Annual Report as of 31-12-2010
NORD/LB Covered Finance Bank S.A.
Summary of Key Data
Performance 31-12-2010(EUR million)
31-12-2009(EUR million)
Increase/Decrease (EUR million) (%)
Loansandadvancestobanks
Loansandadvancesto customers
Riskprovisions
Financialassets
Otherassets
1,111.0
821.4
–2.1
4,044.9
433.2
1,144.8
856.8
–1.0
3,686.4
243.7
–33.8
–35.4
–1.0
358.5
189.5
–3
–4
97
10
78
Balance sheet total – assets 6,408.5 5,930.6 477.8 8
Liabilitiestobanks
Liabilitiestocustomers
Securitisedliabilities
Otherliabilities
Reportedequity
2,550.9
433.0
2,701.3
656.2
67.0
1,960.8
367.9
3,032.7
504.8
64.3
590.1
65.0
–331.4
151.4
2.7
30
18
–11
30
4
Balance sheet total – liabilities 6,408.5 5,930.6 477.8 8
LettresdeGage(coveredbonds) 3,266.2 3,494.2 –228.0 –7
Profit/loss performance 2010(KEUR)
2009(KEUR)
Increase/Decrease (KEUR) (%)
Netinterestincome
Netcommissionincome
Profit/lossfromfinancialassets
Otherprofit/loss
8,589
–1,201
5,041
–2,296
8,725
–903
5,354
–2,323
–136
–298
–314
27
–2
33
–6
–1
Earnings before costs 10,134 10,853 – 720 – 7
Administrativeexpenses
Profit/lossfromchangesinvaluationandriskprovision
Taxes
–2,853
–567
482
–2,675
–223
–1,591
–177
–343
2,073
7
>100
>100
Earnings after taxes 7,197 6,364 833 13
Key economic data 2010 2009 Increase/Decrease
Cost-income-ratioin%*)
RoRaCin%**)
28.1%
11.7%
24.6%
13.8%
3.5%
–2.1%
14
–15
Regulatory law key figures 31-12-2010(EUR million)
31-12-2009(EUR million)
Increase/Decrease (EUR million) (%)
Risk-weightedassetvalues
Corecapital
Equitycapital
902
78
116
908
67
113
–6
11
3
–1
16
3
Corecapitalratio
Overallcoefficient
8.6%
12.8%
7.4%
12.4%
1.3%
0.4%
17
3
Changes in employee numbers 2010 2009 Increase/Decrease (%)
Number of employees 9 7 2 29
*)TheCost-Income-Ratio(CIR)isequaltothequotientsfromadministrativeexpensesandtheearningsbeforecosts**)TheRoRaCisequaltothequotientsfromtheearningsbeforetaxesandthemaximumvaluefromlimitforlocked-upcapitalor
locked-upcapital
Content
Organisational Structure
Management Report
PositionwithintheGroupInternationalEconomicDevelopment DevelopmentofBusinessSectorsEarningsScheduleofAssetsandFinancialDataRiskReportPersonnelReportSupplementaryReportStatementsRelatingtotheFuture
Financial Statements StatementofIncomeandExpenseOverall Profit and Loss AccountBalanceSheetCashFlowStatementStatementofChangesinEquity
Notes
AccountingPoliciesSegmentReportingNotestotheIncomeStatementNotestotheBalanceSheetOtherDisclosures
Statements to the Annual Report
ResponsibilityStatementAuditor’sReportReportoftheSupervisoryBoard
111217222728434444
4647484951
5666707895
116118121
Annual Report as of 31-12-2010
Annual Report 2010
NORD/LB Covered Finance Bank S.A.
7
Members of the Supervisory Board
Martin HalblaubMemberoftheBoardofDirectorsofNORD/LBNorddeutscheLandesbankGirozentrale(until11January2010,Chairman)
Ulrike BrouziGeneralManagerofNORD/LBNorddeutscheLandesbankGirozentrale(since1September2010,Chairmansince17November2010)
Harry RosenbaumChairmanoftheBoardofNORD/LBNorddeutscheLandesbankLuxembourgS.A.(DeputyChairman)
Jürgen MachalettGeneralManagerofNORD/LBNorddeutscheLandesbankGirozentrale
Wolfgang GöhlichGlobalHeadofTreasuryofNORD/LBNorddeutscheLandesbankGirozentrale
Members of the Supervisory Board
8
Board of Directors
Chairman of the Board of Directors/Chief Executive OfficerMarkusThesen
Deputy Chairman of the Board of Directors/Chief Financial-/Risk-/Operations OfficerChristianVeit
Organisation
Public FinanceRené-ChristianRindert
TreasuryOliverMazur
Operation Management/ComplianceKlausSöllner
Board of Directors
9
Chairman of the Board of Directors/Chief Executive OfficerMarkusThesen
Deputy Chairman of the Board of Directors/Chief Financial-/Risk-/Operations OfficerChristianVeit
Board of Directors
Annual Report 2010
NORD/LB Covered Finance Bank S.A.
11
Position within the Group
NORD/LBCoveredFinanceBankS.A.(referredtohereinafteras“NORD/LBCFB”or“thebank”)isafullsubsidiaryofNord-deutscheLandesbankLuxembourgS.A.,Luxembourg,(hereinafterreferredtoinshortas“NORD/LBLuxembourg”)andisincludedinthesub-groupannualaccountsofNORD/LBLuxembourgandintheconsolidatedannualaccountsofNord-deutsche Landesbank Girozentrale, Hanover (hereinafter referred to in short as “NORD/LB”). The financial statements of thesub-groupNORD/LBLuxembourgcanbeviewedontheinternetatwww.nordlb.lu and the consolidated financial state-mentsofNORD/LBatwww.nordlb.de.
NORD/LBandNORD/LBLuxembourgsubmittedaletterofcomfortforNORD/LBCoveredFinanceBankS.A.intheirrespec-tiveAnnualReports.Thisletterofcomfortalsocoverspoliticalrisk.
TheobjectofNORD/LBCFBistoconductthebusinessofacoveredbondbank(Pfandbriefbank)sofaraspermittedunderthelawoftheGrandDuchyofLuxembourg.
Marketconsequence,organisationalandadministrativefunctionsareperformedonthebasisofagencycontractsbytheparentcompany,NORD/LBLuxembourgorthegroupparentNORD/LBexceptforthefunctionsofoperationalmanagement,complianceandcoverpoolmanagement.
ThisreportrelatestotheindividualannualreportofNORD/LBCFBincompliancewithInternationalFinancialReportingStandards(IFRS)oftheInternationalAccountingStandardsBoard(IASB),asimplementedbytheEU.
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International Economic Development
Financial Markets
The extensive fiscal policy measures taken in response to therecession,andthetypical lossesofincomeandaddi-tional burdens for public finances caused by the recession, haveledtoalmostallmemberstatesoftheEurozonehav-ingtoacceptnewborrowingabovethe3%markallowedinaccordancewiththestabilityandgrowthpactin2009and2010. Thus the deficit quota within the Eurozone in 2009 measuredonthenominalgrossdomesticproductwasanaverage of 6.3 %, and even the deficit quota for the year justendedmightwellturnouttobeatasimilarlevel.Thedebt/GDPratiomeanwhileincreasedtoover80%ofGDP.
In particular Greece’s deficit quota which, having being checkedbytheEUCommission,andat15.4%ofGDP,hasturnedouttobeevenhigherthanthe13.6%reportedinApril 2010, was given a very critical assessment on the fi-nancialmarkets.Growingconcernsaboutthecreditworthi-nessofGreecetriggeredsevereturbulenceonthemarketsinspringof2010.ThusGreekgovernmentbondscameun-deralotofpressureandtheGreekyieldcurveinverted.ThespreadofGreekgovernmentbondswithten-yearremainingmaturitytoFederalbondsclimbedtoalmost10percentagepoints.SomeothercountriesoftheEurozonewereaffectedbythis,whichlikewisehavetobattlewithahighdebtleveland a difficult budgetary position.
AttheheightofthedistortionsatthebeginningofMay,theEurocountriesagreedacommonrescuemechanismforail-ingmemberstateswiththeIMFandtheEUCommission.ThecentrepieceistheEuropeanFinancialStabilityFacility(EFSF)withEUR440bn.OntopofthiscomesEUR60bn.fundsfromEUCommission(EuropeanStabilityMechanism,ESM) and EUR 250 bn. support from the IMF. The first coun-trythatneededtobebailedoutusingthismechanismwasIreland.WiththerescueoftheAngloIrishBank,Ireland’sstate finances were also so heavily burdened that the Irish governmenthadtoapplyforhelpinthesumofEUR85bn.fromthecommonrescuepackage.
ThelatestdistortionsasaconsequenceofthecrisisintheIrish state finances have again proven that the debt crisis willremainthedeterminingsubjectintheEuropeanUnionforthetimebeing.Aswellascomprisingthewaybacktosustainable growth, budget consolidation will be one of
themajorbigchallengesfacedbymanycountriesoverthecomingyears.Politicianscontinuetosearchfeverishlyforopportunitiestosustainablycurbthecrisisonthemarketsforgovernmentbonds.Atthetwo-daysummitinthemid-dleofDecember2010,theheadsofstateandgovernmentcreatedthelegalbasisforapermanentcrisismechanismwithanagreementtochangetheEUtreaty.Inourviewitis,however,extremelydoubtfulwhethertheseamendmentswillbeenoughtocalmthetensemarketconditions. It ismostlikelythatthiswillonlybeachievablewithacredibleandunanimousavowalofEuropeanunity,whichwouldalsohave to include financial and risk transfer elements. Oth-erwise,politicsthreatenstocontinuetolagbehindmarketdevelopments.
TheEFSFmaywellnotbeenoughtoovercometheacutecrisisintheEurozone.ThestructureoftheEFSFistoosus-ceptible, in that itactsasguarantorat thesametimeasprovidingrescuemeasures.Aswellasapermanentcrisismechanism, we also need new culture of stability in thecommoncurrencyzone.Webelievethattherecommenda-tionsoftheVan-Rompuyworkingparty,whichwassetupsolely to improve financial and economic policy monitoring, areonlysuitableforestablishinganewcultureofstabilitytoalimitedextent.Oneproblemofthestabilityandgrowthpackagewasthelackofcredibilityofsanctioningbreaches.Whilethere issupposedtobesometighteninghere,thebasicproblems (noautomatism,discretionarydecisions,votinginthecouncilofministers)stillremaininexistence.Ontheotherhand,theapproachoftakingacomprehensiveapproachtofosteringacultureofstabilityandpayingat-tentiontomacroeconomicaberrationsinthefutureaswell,istobewelcomed.Irelandistheprimeexampleofthefactthatstabilityinacurrencyunioncannotbeachievedinthesamewaysasasavingsclubwithsimplecashrules.Moreo-ver,inordertoavoiddisincentives,privateinvestorsshouldalsobeinvolvedinthecostsofrestructuringinthefuture.
TheECBhasreactedtothegovernmentbondcrisiswithapurchasingprogramforEuropeangovernmentbonds(Se-curities Markets Program, SMP) and bought governmentbonds–presumablyprimarilyfromcountriesontheEuroperiphery–involumesofnearlyEUR74bn.uptotheendoftheyear.Inthemeantime,theECBhasmadeitcleartothegovernmentsthroughitsincreaseofcapitalbyEUR5bn.bytheendoftheyearthatanycoststhatmightarisewithafurtherpurchaseofgovernmentbondsbytheEurosystemwillbepassedontothememberstates,atleastindirectly.Consequently,thisisprimarilytobereadasapoliticalsig-naltotheheadsofstateandgovernmentthatthecrisisintrustandthedebtcrisiswillhavetobesolvedpolitically
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andtheymustnotevensecretlyhopefora(partial)mon-etisationofgovernmentbonds.
Until recently, the debt crisis was the most importanttopiconthecapitalmarkets.Although federalsecuritiescancontinuetoberegardedasasafehaven,theyieldoften-yearfederalbondsroserobustlyuntiltheendof2010.Followingthemarkedlowpointofnearly2.1%seenattheendofAugust,yieldrosebynearly100basepointsabove3.0%.Inourview,however,thisisthemanifestationofanormalisationoftheunnaturallylowyieldlevelinthesum-mermonthsof2010.Moreover,againstthebackgroundofthepositiveeconomicoutlookfor2011,riskierassetshavegainedinattractivenessagain.
