backing requirements (e.g. underPrinciple I according to the GermanBanking Act).

Objective 2 Programme NRW (2000–2006)Running from 2000 to 2006, this NRW-EU programme is designed to promote economic and socialredevelopment in structurally challengedregions of North Rhine-Westphalia.

PortfolioThe entirety of a bank’s holdings or partsthereof grouped by types of investment(bonds, shares, derivatives etc.) or types ofrisk (e.g. interest rate risks).

PPPPublic Private PartnershipA long-term agreement between a public-sector entity and a private-sectorcontractor/operator aimed at providingcertain tasks which were previouslyprovided by the public sector. The agreement should be designed to allocatethe project risks in a balanced mannerbetween the two sides. As such, PPPmodels are a hybrid form of procurementranging somewhere between traditionalprocurement and full-fledged privatisation.

RatingBoth tradable securities and their issuersare rated according to standardisedparameters. As such, a rating represents anopinion on the issuer’s future ability andwillingness to pay interest and repay theprincipal of the debt instrument in a timelyand complete manner.

Risk ToleranceA bank’s risk tolerance is defined by itscapability to absorb risks (e.g. by way of its equity or subordinated equity capital).Depending on its risk appetite, a bank willusually define an upper limit of value to beput at risk at any given time.

Scenario AnalysisA scenario analysis is performed to predictthe future development of a given entityassuming changing scenarios but inherentlyconsistent framework conditions.

Sensitivity AnalysisA method used to gauge a portfolio’sresponse to variations in individual riskfactors (e.g. interest rates).


Notes 115

Standard ApproachThe standard approach serves to determinethe credit risk and the operational risks (➔ Basle II). – Credit risks are assessed using risk

classes (external ratings), taking intoaccount fixed weightings (0% -150%).Alternative ➔ IRB approach.

– Operational risks are assessed based onthe average annual gross earnings of agiven business unit (assuming eight units)in the past three years. A fixed percentage(12%-18%) is assumed for theseearnings.

– Other quantification procedures: basis indicator approach and internalmeasurement approach.

State Housing AssetsThe assets of Wohnungsbauförderungs-anstalt NRW (Wfa) are booked as a specialreserve of NRW.BANK (the so called statehousing assets). Given that these housingassets are subject to a variety of federal andstate laws (federal housing promotion act,state housing promotion act) and housing-specific regulations, they may only be usedto fund and finance activities directlyrelated to Wfa’s housing-related mission inthe state of North Rhine-Westphalia.

Stress TestsStress testing is performed in order tomodel the effects of extreme market fluctuations. As such, stress testingcomplements the ➔ VaR analysis and istherefore mandatory under bankingsupervision rules.

Supervisory BoardThe Supervisory Board supervises theactivities of the Managing Board. Its tasksare defined in the institutional charter ofNRW.BANK, which can be viewed atwww.nrwbank.de. The Supervisory Board is entitled to form committees comprised ofits members in addition to the committeesalready formed (Executive Committee, Audit Committee, Credit Committee,Construction Committee).

Upper Loss Limit➔ Risk tolerance

VaRValue-at-riskA risk quantification method. VaR quantifiesthe amount of a future loss which will notbe exceeded in a given period, subject to agiven ➔ confidence level.

Verständigung I AgreementAn agreement reached between the European Commission and the FederalRepublic of Germany on July 17, 2001.According to this agreement, the public-lawbanks engaged in commercial business willno longer benefit from the state guaranteesknown as ➔ Institutional Liability andGuarantor Liability after July 18, 2005.

Verständigung II AgreementAccording to a second agreement (the so-called “Verständigung II”) reachedbetween the European Commission and theFederal Republic of Germany on March 1,2002, ➔ Institutional Liability, ➔ GuarantorLiability and similar state guarantees andtax privileges will continue to be availablefor development banks whose activities are


116 Notes

confined to bona-fide development andpromotion (e.g. SME promotion, technologypromotion, environmental promotion).These banks must not compete with private-sector banks and their public developmentand promotion missions must be clearlydocumented in their charters andguidelines. All requisite implementationmeasures must be completed no later thanMarch 31, 2004.