Themoneymarketrateshavenormalisedontheinterbankmarket, after the interbank rates had been significantly below the base rate for a long time as a result of the flood of liquidityonthemarkets.Meanwhile, the3monthrate(EURIBOR)islistedabove1%.Therelativelysilentreduc-tionintheEurosystem’snetaccountsreceivablefromthebanks through the expiry of several longer term refinanc-ingtransactionsandthelargelysuccessfulstresstestrunin July are the manifestations of a restabilising financial system. Meanwhile, the banking system is no longer soheavilydependentontheliquidityinjectionsoftheissuebank.Neverthelesssomeindividualbanks– inparticularfromthosestatesthathavebeenparticularlybadlyhitbythedebtcrisis–continuetohaveconsiderableproblemstorefinance via the markets and therefore away from the ECB. Manybankshavenotyetcompletedtheprocessofadjust-ingtheirbalancesheets.Moreover,banksare facedwithconsiderablechallengesfollowingtheproposaloftheBaselCommitteeonbankingatthebankforInternationalSettle-mentstotightentheminimumequitycapitalregulationsforbanksaftertheanticipatedtranspositionintonationallaw.Inparticular,themuchhigherqualitativeandquantita-tiverequirementsforliableequitycapitalinthefuturewillrequireconsiderablechanges.
The fluctuation band of the yields in the USA again turned outtobewiderthanthefederalbonds.Theyieldsof10-yeartreasuriesslidfromtheirheightofnearly4.0%atthebeginningofAprilpriortotheannouncementofthenewpurchasing programs of the Federal Reserve Bank (Fed;QuantitativeEasing2,QE2)tobelow2.4%inOctober.TheyieldspreadbetweentenyearUStreasuriesandgermanfederal bonds (Bundesanleihen) fluctuated accordingly be-tween90andnearly5basepointsandrosebytheendoftheyearslightlyagaintoagood30basepoints.
AttheheightoftheEurodebtcrisistheUSdollarwasbrief-lyvaluedatnearlyUSD/EUR1.19againsttheEuro,beforethe greenback came under renewed pressure and briefly devaluedbyNovembertoUSD/EUR1.45.PrimarilypositiveeconomicnewsfromGermanyandtheeffectsofQE2hadasupportiveeffectfortheEurointhesecondhalfoftheyear.Previously, however, market players had focussed moreonthebudgetarypositionofseveralEuropeancountriesandtheworriesaboutthestabilityoftheEurozone.Overthe course of the year, the Euro moved against the Brit-ishpoundwithinabandofGBP/EUR0.92to0.80andwaslistedattheendoftheyearjustbelowGBP/EUR0.86.TheJapaneseyenontheotherhandincreasedstronglyinvalueagainsttheEuro,similarlytotheSwissfranc,whichreachedthetemporarypeakofthestrongincreaseinvalueduring2010attheendoftheyearatCHF/EUR1.24.
Economic Development in Germany
According to the first estimates of the Federal Statistical Of-fice the German economy recovered astonishingly strongly in the year just ended from the major recession of 2009.According to the office, the real GDP increased by 3.6 % in comparisontothepreviousyear.At+1.7%theincreasewastwiceashighastheoverall increaseintheEurozone.Withthisimpressiveupturn,alargepartofthepreviousfallinGDPof–4.7%couldberecovered.Hardlyanybodyhadexpectedthisdevelopmentayearago–atleastnottothisextent.TheGermaneconomyhadstarted2010withastatisticalsurplusofjust0.7percentagepoints,whichonceagainspellsoutthehighdynamicsoftheoverallyearin2010.EventhecurrentGermannationalrecordvalueforgrowthinGDPfrom2006wasslightlysurpassed.Aftertheworstrecessionofthepostwaryears,therecoveryprocessthusendedinthehighestrisein GDP since reunification. Over the same period, the deficit quotaincreasedto3.5%ofthenominalGDP,therisedoes
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howeverturnouttobealotsmallerthanforecastedayearagobecauseofthegoodeconomicdevelopment.
Germany profited particularly from the dynamic worldeconomybecauseofitstraditionalexportstrength.OtherimportantindustrialnationssuchastheUSAandJapan,butaboveallnumerousemergingeconomies,alsorecordedahighoveralleconomicgrowthin2010.Fuelledbythisdevel-opment,worldtradeincreasedintheyearjustendedwitha two-figure rate in comparison to the previous year and wasthusalreadyabletoachievethepre-crisislevelnow.This gave rise to significant impulses for the manufactur-ing industries in Germany, which are reflected among other thingsinaclearriseinforeignordersforGermancompa-niesandtheincreasedindustrialoutput.Theinternationalstabilisationandeconomicprogramsandtheveryexpan-sivemonetarypolicymadetheircontributiontotheglobaleconomicrecovery.Therewereincreasingsignsoflargelyself-supportedrecoveryin2010.Againstthisbackground,itisnotverysurprisingthattheIFObusinessclimaterecov-eredgreatlyinthecompaniesanditwaspossibletorecordanewrecordvalueinDecember.
In2010,Germanexportsgrewbyagood14%inrealterms,imports increased by 13%. While net exports thereforecontributed1.1percentagepointstotherealGDP,there-maining2.5percentagepointscanbetracedbacktodo-mestic consumption. In particular, investment in plantand equipment increased vigorously in 2010 by +9.4%inrealterms,butcouldonlypartiallycompensateforthedropseenin2009.Thisdevelopment,whichwaspresum-ably very dynamic again in the final quarter, may well also bepartiallya resultof thediscontinuationof theoptionofthedeclining-balancemethodofdepreciation,butthehistorically low long-term real interest rates and the tillnowstrong increase incapacityutilisationhave likewisecontributedtothis.Buildinginvestmentsgrewby+2.8%,partlyduetomeasuresinassociationwiththeeconomicprogramandthehistoricallylowmortgagerates.Consumerbehaviour was also positively influenced, so in comparison tothepreviousyear,privateconsumptionroseby0.5%aswellaspublicconsumption(+2.2%).
Thismaywellbenotleastasaresultoftheremarkablygooddevelopment of the employment market. While in mostwesternindustrialnationsunemploymentrosesometimesdrastically as a consequence of the financial crisis, under-employment in Germany only rose slightly in the shortterm. The trend of sinking unemployment figures recorded since the middle of 2009 was not influenced by this. One important contribution to this – in addition to the flexible
reactionofthepartiestowageagreements–wasthein-strumentoftheeconomicshortworkingtimewhichaffect-edabout1.5millionpeopleatitspeak.Inparalleltothefallinunemploymentandinthecourseoftheeconomicrecov-ery, this figure fell significantly from the beginning of 2010. Moreover,theaverageannualunemploymentratesankto7.7%;theabsolutenumberofstatisticallyregisteredper-sonswithoutajobreachedthelowestlevelforaround18yearsinNovemberat2.93million.
Moreover, as well as the very pleasing development ofthe employment market, the relatively low inflation had apositiveeffectonrealpurchasingpowerandthereforeonprivateconsumptioninthelastyearonceagain.Aftertheprice levelshadstayedalmostconstant in2009, thenational consumer price index rose moderately in 2010by 1.1%. This led to a rise in real wages and salaries innegotiatedagreementsinthepastyearby0.7%.Theef-fective gross income rose per employee by 1.1% in realterms,whichwasprimarilyduetothefallinshortworkingtimeandtheresultantincreasednumberofhoursactuallyworkedagain.
… in the USA
Inthelastfewweeksthesignsaremultiplyingthataftertheremarkablerecoverybetweentheautumn2009tospring2010,theredidindeedfollowaninterimweakening,butthishasapparentlycometoanendagain.Thus,themoodin-dicatorsinthemanufacturingsectorralliedagainandarebeingrecordedintheexpansiveregion.Receiptofordersandindustrialproductionarealsoshowinghighergrowthrates.Therenewedrecessionfearedbymany–adouble-diprecession–thereforedidnotoccur.Quitetothecontrary,growthratesseemtobenormalisinginahealthywayandeconomic development seems to be stabilising. Robustconsumptioniscontributingtothisontheoneside,andontheotherside,soaretheglobalgrowthdynamics,whichcontinuetobehigh.
Therealestatemarketcrisisandthesituationontheem-ployment market were a burden in 2010. And yet, highgrowthcontributionsfromconsumptionwererecordedintheGDP.Theunalteredgrowthinincomewasprimarilyre-sponsible forthis–thepeoplewhowerenotaffectedbyshorttimeworkingorlaidoffconsumedalmostasmuchasbefore.Moreover,thericherhouseholds,whotraditionallymakeadisproportionatelylargecontributiontoconsump-tion, may well have additionally profited from a wealth ef-fectonthesecuritiesmarkets.
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Nocountermovementcanbeexpectedontherealestatemarket, which essentially helped to cause the economiccrisis, in view of it being totally a buyer’s market. Theredoappeartobeindicationshoweverofastabilisationataverylowlevel.Atleastitwasthuspossibletostopthefallinstartingbuildingprojects,planningapprovalsandsalesofnewbuilds.Itmusthoweverstillbeassumedthattherewillbeanexcesssupplyofrealestateinthecomingyears.
TheFederalReservestucktothezerointerestratein2010andinadditionresolvedtopurchasefurthergovernmentbondstotallingUSD600billion(QuantitativeEasing2).Thecapitalmarketyieldsatthelongendoftheinterestratestructurecurvesankmarkedlyinanticipationofthispoli-cy,buthavesincebrokenawayfromtheirlowlevelsagainmarkedly.Thus10yearUStreasurieswerelistedjustbelow3.5%againattheendof2010.
Forecast
Withaviewto2011,theglobaleconomythreatenstoex-hibit a somewhat slower dynamic as a result of the notquitesoexpansivemonetaryenvironmentandthemorerestrictive fiscal policy. The global GDP (in purchasingpower parities) should be able to grow in 2011 by morethan4%inrealtermshowever.TherearecurrentlysomevoiceswhoareexpectingamutedgrowthoftheUSecono-mybecauseofthecurrentlystilltensesituationontheUSemploymentmarketandthepossibleassociatednegativerepercussionsforprivateconsumption.Neverthelessthereisnoreason inourviewforexaggeratedpessimism.Thegrowth trend in the United States is still intact and maywellhaveevenspeededuprecentlysothatweareassum-ingariseinrealGDPin2011of3.2%.TheUSissueBankhasmadeitknownonnumerousoccasionsthatitwantstoholdfastto itscourseofveryexpansivemonetarypolicyforlonger.Aboveall,thestillweakconstitutionoftheem-ployment market and the moderate movement of pricesarestillcurrentlyofferingtheFedtheargumentsinfavourofthis.Againstthisbackground,weareanticipatingthatthe US issue Bank will raise the base rate for the first time inthethirdquarterof2011.
Germanywillbeagainatthetopintheeconomicdevelop-mentwithintheEurozonewithagrowthof2.6%.Evenifthedynamicsinthiscountryweretodiminish,thereisstilla large divergence in the overall economic developmentwithin the Eurozone, especially so because several Euromember states face significantly greater needs for consoli-dating their public finances and because these countries
arealsooftenfacedwithhavingtomakefurtherstructuraladjustments.
In the Eurozone, the moderate economic recovery willcontinuedespitetherecentturbulenceonthemarketsforgovernmentbondsandwillallowagrowthinGDPof1.5%.Above all, the precarious position of the public finances in awholerangeofmemberstatesgivesverylittlescopeforgovernmentinvestmentsorotherexpansivemeasures.Inthisrespect,itmustbeexpectedthatthedevelopmentinthesouthernmemberstateswillslowdownthegrowthinthe Eurozone. Moreover, in many states high unemploy-mentremainsaproblem.Inourview,itisnottobeantici-pated that there will be any significant improvements in 2011,andweareanticipatingonlyaslightfallintheannualaverageunemploymentratesfrom10.0%in2010to9.8%in2010inthecomingyear.Thesituationontheemploy-ment market is particularly difficult in Spain.
WhiletheriseinthedebtlevelsintheEurozonetojustbe-low90%ofGDPexpectedupuntil2012 isworryingandneeds a change of course, in view of the severe crisis in2009andincomparisontootherimportantindustrialna-tions,thereisnoreasontoexpectdoomandgloomintheEurozone.Aboveall, there isnoreasontospreadpropa-gandaaboutthebreakdownoftheEurozoneinanyway.Itisnotonlythattheenormousadvantages–especiallyfroma German point of view – of the common economic andcurrencyzonearebeingwantonlyneglectedinthepublicdebate;thereisalsohardlyacountry inEurozonethat isentitledtoplaythejudge.Thusallcountriesinthecurren-cy zone bear a common responsibility for the insufficient constitutionalstructureofthecurrencyunionwhenitwasestablishedandfortheatbestlaxsupervisionofthecrite-riaofthestabilityandgrowthpact.Ontheotherhand,theshare of the five largest economies, Germany, France, Italy, Spainand theNetherlandsof the totaldebtof theEuro-zoneasat2009wasatotalof83.5%.Thesecountriescon-tributedalmost thesameamount (83.4%) to theGDP inthesameyear.Neverthelessthedebtdynamicsinsomeofthesmallcountrieshasincreasedmarkedlyduringthecri-sis.ThereforeEuropeanpoliticsmustreachgreaterunityin economic and fiscal policy and set credible regulations thatarecompatiblewithincentivesforabudgetarypolicyinthememberstatesthat isorientatedtowardsstabilityand to monitor compliance with them – without makingthe acute crisis management prohibitively difficult.