Zero Solvency RatingDebt capital made available to NRW.BANKby financial institutions need not be backedwith equity capital on their balance sheets.


Notes 117


118 Notes

Internal Audit

Gabriela Pantring

Other Promotion Programmes

N.N.

Managing BoardMember

Ernst Gerlach


Dr. Bernd Lüthje

Credit Management

Margret Hirthammer

Group Risk Control

Dr. Yvette Bellavite- Hövermann

Office of the Managing Board

Christiane Jansen

Finance

Wolfgang Beimel

Human Resources

Franz-Josef Frackowiak


Dr. Birgit Roos

Wfa NRW

Rainer Hofmann

Equity Investments

Horst Jann

Organisation Chart of NRW.BANK

Credit Analysis

Margret Hirthammer

Credit Processing

N.N.

Real Estate Loans

Rolf-Werner Huckenbeck

Municipal Loans

Hubert Venneker

Risk Control

Dr. Dirk Erdmann

Business Support

Dr. Ortwin Schumacher

Back OfficePromotion Business

N.N.

Executive Services

Felix Könsgen

Press and Communications

Dr. Klaus Bielstein

Accounting/Balance SheetStructure Management

Joachim Kiesau

Financial Accounting

Ute Kuschel

Regulatory Reporting

Dr. Rüdiger Krautheuser

Tax

Werner Schmitz

Corporate Planning/Controlling

Walter Wohlhage

Human Resources Management

Achim Meierkamp

Basic Issues/Job Assessment

Petra Kalthoff

Personnel Development/Management Training

Ralf Groß-Heitfeld

Human Resources Administration

Peter Schröder

Economic Development I

Dr. Gerhard Weyers

Economic Development II

Nikolaus Hammes

Legal

Wulf Ebsen

Internal Control

Dr. Ulf Tiemann

Loan Processing (Düsseldorf)

Hans Josef Kniel

Loan Processing (Münster)

Gerd Brockmann

Insolvency Management

Lutz Zimmermann

Advisory/Promotion

Walter Coenes

Services

Gerd-Peter Wolf

Equity Finance

Dr. Peter Güllmann

Strategic Equity Investments

Jutta Löffler

Back OfficeCapital Markets

Detlef Böger

General Audit

Rüdiger Weidener

Credit Audit

Gerd Reinhardt

IT Audit

N.N.


Notes 119

Advisory Services

N.N.


Dr. Ulrich Schröder

Capital Markets

Klaus Rupprath

Legal, Compliance,Money Laundering Prevention

Oliver Blaß

IT/Organisation/Internal Services

Tobias Schmitt

InfrastructureFinance

Georg D. Braune

Secondary Markets

Ralf Mitsch

Structural PromotionProgrammes

Anton Render

Status: April 15, 2004

All appointments are preliminary pending the consent of the staff council

Portfolio Management

Thomas Bracht

Business Management

Marco Adler

Municipal Financing

Andreas Kötter

Investor Relations

Dr. Frank Richter

IT Services

Matthias Lersch

IT Non-Trading

Klaus Elschenbroich

IT Trading

Dr. Jens Heinrich

Organisation

Dr. Jürgen Schulte

Advisory CentreRhineland

Advisory CentreWestphalia

Marketing

Kirsten Nagel

Sales Controlling/Support

N.N.

Internal Services

Ralf Welter

Project- and Syndicated Loans

Andreas Koch


NRW.BANK

DüsseldorfHeerdter Lohweg 3540549 Düsseldorf

Phone +49 211 826-09Fax +49 211 826-11800

Münster Friedrichstraße 148145 Münster

Phone +49 251 412-09Fax +49 251 412-2288

[email protected]

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