TheECBwillretainthecurrentlowinterestrateforaboutanother year. The surprisingly large jump in inflation in De-cemberto2.2%Y/Yshouldnotchangeanythinghere.The
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leapinpricesislargelyaresultoftemporaryincreasesinenergy,crudeoilandfoodstuffprices.Afteranincreasedrise in prices in the first quarter, a slight fall in price pres-sureisanticipatedoverthecourseoftheyear,sothattheinflation for Germany and the Eurozone inflation will not riseabove2%asanaveragefortheyear.EventhelatestdevelopmentinlendingintheEurozoneandthemonetaryaggregates still do not hint at possible inflation dangers. In the face of the continuing tense situation on the financial marketsagainstthebackgroundofthedebtcrisis,theECBwillonlyverycarefullyandgraduallycutbackontheun-conventionalmeasuresin2011andafterthatintroducetheinterestraterisecycle.
Thepotentialofnewtensionsasaresultofthedebtcrisismay well lead in our view to the federal bonds profiting from thesafehavenin2011aswell–evenifitistoalesserextent.Moreover, a marked increase in inflation expectations is not tobeanticipatedoverthecourseof2011,whichiswhytheupwardsliftofthefederalyieldsshouldbemoderate.Nev-ertheless,acompletelydifferentpicturewouldemergeiftherewereaEurocrisismanagementwithhigh(risk)trans-fer,whichcannotberuledout,(e.g.throughEuro-Bonds,guaranteeexpansion,etc.)orthroughamassivepurchaseofgovernmentbondsbytheECB.Thelatterdoeshoweverremainaratherunlikelyscenarioinourview.
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Development of Business Sectors
Treasury
Lettres de Gage Publiques (Luxembourg public sector covered bonds) – strategic Element for potential “Future Key Market Segment” covered bonds
2010wascharacterizedbypossibly record-breakingnewissuebusinessinthecoveredbondmarket,drivenandmo-tivatedbythepurchasingprogramoftheECBandarapidlyrisingnumberofnewcoveredbondissuers.Asanticipated,thedevelopmentsloweddownatthebeginningofthesec-ondhalfoftheyear,whichwasessentiallyaresultoftheuncertaintiesinconnectionwiththedebtsituationofsomeEUperipherycountries.Thesometimesdrasticexpansionofcreditspreads forvariouscentralgovernmentswithintheEUzoneledtoextremelyinvestor-friendlyconditionsfor investors in bonds of issues with first class credit rat-ings.ThissituationofcompetitionbetweengovernmentbondsandcoveredbondproductsthathasrecentlycomeaboutledtostrongcompetitioninthenewissuessectorwhichtheLettredeGagealsofounditselfsubjectedto.Forawhile,supplycongestedinthesecondarymarket,whichcontinuedtobeilliquid,andthreatenedtoblockprimaryissue pipelines. In particular, a circle of investors orien-tatedtowardsmakinglongtermandqualityinvestmentsensuredthatthemarket forcoveredbondsalsoreceivedsupportduringthesephases.EventhediscontinuationofthepurchasingprogramoftheECBforcoveredbondscouldbe overcompensated. Furthermore the market situationimprovedoverthecourseofthesecondhalfoftheyear,sothatevena fewissuersofcoveredbondsfromperipherystateswereabletodareenterthemarket.
During this phase, NORD/LB CFB decided to sharpen itsprofile by subjecting itself to the critical assessment of a secondratingagency–FITCHRatings–aswellasStandard&Poor’s.Havingpassedthroughtheratingprocessforcov-eredbondsandtheissueofalongtermseniorunsecuredrating of A (stable), the rating agency likewise awardedNORD/LBCFBthebestratinggradeofAAAforitsLettresdeGagepubliques.
In the past year under report there was predominantly ademandfortheLettresdeGagepubliquesofNORD/LBCFBfor medium to long-term maturities. This was the first time
thatitwaspossibletoissueasinglecallableintheregisteredcoveredbondformat.TheconstantexchangeofinformationwithinvestorsandtheexpansionofInvestorRelationsisacentralpointof thecommunicationsstrategyofNORD/LBCFB.Thebankanditsstaffareactivelyavailableinthattheybothprovideinformationaboutthedevelopmentofthecov-erpoolandthebankthroughpublicationsontheirwebsitewww.nordlbcfb.luandinthattheyalsohappilyaccommodatethewishesofinterestedinvestorsforone-on-onemeetings.Inaddition,inordertoexpandmarketpresence,pagesweresetupontheinformationsystemsatReutersandBloomberg(“NCFB”)onwhichinterestedmarketplayerscancalluptheup-to-dateissuepricesandyieldsatanytime.
Control of Interest Rate and Exchange Rate Risks
EnteringintointerestrateandexchangeraterisksisnotacentralpurposeofNORD/LBCFB’sbusiness.
Therefore, itessentiallyhedgesinterestraterisksonthebasisofamicro-hedgeapproachusing interest rateandinterestrate/currencyswaps.Thepurposeofthishedgingstrategy,whichhasbeenusedsincethebankwasformed,istoestablisheffectivehedgingrelationshipsthatalsomeetthestrictcriterialaiddownbytheInternationalFinancialReportingStandards(IFRS).
Exchangeraterisksariseinthebankonlytotheextentofearningsorexpensesthatareaccrued,whichmainlycom-prise the interest accruals from the underlying transac-tions.Thebankalsopursuesaconservativeriskpolicyhereandstrictlylimitsrisksthatarise,sothatthecurrencybal-ancesthathaveaccruedareregularlyexchangedintothebalancesheetcurrency.
Public Finance
The Bank for Municipal Undertakings in Germany
The department Public Finance concentrated in particu-lar on the expansion of the municipal corporate clientbusiness in Germany in 2010 too. The bank was able toachieveground-breakingaccountsinthissectorsuccess-fullyandtogetherwiththecorporateclientdepartmentsof the NORD/LB group, both in genuine direct businessandinconsortiumloans,throughwhichitwaspossibletostrengthennewbusinessactivitiesinGermanyandatthesametimewinnewcustomersforthegroup.Incontrastto
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privatelending,whichisstillcharacterizedbyacertainreti-cence,therewasasenseofalivelydemandforlendinginthemunicipalcorporateclientbusiness.Theborrowingre-quirementisinparticulararesultofexpansiveinvestmentactivities intheenergysector inrenewableenergies.Ontopofthistherewasandisrestructuringthroughthetrendof remunicipalisation, which is sometimes financed through credit.Thebankwasinvolvedinthe“VerbandkommunalerUnternehmen(VKU)”[AssociationofMunicipalUndertak-ings]in2010too,inwhichalmostallmunicipalundertak-ingsareorganized.Aswellastheregularworkintheasso-ciation,inwhichtheboardofdirectorsandcorporateclientservicesarecloselyinvolved,jointclienteventswerealsoorganizedwiththecorporateclientsectorsofthegroupinNorthRhineWestphaliaandHesse.
The bank takes advantage of the Luxembourg coveredbondlaw,whichmakescoverageofassetsfrommunicipalundertakings (public utility companies, water supply, airandseaports,etc.)possible.Thisgrouphasaparticularrel-evancetotheNORD/LBgroupasitisparticularlyinterestedinsecuringthesupplyofcreditformunicipalundertakingsasahousebankwithapublicserviceownershipstructure.TheNORD/LBgrouphasauniquesellingpointinthismar-ket segment in the form of NORD/LB CFB. As the first and onlyFederalStateBank,itisinapositiontoofferthemu-nicipalundertakingscustomergroup,which iseminentlyimportant for the provision of public services, a financing partnertunedintotheirneeds.TheLuxembourgcoveredbondprivilege,inconjunctionwiththespecialexpertiseofa group at home in the public sector, opens up optimal fi-nancingconditionsformunicipalundertakings.Ontheba-sisofthestrategicprocesscarriedoutin2009thePublicFi-nancedepartmentisincreasingthedirectlendingbusinesswithmunicipalundertakingsinGermany.Forthispurposethedepartmentwasstrengthenedbyacorporateclientad-visorwithexperienceinthisbusiness,whowillsupportex-istingcustomersandacquirenewonesdirectlyorthroughtheservicesofthecorporateclientsectoroftheNORD/LBgroup based in Germany. The proportion of directly ac-quiredcorporatebusinesswithmunicipalundertakingsinGermanywillcontinuetobeexpandedsystematicallyinfu-tureusingthissamemethod.
Inordertocompletetherangeonofferformunicipalcor-porateclient lending,thebankbecomeaccreditedattheKfWFörderbank.ThusthedepartmentPublicFinancehasalreadybeenofferingtargeted fundingconsultations forthemunicipalcorporateclientssince2009andcanshowthe first funding supported by the KfW in its books this yearaswellastheconsultancyservice.Thebankconcen-
trated here in the first step to winning new customers for the group,whoturnedawayfromtheirprevioushousebanktoNORD/LBCFBwithinthescopeoftheso-calledKfWhousebankswitch.
Financing of Savings Banks and Other Public Financial Institutions
The possibility of covering loans and advances to public fi-nancial institutions and Savings Banks is another benefit oftheLuxembourgcoveredbondlaw.ThustheNORD/LBgroup has at its disposal an additional source of refinancing initsfunctionasthecentralbankforSavingsBanksinthethreefederalstatesofLowerSaxony,Mecklenburg-WesternPomeraniaandSaxonyAnhalt.Againstthebackgroundofthe final discharge of old liabilities of the Savings Bank and regionalbanksector,whichwerecollaterisedthroughmain-tenanceliabilityandguarantorliability,bytheendof2015alternative refinancing solutions are becoming more and moreimportant.WithNORD/LBCFB,theNORD/LBgroupistheonlyGermanFederalStateBankwhichhasacourseofactionthat
• can provide the Savings Banks with both long term refi-nancingfunds
• andcanfallbackonwell-knownformsofdocumentationas well, such as the investment certificate and is there-foreeasytohandle
• andwhich,throughitscharacterofgeneralpartnertothecoverpoolingdevelopedinGermany,makesavaluablealternative to other refinancing solutions.
NORD/LBCFBhasalreadybeenabletosupportvariousin-dividualinstitutionswithintheSavingsBankgrouponnu-merousoccasionssothatthereisalreadyexpertiseinthissector.
International Public Financing and Replacement Cover Business
With the aim of risk optimisation and diversification, the bankalsoacquiresinternationalmunicipal lendingbusi-nessandotherassetseligibleforinvestmentinthecoverpoolviabanksandinvestmentcompaniesthatoperatein-ternationally,aswellasdirectcustomerbusiness.
InthisportfoliothedepartmentPublicFinanceundertookalargenumbersofstepsintheyearunderreportjustended.Thiswasdonebothforstrategicreasons(primarilyfurther
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underweightingofassetsinUSDinfavouroftheEURshare)and also in order to fulfil the requirements of the rating agencyFITCHRatings (awardingtheAAArating).AswellastheratingprocesssuccessfullycarriedoutbyFITCHRat-ingsandtheawardoftheAAArating,theconsequenceofthesemeasuresisaboveallaUSAportfoliothatwasfurtherreducedin2010(bothinthecoverpoolandoverall)andanincreasedshareinEURdenominatedassets.Amajorpartinthiswasplayedbythesaleofasub-portfoliotoaninves-torintheUSA.WithinEurope,PublicFinancereducedtheaccountsoutstandingsfrompartiesdomiciled inLuxem-bourg,whiletheGermanysharewasfurtherexpanded.InordertomaintaintheAAAratingoftheagenciesS&PandFITCHRatings,itwillalsobenecessaryinfutureforreasonsof diversification and granularity to pursue activities in this businesssector.Atthesametime,assetsareselectedac-cordingtostrictinvestmentpremisesandonlywithinthescopeofexistingcountrylimits.
Control of the Cover Pool
Aswasalreadythecaseintheprevioustwoyears,astrong-erconcentrationonEuropeandebtorswasalsointhefore-ground in 2010, which in the meantime make up signifi-cantlymorethanhalfofthecoverpool.ItisastatedaimtoincreasetheGermanyshareofthecoverpoolsustainablyandpermanently;at thesametimetheUSAshareof thecoverpoolshouldcontinuetoshrinkduringthecourseoftimeandinfutureplayalessimportantrole.Onthereport-ingdate,31-12-2010,Germanassets–inparticularmunici-palundertakingsandpublicbankssuchasSavingsBanksandregionalinvestmentbanks–arealreadymakingupthehighestshareofthebank’scoverpool.NORD/LBCFBhasacoverpoolofconsistentlyhighqualitytosecuretheissuedLettresdeGagepubliques.Themaximforthemanagementofthisportfolioistogainandretaininves-tors’trustinLettresdeGagepubliques.TheperformanceofthisportfolioismadeavailablebyNORD/LBCFBbyregularlypublishingthecoverpoolbycreditratingclassandgeo-graphicaldistributiononthewebsitewww.nordlbcfb.lu.AsaruletheLuxembourgcoveredbondlegislationallowsthecoverageofassetsfromcountrieswhichbelongtotheOECD,theEuropeanUnionortheEEA.
AsafullsubsidiaryofaGermanFederalStateBankNORD/LBCFBfocusesonGermanyinparticularforthelendingbusinesstomunicipalundertakingsandSavingsBanks.Thelendingbusinessthatitoriginatesautonomouslyatpresentanduntil
furthernoticeistransactedmainlywithGermanparties.For the purposes of risk diversification, transactions that arenotoriginatedautonomously(capitalmarkettransac-tions)arealsomadeincurrentlytwentyotherOECDcoun-tries apart from Germany, so long as they fulfil the strict investment grade rating specifications of the bank.
ThebankhasnocommitmentsinEstonia,Latvia,Lithuania,Greece, Iceland, Mexico or Turkey. Because of the difficult economicsituation,thebankisnotcurrentlyplanninganynewcommitmentsinthesecountrieseither.
Inaddition,thebankwillnotundertakeanymorenewcom-mitments inEasternEurope (with theexceptionofSlov-enia), IrelandortheUSA(exceptfortransactionsthatare100%guaranteedbytheUScentralgovernment)untilfur-thernotice.Acontinuationofinvestmentsinthesecoun-trieswilldependonthefurtherdevelopmentoftheeco-nomicsituationintheindividualeconomies.
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Atthereportingdate,31-12-10,thecoverpool’screditratingstructurewasasfollows:
Rating in % in % in %
AAA 31.7
AA 20.6 52.3
A 37.3 89.6
BBB 10.4
Region in %
Europe 66.0
NorthAmerica 31.4
Asia 2.6
Other 0
AA10.8%AA–
5.8%
A7.9%
BBB–0.5%BBB+
4.4%
AAA31.7%
A+19.7%
BBB5.5%
AA+4.0%
A–9.7%
Switzerland1.3%Slovenia1.3%
Poland2.1%
Spain2.1%
USA26.2%Canada5.2%
Japan0.6%
Sweden2.3% Germany31.6%
Austria4.0%
Netherlands4.3%
Luxembourg3.9%
France3.8%
Italy3.3%
SouthKorea2.0%Ireland1.8%Portugal1.5%
Norway2.6%
Geographically, NORD/LB CFB’s cover pool is diversified over 21 different OECD states:
Cover calculation Cover Pool(EUR million)
Issues*)(EUR million)
Deficit (-)/Surplus (+) (EUR million)
31-12-2010 31-12-2009 31-12-2010 31-12-2009 31-12-2010 31-12-2009
Total 4,422.0 4,459.2 3,645.2 3,928.4 776.8 530.8
Inthecovercalculation,thecoverratiosareasfollows:
*)Nominalamountofthecoveredissuesincirculationincl.ownstocks.
AAA AA+ AA AA– A+ A A– BBB+ BBB BBB–
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Rating
This cover pool has provided the basis of the bank’s first-rateassessmentsfromtworatingagencies.
In 2010 the rating agency Standard & Poor’s also confirmed the best rating grade AAA for the Lettres de Gage pub-liquesissuedbyNORD/LBCFBevenafterthereorganisa-tionoftheirratingmodel.ThechangeoftheCreditWatchto“negative”undertakeninDecember2009waswithdrawn.Becauseoftheoutlook“negative”intheratingofNORD/LB,theAAAratingofthebankislikewisebrandedwiththisoutlook.TheratingremainedinplaceevenwhentheratingofNORD/LBbyStandard&Poor’swaschangedto“unsolic-ited”inJanuary2011.
The quality of the cover pool has moreover been confirmed byasecondAAAratingbytheagencyFitchRatingssincethemiddleoftheyear.ThegoalofNORD/LBCFBwillcon-tinuetobetoreceivethebestgradeofAAAfortheLettresdeGageofthebankfrombothratingagencies.Thebankisthereforeworkingonacoverpoolpolicyinwhichitwillcombineitsownstrictquantitativeandqualitativecriteriaandinternationalstandardsofcorrespondingtransparencyspecifications for cover management. With the publication ofthiscoverpoolpolicyduringthecourseof2011,thebankwill obligate itself to the benefit of its investors and thereby honourtheirtrustinthebankandtheLettresdeGage.
Outlook
NORD/LBCFBwillalsoconcentrateontheissueofLettresdeGagepubliques(publiclycoveredLuxembourgcoveredbonds) inthe future.Underthemotto“Thebank forMu-nicipalUndertakings”thefocuswillcontinuetobethere-financing of public lending business complementary to the othercompaniesintheNORD/LBgroupofcompanies.
Thefeedbackfromdiscussionswithborrowers, investorsandcapitalmarketpartners,aswellasthepositiveresultfrom an unusually difficult year under report for the finan-cialmarkets,demonstratehowadvantageousitistohaveaLuxembourgcoveredbondbankinthegroup.Withthefocus on municipal financing business at the sub-state lev-elthebusinessmodelofNORD/LBCFBisorientatedtothefuture.
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EarningsThe financial statements of NORD/LB CFB as of 31-12-2010 werepreparedinaccordancewiththeInternationalFinan-cialReportingStandards(IFRS)issuedbytheInternation-alAccountingStandardsBoard(IASB),asimplementedbytheEU.
Theearningsaftertaxesfor2010amounttoEUR7.2million(previous year EUR 6.4 million). The earnings after taxesalsoexceedtheplannedvaluesinthefourthfullyearunderreport.
Forcomputationalreasons,thefollowingtablesmaycon-tainroundingdifferences.
The components of the profit and loss account have developed as follows for the years under report 2010 and 2009:
2010 (KEUR)
2009 (KEUR)
Increase/Decrease*)(KEUR)
Netinterestincome 8,589 8,725 –136
Loanlossprovisions –1,013 –289 –723
Netcommissionincome –1,201 –903 –298
Profit/lossfromfinancialinstrumentsstatedthroughprofitorloss,includinghedgeaccounting
446 66 380
Otheroperatingprofit/loss –2,296 –2,323 27
Administrativeexpenses –2,853 –2,675 –177
Profit/lossfromfinancialassets 5,041 5,354 –314
Earnings before income taxes 6,714 7,955 – 1,240
Incometaxes 482 –1,591 2,073
Profit for the year 7,197 6,364 833
*) The prefix in the Increase/Decrease column indicates effects on the results.
Thenetinterestincomeisatthelevelofthepreviousyear.
Itwaspossibletokeepthelossprovision,exclusivelycom-prisingvalueadjustmentsbasedonportfolios inaccord-ancewithIFRS,atalowerlevelinyearunderreport2010.Asin previous years under report, direct specific value adjust-mentsarenottobereported.
Thenetcommissionresultwhich istypicallynegative formunicipal financiers is EUR – 1.2 million after EUR – 0.9 mil-lioninthepreviousyear.
Profit/loss from financial instruments stated at fair value through profit or loss shows both trading profit/loss in the true sense and profit/loss from financial instruments that arevoluntarilydesignatedunderthefairvalueoption.Prof-its/lossesfromhedgeaccountingarealsoshownhere.
The other operating profit/loss and the administrative ex-penses are in the range of the previous year. The profit/loss from financial assets results from the price management ofownissuesandsalesbecauseofthereductionintheUSportfolio.
Beforetaxes,thebankreportsearningsfor2010inthesumof EUR 6.7 million; after taxes a profit remains for the year ofEUR7.2million.Thisistobecarriedforwardwithinthescopeofappropriationofearningsafterallocationstostat-utoryandvoluntaryreservesinthesumofEUR2.0millionandEUR1.0millionrespectively.
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Theindividualitemsmakinguptheresultareasfollows:
Net Interest Income
The net interest income and the total of the interest income and interest expense are at previous year’s levels. In the first halfof2010,aone-offamountofEUR0.7millionwasgeneratedthroughtheearlyterminationofaborrowingcommitment.Ontheotherhand,amortisationsinconnectionwithhedgedesignationsarealsoshowninthenetinterestincome.In2010thisitemamountedtoEUR–2.5million(comparisonperiod:EUR–1.6million).
Loan Loss Provisions
Intheyearunderreport2010theportfoliobasedvalueadjustmentsonassetstockswereincreasedfurtherincomparisontopreviousyears.Therearenoindividualprovisionsforlosses.
Net Commission Income
Netcommissionincomeonlyincludesincomeandexpensefrombanking.Commissionearningsinthepreviousyear
includedone-offincomeswhichthebankgeneratedfromcustomerlendingwithmunicipalundertakings.Apartfrom
this, the commission loss, which is typical for municipal financers, is characterized by expenses for the bank’s securities
custodiansandcommissiononguaranteesforthehedgingoflargelendingrisks.
2010(KEUR)
2009(KEUR)
Increase/Decrease*)(KEUR)
Interestincome 390,564 378,472 12,092
Interestexpense –381,975 –369,746 –12,228
Net interest income 8,589 8,725 – 136
2010(KEUR)
2009(KEUR)
Increase/Decrease*)(KEUR)
Commissionincome 740 1,175 –435
Commissionexpense –1,941 –2,078 138
Net commission income – 1,201 – 903 – 298
*) The prefix in the Increase/Decrease column indicates effects on the results.
*) The prefix in the Increase/Decrease column indicates effects on the results.
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Profit/Loss from Financial Instruments Stated at Fair Value through Profit or Loss and Hedge Accounting
Trading profit/loss mainly comprises profit/loss from derivative security transactions, which efficiently and economically hedgecurrencyandinterestrisksarisingfromtherespectiveunderlyingtransactioninseparatetransactions,butdonotmeettherestrictivecriteriaforhedgeaccounting.
Other operating Profit/Loss
TheotherexpensesresultpredominantlyfromaccountingforserviceswithNORD/LBLuxembourgandNORD/LB.
*) The prefix in the Increase/Decrease column indicates effects on the results.
2010(KEUR)
2009(KEUR)
Increase/Decrease*)
(KEUR)
Tradingprofit/loss –587 665 –1,252
Profit/lossfromfinancialinstrumentsdesignatedatfairvalueatinitialrecognition
0 0 0
Profit/lossfromhedgeaccounting 1,032 –599 1,632
Profit/loss from financial instruments stated at fair value through profit or loss, including hedge accounting
446 66 380
*) The prefix in the Increase/Decrease column indicates effects on the results.
2010(KEUR)
2009(KEUR)
Increase/Decrease*)
(KEUR)
Otheroperatingincome 584 111 473
Otheroperatingexpenses –2,880 –2,434 –446
Other operating profit/loss –2,296 –2,323 27
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Administrative Expenses
Administrativeexpenses,includingdepreciation,increasedbyatotalofEUR0.2milliontoEUR2.9million.Thisisduetotheincreaseinstaffexpensesarisingfromtheemploymentofnewpersonnel.
Profit/Loss from Financial Assets
The profit/loss from financial assets results from own issues bought back for price management purposes and the re-ductionoftheUSportfolio.
*) The prefix in the Increase/Decrease column indicates effects on the results.
2010(KEUR)
2009(KEUR)
Increase/Decrease*)
(KEUR)
Wagesandsalaries 1,271 976 –295
Otherstaffexpenses 259 130 –128
Staffexpenses 1,530 1,107 –423
Otheradministrativeexpenses 1,315 1,360 44
Depreciationandvalueadjustments 7 209 202
Administrative expenses 2,853 2,675 – 177
*) The prefix in the Increase/Decrease column indicates effects on the results.
2010(KEUR)
2009(KEUR)
Increase/Decrease*)
(KEUR)
Profit/lossfromfinancialassetsclassifiedasLaR 1,653 0 1,653
Profit/lossfromfinancialassetsclassifiedasAfS(withoutparticipatinginterests)
3,388 5,354 –1,966
Profit/lossfromaffiliatedcompanies 0 0 0
Profit/lossfromjointventuresandassociatedcompanies
0 0 0
Profit/lossfromotherparticipatinginterests 0 0 0
Profit/loss from financial assets 5,041 5,354 – 314
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Income Taxes
ThebankandNORD/LBLuxembourgformataxgroupinaccordancewithArticle164bisoftheLuxembourgincometaxlaw.Becauseofataxlossattheparentcompany,nocurrentincometaxesaredueinthetaxgroupin2010.
Appropriation of Earnings
The profit of the year under report incl. profit carried forward amounts to EUR 7.2 million. The board of directors proposes totheannualgeneralmeetingthefollowingappropriationofearnings:
*) The prefix in the Increase/Decrease column indicates effects on the results.
2010(KEUR)
2009(KEUR)
Increase/Decrease*)
(KEUR)
Currenttaxes 482 –1,591 2,073
Deferredtaxes 0 0 0
Income taxes 482 – 1,591 2,073
2010(KEUR)
2009(KEUR)
Increase/Decrease(KEUR)
Profit/lossfortheyearunderreport 7,197 6,364 833
Profitcarriedforwardfrompreviousyear 0 0 0
Sub-total 7,197 6,364 833
Dividendpayment 0 5,500 –5,500
Allocationtothestatutoryreserves 2,000 318 1,682
Transfertotheotherreserves 1,000 546 454
Profitcarriedforwardfromyearunderreport 4,197 0 4,197
2010 2009 Increase/Decrease
Dividends(EUR) 0.00 5,500,000.00 –5,500,000.00
Numberofshares 720,000 620,000 100,000
Dividendspershare(EUR) 0.00 8.87 –8.87
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Schedule of Assets and Financial Data
31-12-2010(EUR million)
31-12-2009(EUR million)
Increase/Decrease(EUR million)
Loansandadvancestobanks 1,111.0 1,144.8 –33.8
Loansandadvancestocustomers 821.4 856.8 –35.4
Riskprovisions –2.1 –1.0 –1.0
Financialassetsatfairvaluethroughprofitorloss 45.1 11.1 34.0
Financialassets 4,044.9 3,686.4 358.5
Equity-accountedinvestments 0.0 0.0 0.0
Otherassets 388.1 232.6 155.5
Total assets 6,408.5 5,930.6 477.8
Liabilitiestobanks 2,550.9 1,960.8 590.1
Liabilitiestocustomers 433.0 367.9 65.0
Securitisedliabilities 2,701.3 3,032.7 –331.4
Financialliabilitiesatfairvaluethroughprofitorloss 25.2 20.9 4.3
Provisions 0.1 0.2 –0.2
Otherliabilities 631.0 483.6 147.3
Reportedequity 67.0 64.3 2.7
Total equity and liabilities 6,408.5 5,930.6 477.8
Thebalancesheettotalisabovepreviousyear’slevel.ThisisprimarilyaresultofthedevelopmentoftheEUR/USDex-changerateandthehighervaluationresultsofderivatives,whichareineffectivehedgerelationships,causedbypricedevelopment.Bothleadtobalancesheetextensions.Financial assets and liabilities at fair value through profit orlossincludeexclusivelyderivativesecuritytransactions,whichhedgecurrencyandinterestraterisksfromthere-spectiveunderlyingtransactionsinseparatetransactionseconomically, however not fulfil the restrictive conditions ofhedgeaccounting.
ThereportedequityofthebankrosetoEUR67million.ThecauseofthisisapartialconversionoftheMandatoryCon-vertibleBonds,whichwereplacedin2008,intosharesinthesumofEUR10millionandtheriseinthenegativevalu-ationofthesecuritiesinthecategoryAvailableforSale.
Thebankdoesnothaveanybranchesanddoesnotholdanyofitsownshares.
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Risk Report
TheriskreportforNORD/LBCFBasof31December2010wasdrawnupinaccordancewithIFRS7.Thebankdoesnotenterintoanyriskspertainingtocomplexstructuredderivatives.
Overall Bank Management
Principles of Risk Management
Bankingbusinessisinextricablylinkedtotheconsciousen-teringintorisks.Fromabusinesspointofview,thebankdefines risk as being potential direct or indirect financial lossesduetounexpectednegativedifferencesbetweenac-tual and projected results of business activity. The identifi-cation,analysis,measurement,managementandmonitor-ingoftheserisksisabasicprerequisiteforthesustainablesuccessofthebusiness.
Accordingtotheregulationsofthesupervisorylegislation,institutions must have a proper business organisation,whichensuresadherencetothestatutoryprovisionstobeobservedbytheinstitutionanditsoperatingrequirements.Proper business organisation includes the specification of strategiesonthebasisofproceduresforascertainingandsecuringrisk-bearingcapacity,whichcomprisesbothrisksandthecapitalavailableforcoveringtheserisks.Forthebank these statutory requirements are firmly established inLuxembourglawaswellasGermanlaw.
NORD/LB Luxembourg issued a letter of comfort for thebank.Thebankisincludedintheriskcapitalcoveragere-quirementsofNORD/LBLuxembourgwithinthescopeoftheconsolidatedcapitaladequacycalculation.
Risk StrategiesThebank’sriskpolicyischaracterizedbyaresponsiblehan-dlingofrisks.Accordingly,thebankhaspassedariskstrat-egyonthebasisofitsbusinessstrategythatisinspectedanddiscussedwiththesupervisorybodiesonanannualbasis.Thecoreelementofthisriskstrategyistherisk-bear-ingcapacitymodel,onthebasisofwhichthewillingnesstoacceptriskisdeterminedandtheriskcapitalisallocated.The risk-bearing capacity model therefore defines the bar-rierswithinwhichrisksmaybetaken.
Theriskstrategiesconstantlyaimforoptimalcontrolandmonitoringofallrelevanttypesofriskandtheirtranspar-entpresentationtothebank’sBoardofDirectors,supervi-sory bodies and other third parties with a qualified interest. Theriskstrategiesintegratedintotheoverallriskcontrolcontainmeasuresandinstrumentswhicharedescribedinmoredetailintheriskmanual.
On the basis of a risk-bearing capacity model that com-plieswiththemethodsusedbythegroup,theriskstrat-egies–basedontheactualsituationandtakingaccountofplannedbusinessactivity–focusonsecuringthefuturerisk-bearingcapacityofindividualcompanies.
Inthiscontextthebank,attheoperationallevel,hasthein-strumentsthatarenecessarytocontrol,monitorandcom-municaterisks.Thesefundamentallystandardinstrumentsaredescribedindetailinthebank’sworkingguidelinesandinthegroup’sriskmanual.
Risk-bearing CapacityTherisk-bearingcapacitymodel(RBCmodel)formstheme-thodicalbasisformonitoringadherencetotheriskstrategiesinNORD/LBCFB.ThismonitoringisperformedforthebankbytheControllingdepartmentofNORD/LBLuxembourg.
Theaimofthemodelistheaggregatedrepresentationoftherisk-bearingcapacity (RBC)of thebank in termsofacomparisonof theriskpotential resulting fromthemainrisksandtheriskcapital.Throughthemonitoringandre-portingprocess,whichiscarriedoutregularly, it isguar-anteedthatthecompetentgoverningbodiesofthebankareinformedpromptlyoftherisk-bearingcapacitysitua-tion.Thismodelservestosecurerisk-orientedcorporatemanagement.
TheNORD/LBgroupemploysascenario-basedRBCmodelwhich also fulfils the requirements of the Internal Capital AdequacyAssessmentProcess(ICAAP)inaccordancewithBasel II. The NORD/LB group reviewed and extended itsexisting RBC model in the year under report, which alsoappliestoNORD/LBCFB.OneofthecentralpointsofthereviewwastheimplementationoftherequirementsofthesecondMaRiskamendmentwithregardtoanextendedcon-siderationofstressscenariosencompassingallrisktypes,aswellasafurtheroptimisationofthegroup-wideoverallbankmanagement.Duringtheyear,thereportswerepro-ducedquarterlyonthebasisofthereviewedRBCmodelinparalleltotheRBCreportingusedtodate.Asat31Decem-ber 2010, the reports were for the first time produced only onthebasisofthereviewedmodel.
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TheextendedRBCmodelcomprisesthethreeperspectivesofGoingConcern,EconomicCapitalAdequacyandRegula-tory Capital Adequacy, in which the total of the significant risks (risk potential) is compared to the defined risk capital ineachcase.Theeconomicandregulatorycapitaladequa-cyarebothfurtherbrokendownintotheperspectivesofstatusquoandunderstress.
The first perspective is represented by the Going Concern Case,whichassumesthecontinuationofthebusinessandfunctionsasanearlywarning.Theriskcapitalcomparedtotherisksisbasedonfreecapitalstockundersupervisorylaw beyond a set total key figure. In addition, effects affect-ingriskcapitaleffectsare taken intoaccountduringtheyearwithinthescopeofadynamisationprocess.
Thesecondandthirdperspectiveseachtakeaccountofahigher confidence level of 99.9 % on the risk potential side. Fortheeconomiccapitaladequacy,economicallycalculat-edriskpotentialsareused,andfortheregulatorycapitaladequacy,theriskpotentialscalculatedaccordingtoregu-latory.Thecapitalsideisbasedbothintheeconomicandtheregulatoryadequacycheckonequityandnear-equitycomponents,whicharetobetakenintoaccountaccordingtoregulatoryrulesoncapitalstock. Intheeconomicper-spective,adynamisationprocessforeffectsaffectingriskcapitalduringtheyeariscarriedoutlikeinthegoingcon-cerncase.
Fortheproofoftheadequacyofthecapitalbase(InternalCapitalAdequacyAssessmentProcess,ICAAP)neededac-cordingtobankregulatorylaws,theeconomiccapitalad-equacy (status quo) indicator is looked at primarily. Theregulatorycapitaladequacyinthestatusquoistobecom-pliedwithasastrictsecondarycondition;thegoingcon-cerncaseservesasanearlywarninglevel.Thederivationofstrategiclimitsfromtheriskbearingcapacityperspectivearisesfromthegoingconcerncasetakingintoaccounttheriskcapitalallocationundertakenintheriskstrategy.
Whendeterminingtherisk-bearingcapacity,riskconcen-trationsarealsotakenintoaccount,bothwithinariskcat-egoryandacrossriskcategories.Concentrationswithinariskcategorymainlyrelatetocreditrisksasthemostim-portantriskcategoryatNORD/LBCFB.TheseareintegratedintotheRBCmodelviatheinternalcreditriskmodelandflow into the economic risk potentials.
Concentrations across risk categories are taken into ac-countvia thestress test.Whenselecting thestresssce-nario,theselectioncriteriaareconsciouslybasedontheNORD/LBgroup’smainbusinessandriskpoints.Amongstothers,thisincludesselectingsectors,segments,regionsand customers that have a decisive influence on the risk sit-uationofthegroup.Theseriskconcentrationsareregularlydetermined,reportedandmonitoredwithtargetedstresstestsinthecontextofrisk-bearingcapacity.
TherelevantscenariosaremergedatNORD/LBgrouplevelandaretobeappliedinallindividualcompanies,inordertoensurecomparabilitybetweenthebanksandtoensurethatitispossibletoaggregatethemintogroupvalues.
ThequarterlyreportspreparedbyControllingontherisk-bearingcapacity(RBCreports)constitutethemaininstru-mentforriskreportingtotheBoardandthesupervisorybodies at overall bank level. These are used to regularlycheck compliance with the specifications of the risk strat-egy regarding the appetite for risk and allocation of theriskcapitaltotheprimaryriskcategories.Furthermore,thebank’srisk-bearingcapacityisalwaysassessedduringthebank’sregularsupervisoryboardmeetings.
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ThelevelofriskcoverintheICAAPamountedto117.8%on31December2010.
When comparing the reporting dates it must be consid-eredthatthecomparativevaluesto31-12-2009weredeter-minedusingtheRBCmodelthatappliedin2009.Despitefallingbelowtherequiredcoverrateof125%(AMBERtraf-fic light), a considerable improvement would be seen in the determinationofthecomparativereportingdateaccordingtothenewRBCmodel.
Themarkedeasinginthecreditrisksbyundertakingav-alisationmovesinthethirdquartercannotbeseenintheabovetablebecauseof thechangeoverof thecredit riskmodel(fromGordytoCreditRisk+).
Thechangesintheotherriskcategoriesarepredominantlyduetomethodicalimprovements.Theriseinliquidityrisksresultsfromtheintegrationoftheforeigncurrencyrisks.Themarketpricerisksincreaseasaresultoftakingcreditspreadrisks(liquidityreserve)intoaccount.
OutlookThenewrisk-bearingcapacitycalculationimplementedfortheyearended31-12-2010formsagoodbasisforthefur-ther extension and refinement of the capital stock control. Theearlyconsiderationofupcomingregulatorychanges(BaselIII)intheexistinginstrumentsisonthebank’sto-dolistfor2011,alongwiththeimplementationofbank-specif-icstresstests.Furthermoretherequirementforalignment
arisingfromthethirdMaRiskrevisionwillbeanalysedandprocessedwithinthescopeofaprojectin2011.
Structure and Organisation of Risk Control
The responsibility for risk control lies with the Board ofDirectors of NORD/LB CFB, which also specifies the bank’s riskstrategy.
Thebank’sriskcontrolpolicyissubjecttocontinuousre-viewandimprovement.Thisinvolvestheuseofmethodsthat are standardized for the group. Adjustments whichmaybecomenecessaryincludeorganisationalmeasures,adjustments to procedures for quantifying risk, and thecontinuousupdatingofrelevantparameters.Arisk-relatedexaminationoftheeffectivenessandadequacyoftheriskmanagementsystem iscarriedout independentlyof theprocesses by NORD/LB Luxembourg on the basis of theexistingserviceagreements.Theaimsofinternalauditingalsoincludecontributingtowardssecuringtheeffective-ness,economicviabilityandorderlinessofbusinessactivi-ties.Italsofacilitatestheoptimisationofbusinessprocess-esaswellasthecontrollingandmonitoringofprocedures.
Aspartoftheongoingdevelopmentofmonitoringinstru-mentsforthewholegroup,theinternalauditorsatNORD/LBandNORD/LBLuxembourgworktogethercloselyusingastandardizedgroupauditpolicyandanevaluationma-trix for the audit findings. Cross-institutional competence
EUR million Risk-bearing capacity31-12-2010
Risk-bearing capacity31-12-2009
Risk capital 116.9 100.0 % 112.7 100.0 %
Creditrisks
Participationrisks
Marketpricerisks
Liquidityrisks
Operationalrisks
74.2
0.0
6.5
17.2
1.3
63.5%
0.0%
5.6%
14.7%
1.1%
50.8
0.0
3.3
14.0
1.2
45.0%
0.0%
2.9%
12.4%
1.1%
Total risk potential 99.3 84.9 % 69.3 61.5 %
Excess cover 17.7 15.1 % 43.5 38.5 %
Risk cover ratio 117.8 % 162.7 %
Theutilisationoftheexistingriskcapitalwithriskpotentialintheeconomiccapitaladequacycanbeseenfromthefol-lowingtable:
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centreswerealsosetupinthisregard,inordertodevelopcomplex specialised subjects and conduct audits in thebanks.Thebank’scompliancefunction isresponsible foridentifyingandassessingthecomplianceriskswithinthebank. It isresponsibleforensuringthatherequirementsinrelationtotheICAAP,inparticularthoseincircularCSSF07/301 including addenda, are fulfilled in full conformity by NORD/LBCFB.TheComplianceCharterofNORD/LBCFBde-scribes which tasks and responsibilities were defined.
Allof theproceduresandresponsibilitiesrelevanttotheriskcontrolprocessaredocumentedintheNORD/LBriskmanual and NORD/LB CFB’s working guidelines. The riskmanualactsasguidancefortheentireNORD/LBgroup.
Credit Risk
Creditriskisacomponentofcounterpartyriskandissubdi-videdintoclassicalcreditriskandcounterpartyriskintrad-ing.Theclassicalcreditriskdescribestheriskofalossoc-curringbecauseofthefailureordeclineincreditworthinessofaborrower.Thecounterpartyriskintradingdescribestheriskofalossoccurringbecauseofthefailureordeclineincreditworthinessofaborrowerorcontractualpartnerintradingtransactions.Thisissub-dividedintothedefaultriskintrading,replacement,settlementandissuerrisks.
Aswellastheoriginalcreditriskthereisalsothecountryrisk in thecaseofcross-bordercapitalservices (transferrisk).Thisincludestheriskofalossoccurringbecauseofoverridingstaterestraints,despitetheabilityandwilling-ness of the counterparty to fulfil its payment obligations.
Credit Risk – Control
Early identification and recognition of critical situations forms the basis for the effective management of creditrisks.Forthisreason,anumberofprocesses,systemsandinstructionsare inplace, forportfoliosandfor individualborrowers, and these correlate to form a system for theearlyrecognitionandeffectivemanagementofrisksortheinitiationofmeasurestolimitthoserisks.Inthissystemthefollowingorganisationalunitsinparticular
• thebank:PublicFinance(LendingMarketDivision) andTreasury• NORD/LBLuxembourg:CreditRiskManagement (LendingMarketConsequences)andControlling
• NORD/LB:CreditRiskManagement (LendingMarketConsequences)
areinvolved.Newproducts,marketsordistributionchan-nelsinthebank’slendingbusinessareintroducedwithinthescopeofanewproductprocess (NPP).A risk-relatedorganisationalstructure,aswellasthefunctions,respon-sibilitiesandauthorisationofthedivisionsthatdealwithrisk processes, are clearly defined at employee level. In ac-cordancewiththerequirementsoftheLuxembourgbanksupervisory authorities, lending business processes arecharacterizedbyaclearorganisationalseparationof thefront and back office, right up to Board level.
Thebank’sriskmanagementisbasedontheprinciplesusedbyNORD/LBand iscontinuously improved inaccordancewithcommercialandregulatorycriteriaand,whereneces-sary, adapted to the specific characteristics of the bank. TheindependentmonitoringoftheportfolioinrelationtostrategicandoperationalstandardswillbeperformedbyNORD/LBLuxembourg’sControllingdepartment.
Aspartof itsmanagement informationsystem,thebankdrawsupaquarterlycredit/borrowerriskreportinordertomakeexistingrisksorconcentrationsofrisktransparentatanearlystageandtointroduceanynecessarymeasures.The report sets out the significant structural features (e. g. branchstructure,countryandtermstructure)andthepa-rametersthatareneededtocontroltheloanportfolio.
Credit Risks – Measurement
Credit risks are quantified on the basis of the risk figures ExpectedLossandUnexpectedLoss.ExpectedLossisde-terminedonthebasisofone-yeardefaultprobabilitiestak-ingintoaccountrecoveryratesorresultantlossratios.The Unexpected Loss for the credit risk is quantified across thegroupwiththehelpofaneconomiccreditriskmodelfor different confidence levels and a time horizon of one year.ThecalculationwasbasedontheGordyModelupun-til30-06-2010,which isusedbytheBaselCommitteeonbanking Supervision for modelling the capital adequacywithinthescopeofBaselII.
Themodeldeterminesthecontributionsmadebyindivid-ual borrowers and investment companies towards unex-pectedlossattheportfoliolevel,whichtogetheradduptounexpectedlossforthefullportfolio.Thismodelusesthe
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probabilitiesofdefault(PDs)resultingfromtheinternalrat-ingprocedureandthelossgivendefault(LGD)relatingtospecific transactions. Standard instructions under Basel II aregenerallyappliedfortheremainingmodelparameters.Thecredit riskmodelusedsince30-09-2010determinestheunexpectedlossesatthelevelofthewholeportfolio.ThemodelusedisbasedonthebasicmodelCreditRisk+.Itinvolves representing systematic sector influences on the distributionoflossusingcorrelatedsectorvariables.TheestimateoftheProbabilityofDefault–PDdrawsonthein-ternalratingprocedure.Thelossquotas(LossGivenDefault– LGD) are defined specific to the transactions.
Themethodsandproceduresforquantifyingriskarecoordi-natedwithinthesub-groupinordertoensureastandardizedapproachwithinthesub-group.ThemeasurementforNORD/LBCFBisdonebyControllingatNORD/LBLuxembourg.
Credit Risk – Development in 2010
Thebankusesamanagementapproachfor reporting itsrisks, which means that its internal and external risk re-portsarealwaysbasedonthesameterms,methodsanddata.ThecategoriestobeformedinaccordancewithIFRS7.6fortheportrayalofcreditriskareaccordinglyinkeepingwiththoseofthereportsonrisk-bearingcapacitysubmit-
tedquarterlytotheBoardofDirectorsofNORD/LBCFBandthesupervisorybodies.
The credit exposure dimension plays a significant role in the context of credit risk control. This figure shows all of the transactionsbearingcreditrisksconcludedwithcounter-parties.Creditexposureiscalculatedonthebasisofcreditutilisation (in thecaseofguarantees, thenominalvalue,andinthecaseofsecurities,thecarryingamount)andthecreditequivalentresultingfromderivatives(includingadd-onsandonconsiderationofnetting).Irrevocablecommit-mentstolendareincludedinthecreditexposurecalcula-tionat61%and revocablecommitments to lendat5%,whilesecuritiesremaindisregarded.
Analysis of Credit ExposureThe credit exposure of NORD/LB CFB as at 31 December2010amountstoEUR5.5billion(previousyearEUR5.6bn.).Classification is equivalent to the standard IFD rating scale agreeduponbythebanks,SavingsBanks,andassociationsincludedintheInitiativeFinanzstandortDeutschland(IFD,initiative to promote Germany as a financial and business centre).Thishasbeendesignedtoimprovethecompara-bility of the various rating levels of the individual financial institutions.Thegroup’sstandard18-tierDSGVratingmas-terscaleofratingcategoriesusedatNORD/LBCFBcanbetransferreddirectlyintotheIFDcategories.
1) Classification in accordance with IFD rating categories2) Differencesinamountareroundingdifferences3) Includesloanstakenuporloancommitments,securities,guaranteesandothernon-derivativeoff-balancesheetassets, theirrevocablecreditcommitmentsbeingincludedat61%andtherevocableonesat5%,asintheinternalreporting4) Includesthebank’sownstockofsecuritiesofexternalissuers(investmentbookonly)5) Includes derivative financial instruments such as financial swaps, options, futures, forward rate agreements and currency transactions6) Includesotherproductssuchastransmittedloansandadministrationloans
Rating Structure 1) 2) EUR million
Loans 3) Securities 4) Derivatives 5) Other 6) Total31-12-2010 31-12-2010 31-12-2009
Verygoodtogood 614 4,130 283 130 5,157 5,332
Good/satisfactory 0 337 0 0 337 317
Stillgood/adequate 0 0 0 0 0 0
Increasedrisk 0 53 0 0 53 0
Highrisk 0 0 0 0 0 0
Veryhighrisk 0 0 0 0 0 0
Default(=NPL) 0 0 0 0 0 0
Total 614 4,519 283 130 5,546 5,649
Thefollowingtableshowstheratingstructureofthebank’soverallcreditexposure(existingandnewbusiness),dividedintoproducttypesandcomparingthetotaltothestructureforthepreviousyear.
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Themajorityoftotalexposure(93.0%)isinthe“verygoodtogood”ratingcategory.Theproportionofthisrating,thebestrating category, in the total exposure continues to be very high due to the large volume of business conducted with financ-inginstitutionsandpublicentities.
The classification of total credit exposure into sectors is as follows:
The table shows that, with a total share of 81.9 %, business with financial institutions/insurers of good creditworthiness, which till now was relatively low risk, and with public bodies, continues to make up a significant share of the total exposure.
Sectors 1) 2) EUR million
Loans 3) Securities 4) Derivatives 5) Other 6) Total31-12-2010 31-12-2010 31-12-2009
Financialinstitutes/insurers 50 2,280 283 75 2,689 2,596
Serviceindustry/other 89 1,879 0 55 2,023 2,638
ofwhich:realestateand residential
ofwhich:publicadministration
62
0
0
1,797
0
0
0
55
62
1,852
0
2,097
Transport/newsbroadcasting 54 83 0 0 138 96
ofwhich:shipping
ofwhich:airtransport
0
0
0
0
0
0
0
0
0
0
10
54
Processingindustry 0 0 0 0 0 0
Energy,watersupply,mining 420 276 0 0 696 319
Trade,maintenance,repair 0 0 0 0 0 0
Agriculture,forestryandfishing 0 0 0 0 0 0
Constructionindustry 0 0 0 0 0 0
Other 0 0 0 0 0 0
Total 614 4,519 283 130 5,546 5,649
1) Classification same as internal reporting according to economic critieria2) to6)seeprevioustableontheratingstructure
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Abreakdownofthetotalcreditexposurebyregionisasfollows:
Withashareof24.1%,NorthAmerica,alongwiththeEurocountriesat58.1%,continuestobeacentralbusinessre-gionofNORD/LBCFB,wherebytheNorthAmericaexposurewasreducedby19.6%incomparisonto31-12-2009.
Thediscrepanciesbetweenthetotalofthecreditexposuresaccordingtointernalreportingandaccordingtobookval-ues results from the definition of credit exposures for inter-nalpurposesbasedontheregulatoryreportingandfromdifferentaccountingmethods.
Non-Performing Loans (NPL)In accordance with the impairment policy, specific value ad-justmentsareestablishedatthebankforacuteborrower’sdefaultrisksintheeventofthepresenceofobjectiveindi-cations.Loanlossprovisionrequirementsarebasedonacashequivalentconsiderationofanticipatedinterestandredemptionpaymentsaswellasonearningsfromthereali-sationofcollateral.
The latentborrower’sdefaultriskforthetotalamountofreportedandoff-balance-sheettransactionsforwhichnospecific value adjustments is accounted for by means of portfolio-basedprovisionsforimpairmentswhichhaveal-readyoccurred,butwerenotknownatthereportingdate.
Asat31-12-2010,theriskprovisionsofNORD/LBCFBareEUR 2.1 million (excluding portfolio based value adjust-mentinaccordancewithIFRS).
Thebankdoesnothaveanynon-performingloansonitsbooksatthebalancesheetdate.
Credit Risk – Outlook
In 2011, the bank and NORD/LB group are intending tocloselycooperate inthe implementationofmeasuresforthe further optimisation of the model for the quantifica-tionandcontrolofcreditandparticipationrisks.Aswellasfurtherdevelopingtheeconomiccreditriskmodel,thelossdatacollectionforthevalidationofthecomponentsLGDandCreditConversionFactor(CCF)willalsobefurtherexpanded.
Market Price Risk
Market price risks are potential losses which may be in-curred as a result of changes in market parameters. Thebankdifferentiatesbetweeninterestrisk(incl.prepaymentrisk), currency risk, volatility risk and credit-spread riskwithinmarketpricerisk.
Regions 1) 2) EUR million
Loans 3) Securities 4) Derivatives 5) Other 6) Total
31-12-2010 31-12-2010 31-12-2009
Eurostates 533 2,397 164 130 3,224 3,079
RemainingWesternEurope 55 221 89 0 365 333
EasternEurope 25 431 0 0 456 500
NorthAmerica 0 1,305 31 0 1,336 1,661
LatinAmerica 0 0 0 0 0 0
MiddleEast/Africa 0 0 0 0 0 0
Asia 0 116 0 0 116 77
Other 0 50 0 0 50 0
Total 614 4,519 283 130 5,546 5,649
1) Classification same as internal reporting according to economic critieria2) to6)seeprevioustableontheratingstructure
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Interestrateriskswillalwaysoccurwhenthevalueofapo-sitionorportfolioreactssensitivelytochangesinoneormoreinterestratesortochangesincompleteinterestratecurvesandthesechangesmayresultinanimpairmentoftheposition.
Currencyrisks(orexchangeraterisks)arisewhenthevalueofapositionorportfolioreactssensitivelytochangesinoneorseveralcurrencyexchangeratesandifchangestotheexchangeratescouldimpairtheposition.
The volatility risk describes the risk that the value of anoptionpositionmightreacttobecauseofpotentialpricechangesresultingfrommarketmovementsofthevolatili-tiesusedforthevaluationoftheoption,andthesechangescouldleadtoareductioninvalueoftheposition.
The credit spread risk denotes potential price changes,whicharise if thecreditspreadapplicable to the respec-tiveissuer,borrowerorreferencedebtors,whichisusedintermsofthemarketvaluationoftheposition,changes.
Market Price Risk – Management
StrategyTheactivitiesofNORD/LBCFBassociatedwithmarketpriceriskareconcentratedonselectedmarkets,customersandproductsectors.Theirpositiononthemoney,currencyandcapital markets should comply with the significance and sizeofthebank.
Credit-spread risks also result from security positions.However,thebankprimarilypursuesabuy&holdstrategy.Therefore,thesetransactionsarealwaysshowninthein-vestmentbook.
Organisational UnitsTheprocessofmarketpriceriskcontrolextendstoallsec-torsthatmanagemarketpriceriskbearingpositionsandthatbeargainsand losses resulting frommarketchang-es.TherisksaremonitoredbyControllingdepartmentofNORD/LBLuxembourgS.A.
InaccordancewithnationalrequirementsandtheGermanMaRisk,theControllingdepartmentisfunctionallyandor-ganisationallyindependentofthedivisionsresponsibleformarketpriceriskmanagementandperformsvariousmoni-toring,limitingandreportingtasksforthebank.
Market Price Risk – Management and Monitoring
The bank uses a value-at-risk (VaR) procedure for themanagementandmonitoringofthemarketpricerisksofNORD/LBCFB(exCreditSpread).
The value-at-risk key figures are determined on a daily ba-sisusingthemethodofhistoricalsimulation.Aunilateralconfidence level of 95 % and a holding period of one trad-ingdayareappliedthroughoutthegroup.Theanalysisisbased on historical changes to risk factors over the lasttwelvemonths.Themodelstakesaccountofdirectandin-directcorrelationeffectsbetweenriskfactors,typesofrisk,currencies and sub-portfolios. In addition to the overall fig-ure,theriskcontributionsoftheindividualriskcategoriesarealsoreported.Thecontributionofcurrencyriskisalsocalculatedseparatelyinternallyaccordingtocurrenciesandanalysed.Alimitissetforthevalue-at-riskvalue.Anypos-siblelossestothebankbookaredirectlyaddedtothelosslimitsandleadtoareductioninthevalue-at-risklimitsfol-lowingtheprincipleofself-consumption.
Ontopofthis,interestratesensitivitiesarealsocalculatedonadailybasis.Thesearereportedinthedailyreportinaggregatedformforeachcurrencyattheleveloftheindi-vidualportfolios,forthevariousproducttypesandinma-turitybands.
Thecredit-spreadrisksoftheinvestmentbookarenotcur-rentlycontrolledwiththeaidofavalue-at-riskmethod,butcalculatedviaascenarioanalysisandlimitedseparately.
The prediction quality of the value-at-risk model is verified with comprehensive backtesting analyses. This involvesthecomparisonofthedailychangeinvalueoftherespec-tiveportfolioswiththevalue-at-riskofthepreviousday.Aso-calledbacktestingoutlieroccursifthenegativechangeinvalueobservedexceedsthevalue-at-risk.Thenumberofoutliersinthebankbookwasinthegreenareaaccordingtothe Basel traffic light approach at the overall bank level.
Theeffectsofextremechangesonthemarketsontheriskpositionofthebankaredeterminedonadailybasisinad-ditiontothevalue-at-risk.Todoso,variousstressscenari-os, which approximately reflect the highest changes in the respectiveriskfactorstohavebeenobservedoverthelastfive to ten years over a period of ten trading days, were de-fined for each of the risk categories, interest, currency and volatilityrisk,aswellasforcredit-spreadrisk.
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Thevalue-at-riskofNORD/LBCFBisalsocalculatedonthebasis of the respective regulatory parameters (confidence levelof99%andaholdingperiodof10days).
Market Price Risks – Reporting
IncompliancewithMaRiskrequirements,theControllingdepartment,whichisindependentofthedivisionsrespon-sibleforthepositions,reportsthemarketpriceriskstotheBoardofDirectorsonadailybasis.
Market Price Risks – Development in 2010
Itwaspossibletoreducethemarketpricerisksshowninthefollowingdiagramoverallintheyearunderreport:
Theannualaverageutilisationofthemarketpricerisklimit(value-at-risklimit)inNORD/LBCFBwas29.7%(previousyear60.3%).Inthelastfourmonthsoftheyear,alowerutilisationofthelimitcanbeseen.Thisistobeseenasaconsequenceofaconsciousreductionofinterestrisks.Thevalue-at-riskcalculated daily (confidence level 95 % and holding time of 1day)amountedtoEUR0.167millionon31December2010(previousyearEUR0.353million)atNORD/LBCFB.
VaR-utilisation NORD/LB CFB 2010
Thecredit-spreadriskoftheinvestmentbookasat31De-cember2010wasEUR2.1millionforAFSstockandEUR41.1millionforLARstocks(holdingtimetendays).
Withregardtointerestraterisksintheinvestmentbook,theeffectsofastandardized interestrateshockof+130
basispointsarealsoanalysedinaccordancewiththere-quirementsof theGermanSolvencyRegulations (SolvV).Theresultcontinuestobefarbelowtheregulatorythresh-old,whichprovidesforamaximumproportionof20%ofauthorisedequitycapital.
Theproportionofinterestandforeigncurrencyrisksinthetotalriskasat31-12-2010amountstoKEUR162andKEUR96respectively.
Asat31-12-2010,theinterestsensitivitiesareasfollows:
Sensitivities (Interest rates)„Present Value of a Basis Point“ (PVBP) per portfolio and currency
31-12-2010(KEUR)
Currencies AUD CAD CHF CZK DKK EUR GBP HKD HUF JPY NOK NZD PLN SEK TRY USD ZAR Total
Whole bank + 0.0 + 0.0 + 4.0 + 0.0 + 0.0 + 5.1 + 0.0 + 0.0 + 0.0 + 0.0 – 0.0 + 0.0 + 0.0 + 0.0 + 0.0 + 6.5 + 0.0 + 15.6
1.00
0.80
0.60
0.40
0.20
0.00
WholebankVaR VaRrisklimit
EUR
mill
ion
04-01-2010 05-03-2010 04-05-2010 03-07-2010 01-09-2010 31-10-2010 30-12-2010
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Market Price Risks – Outlook
We do not expect interest rate and FX risks to be signifi-cantlyhigherin2011.
Furthermore,thebankwillintroduceacreditspreadvalue-at-riskviahistoricalsimulationwithinthescopeofthedailycontrols in2011.Thismethodisalreadybeingappliedintherisk-bearingcapacitycalculationfor31-12-2010withinthescopeofthegroup-wideintroductionofthenewRBCmodel.
Liquidity Risk
Liquidityrisksareriskswhichmayresultfrommalfunctionsintheliquidityofindividualmarketsegments,unexpectedeventsinlendingorinvestmentbusiness,ordeteriorationsin the bank’s own refinancing conditions.
Liquidity Risk – Control
StrategyTheliquidityriskstrategyofthebankisorientatedtowardsthe recommendations published by the CEBS on efficient li-quidityriskmanagement,therequirementsderivedthere-fromonthepartoftheLuxembourgregulatoryauthoritiesandtheCentralBank,aswellastherequirementsaccord-ingtoMaRisk.Tothisend,thebankimplementedaliquiditystrategy/policyandanemergencyplanningsystemin2010,whichaccommodatestheserequirementsandisincludedinthesystematicsofthe(sub-)group.Thefocusisessen-tiallyonthecontrolof theclassical liquidityriskandthecontrol of the refinancing risk.
Thebank’sliquiditymanagement–alongsideitsfunctionas a special bank in the sphere of covered financing and the contribution arising therefrom to the diversification of the financing basis of the sub-group – is done in the uncovered area mainly in close coordination with NORD/LB Luxem-bourg,whichperformsthefunctionofcoordinatorofun-coveredliquiditywithinthesub-group.
NORD/LBCFBonlyhasitsownmarketpresenceintheun-coveredsphereinconnectionwithpubliccustomers.
Organisational UnitsTheliquidityriskmanagementprocessistheresponsibilityoftheTreasuryorganisationalunit.
TheControllingdepartmentofNORD/LBLuxembourgper-forms the control functions for the calculation of the refi-nancingriskandthecalculationandmonitoringoftheclas-sical liquidityriskandis involvedtoa largeextent intheimprovementofinternalmethodsofmeasurement,limitingandmonitoringofliquidityrisks.
Liquidity Risk – Management and Measurement
Thebankdifferentiatesbetweenthefollowingtypesofli-quidityriskwithinthescopeofitsliquiditycontrol:
Classical Liquidity RiskThe classical liquidity risk is defined as the danger that the bank can no longer fulfil its short term payment obligations duetomarketdisturbancesinducedbyexternalpartiesorbecauseofunexpectedeventsinthelendingorinvestmentbusiness.Theaimistolimittheclassical liquidityriskbyholding sufficient liquid assets in reserve. The observation isfocusedonthenexttwelvemonths.
Theclassicalliquidityriskismeasuredwithreferencetotheso-calledliquiditystresstests(LST),whicharegeneratedonadailybasisatsub-grouplevel.
All liquidity payment flows of the bank are taken into ac-count. At the same time a distinction is made between fixed paymentsontheonehandandvariable/unforeseeablepay-ment flows on the other hand. The amount and due dates of fixed outgoings are known at the time of reporting, the so-calleddeterministicoutgoings.Thefocusisonthemod-elling of the payment flows that are variable in time and amountinthevariousscenarios.Theselectedproductsaredivided into outflows and inflows. The process takes into account,amongstothers,outsideinducedmarketdistor-tionsinthemodels,andtheeffectsofunexpectedeventsinthelendingordepositbusinesses.
Adistinctionismadeinthescenariosbetweenonedynam-icandthreestatisticalscenarios.
The dynamic stress test reflects the current or nearest cri-sissituation.
Thestaticscenariosaredifferentiatedinto:
Market wide Liquidity Disruption On the financial markets there is a strong financial market induced liquidity bottleneck which stops interbank andcustomer business. This is significant for the bank in the
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maintradingcurrencies,whicharelistedbythecompeten-cydelegationFinancialMarkets.Thisscenarioisbasedontheassumptionthatthecentralbanksarereadytoactandintervene helpfully in the financial market.
NORD/LB Credit Event NORD/LB’s creditworthiness is downgraded or NORD/LBisthesubjectofnegativeheadlinesorrumours.Thishasaconsiderableimpactonthebank’sliquiditysituation.
Market wide Credit Event This event is defined as an international financial crisis, triggeredby individualbanksorbranchesandcausingaliquiditycrisisinthebankingworld.
Withinthescopeoftheclassicalliquidityriskthedailybusi-nessismanagedwithreferencetothedynamicscenario.Forthispurpose“Distance-to-Illiquidity”isdeterminedasafactorwhichshallnotbefallenshortof.Themeetingofthiscore figure is to be reported to the bank’s Board of Direc-torsandNORD/LB’sRiskControlling/LiquidityRiskdepart-mentonadailybasis.
Inordertomonitortheliquidityriskappetiteandtoleranceusing the “Distance-to-Illiquidity”, which is calculated atsub-group level, the bank has defined the following limits:
• riskappetite:180days• risktolerance:60days
These limits are integrated into the traffic light control sys-tem of the dynamic scenario, which is defined across the group.
Thereisanescalationprocess,whichrangesfrompreventa-tivemeasureswhenfallingbelowtheriskappetitethroughtotriggeringtheemergencyplanwhenfallingbelowtherisktolerance.
Refinancing RiskThe refinancing risk is defined as the potential falls in profit whichwouldariseforthebankasaresultoftheworseningof its own refinancing conditions. This refers to positions on boththemoneyandcapitalmarkets.Aperiodofbetweenintraday and indefinite maturity is taken into account.
The refinancing risk is measured on a weekly basis.
Volumestructurelimitsaresetfortheindividualmaturitybands within the scope of the management of the refinanc-ing risk, which limit the refinancing risk accordingly. The
volume structure limits are defined at individual institution level.Thebankusestheselimitstorecordariskappetiteinrelationtodiscrepancies.
The refinancing risk is measured on a weekly basis. A poten-tialincreaseinpriceoftheliquidityislimitedviathevolumestructurelimit(i.e.limitsinindividualmaturitybands).
Liquidity Risk – Reporting
The liquidity risksituationof thebank in theclassical li-quidity risk is calculated daily and in the refinancing risk weeklybytheControllingdepartmentofNORD/LBLuxem-bourgandprovidedtothetradingboardofdirectors.Anypossibleover-runsinthevolumestructurelimitsofthere-financing liquidity risk or a switch to an amber or red traffic light intheclassical liquidityriskarereportedtothefullBoardofDirectors.
In addition, liquidity outflow balances are prepared on the basis of the refinancing liquidity risk for the availability com-mittee,whichmeetsmonthlyatbankandgrouplevelsbytheControllingdepartmentofNORD/LBLuxembourg,whicharediscussedwithinthescopeoftheregularmeetings.
Aswellasthis,thefullboardisinformedabouttheessentialliquidity key figures within the scope of the daily reports.
Within the scope of the monitoring of the refinancing struc-ture,aconcentrationreportwasintroducedintheyearun-der report (for the period ended 31-12-2010, for the first time),whichincludestheanalysisofthefunding.Aswellastheequityandliabilitiesside(balancesheet),concen-trationsofoff-balancesheetobligationsarereportedonaquarterlybasisaswell.AreportispreparedfortheBoardofDirectorsatannualintervals.Theevaluationsareconsoli-datedintoagroupconcentrationreportatgrouplevel.
Liquidity Risk – Development in 2010
The financial market continues to find itself in a tense mood overthecourseof2010too.Theavailabilityofliquidfundsof thebankwasguaranteedatall timesand improved incomparisontothepreviousyear.
Theaggregatedliquidityprogressreviewusedforthein-ternal control of the refinancing risk was as follows on the reportingdate:
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The regulatory specifications were met constantly in the yearunderreportjustended.
In order to depict and control the liquidity flows accurately, a security classification system was introduced via a me-thodical improvement, which groups together the wholesecuritystocksintovariousclassesaccordingtotheassess-mentoftheirconvertibilityintocash.Thechangeincumu-lative outflows results predominantly from the introduction ofthisnewlogicandisthereforeonlycomparablewiththeprevious year’s outflows to a certain extent.
Liquidity Risk – Outlook
Withthemanagementoftheliquidityriskthatgoesbeyondtheregulatoryframework,itisensuredthatthebankisal-ways in a position to fulfil its payment obligations on time.
Thebankisactiveonliquidmarketsaswellasinmunicipalundertakings lendingbusinessandmaintainsaportfolioofhighqualitysecurities.Therearenoconcentrationsofliquidityrisk.
Closeobservationofthemarketsandactiveliquidityman-agement ensured that the bank had a sufficient supply of liquidityintheyearunderreport2010.Fortheyear2011,wearenotexpectinganyfurthersubstantialincreaseintheliquidityrisks.
In2011,themethodsandriskmeasurementprocesseswillbeoptimisedfurther.Anessentialcomponentofthisisthe
implementation of the significantly increased requirements ofmanagementannouncedbytheinternationalregulatoryauthorities as a reaction to the financial market crisis, and theexternalreportingwithregardtoliquidityrisks.Asre-gardsthemethodicalimprovement,thebankisparticipat-inginagroup-wideliquiditymanagementproject.
Operational Risk
Operational risks are defined as the risk of incurring losses asaresultoftheinadequacyorthefailureofinternalproce-dures,employeesandtechnology,orlosseswhichoccurasa result of external influences. Besides covering legal risks, this definition implicitly includes reputation risks as con-sequentialorsecondaryrisks.Strategicrisksandbusinessriskshavenotbeenincluded.
Operational Risk – Control
StrategyThereareoperationalrisksineverybusinessactivity.Theaimisthereforetoavoidthem–sofarasiseconomicallyreason-able.Theoperationalformulathathastobeappliedinthisrespectfollowsthebasicideaofprovidingprotectionagainstoperationalriskstotheextentthatthecostsoftheprotec-tiondonotexceedthecostsoftherisksthatmightoccur.
Organisational UnitsTheBoardofDirectors, theperson inchargeofOprisks,internalauditorsandallotherdivisionsareinvolvedinthe
Schedule of Liquidity Flows
Man
agem
ent
Rep
ort
1,300
800
300
–200
–1,200
cum. flows 31-12-2010 cum. flows 31-12-2009
EUR
mill
ion
upto
1y
ear
upto
2y
ears
upto
3y
ears
upto
4y
ears
upto
5y
ears
upto
6y
ears
upto
7y
ears
upto
8y
ears
upto
9y
ears
upto
10
year
sup
to1
1ye
ars
upto
12
year
sup
to1
3ye
ars
upto
14
year
sup
to1
5ye
ars
upto
16
year
sup
to1
7ye
ars
upto
18
year
sup
to1
9ye
ars
upto
20
year
sup
to2
1ye
ars
upto
22
year
sup
to2
3ye
ars
upto
24
year
sup
to2
5ye
ars
upto
26
year
sup
to2
7ye
ars
upto
28
year
sup
to2
9ye
ars
upto
30
year
sup
to3
1ye
ars
–700
Risk Report
40
processofcontrollingoperationalrisks.TheBoardstipu-latesthebasicmethodofhandlingoperationalrisks,takingintoconsiderationtherisksituationforthebankasawhole.Within the defined framework conditions, the responsibil-ityforcontrollingoperationalrisksisdecentralisedandisbornebytheindividualdivisions.ThepersoninchargeofOp risks is responsible for central monitoring and inde-pendentreportingonoperationalrisks.Thisdivisionisalsoresponsible, incooperationwiththegroup’sparentcom-pany,forspecifyingthemethodstobeapplied,forproperlyimplementingcentralisedmethods,and forcoordinatingtheimplementationofdecentralisedmethods.TheInternalAuditdepartment is inchargeof independentlyauditingtheproperandcorrect implementationandexecutionofmethodsandprocedures.
Operational Risk – Management
Safetyconceptsandcontingencyconceptshavebeenputinplaceforthepurposeofprotectingpersonsandtangibleassets;amongotherthingstheyregulatetheuseofbuild-ings, the procurement of replacement operating and office equipment,and thesupplyofenergy.The toppriority ismaintainingthehealthofemployees.Thereforethepersoninchargeofsafety,forexample,isresponsibleforthepro-motionofhealthandsafetyatwork.
The management of operational risks is supported by amethodical framework for risk assessment. Escalationprocesses are defined in order to introduce timely targeted measures.
Risk causes are to be identified and risk concentrations avoidedthroughacontinuousanalysisoflossevents,riskindicators (from2011)andscenarios.Thesuitabilityandeffectivenessoftheinternalmanagementsystem(IMS)ischeckedatregularintervals(IMScontrolloop)intermsofrisks.Dependingontheoccasion,suitablecountermeas-uresareseized.Emergencyplansservetolimitdamageintheeventofunexpectedextremeevents.IntheITdepart-ment, instructions on procedures, alternative capacitiesandbackupsensurethattheITinfrastructureisadequatelystable.Safetyconceptsandcontingencyplanssupplementthepre-emptivemeasuresinordertopreventlossordam-ageresultingfromthefailure,tamperingormanipulationofsystemsandinformation.
Process-related and structural organisational risks arecounteredwithwell-organizedstructuresandprocedures.Regularinteractionbetweenallofthedivisionsinvolvedin
theprocessofcontrollingoperationalrisksiscontinuouslyguaranteed.
The bank is sufficiently insured. The legal department is to beconsultedwithregardtosecuringlegalrisks,forexam-plewhenlegalstepsaretobeinitiatedandwhencontractsareconcluded.
Natural disasters and terrorist attacks are defined as force majeure. These risks are handled with contingency con-ceptsandadisasterrecoverycentre.
Operational Risk – Measurement
Sincethemiddleof2006,thebankhasbeencollectingdataonlosseventsarisingfromoperationalrisksandhasclas-sified these events according to cause and effect. There is no “insignificant” level, although a simplified reporting processisappliedforgrosslossesoflessthanEUR1,000.Datainthelossdatabaseprovidesthebasisforanalysesinsupportofriskmanagementandinthefuturewillbeanimportantfoundationforcreatingastatistical-mathemati-calriskmodel.
ThecollectionoflosseventsisenteredintotheDakORdataconsortiuminitiatedbytheGermanFederalAssociationofPublicSectorBanks(BundesverbandÖffentlicherBankenDeutschlandse.V.,orVÖB).NORD/LBusesthelosseventsreportedbytheconsortiumtoimprovethedatabaseoftheadvancedmeasurementmodelforoperationalrisks,whichisstillinthedevelopmentstage(advancedmeasurementapproach–AMA).
WiththehelpoftheannualriskassessmentcarriedoutinNORD/LBCFB,thecollectionofpast-relatedlosseventsissupplementedbythefuturecomponent.Expertappraisalsprovidedetailedinsightintotherisksituationofthebank’sindividualdivisions,sothatrelevantmeasurescanbede-rivedifnecessary.Themethodwastotallyreviewedintheyearunderreportandreplacestheself-assessmentcarriedoutuntilthen.
Operational Risk – Reporting
Intermsofthecontinualriskmanagementprocess,there-sultsfromthelosseventcollection,riskassessment,riskindicators(from2011)andinternalmodelareanalysedandcommunicatedtotheboardofdirectorsquarterlyandtothe competent divisions in relation to the cause, but at
Risk Report
41
leastonceayear.AllresultsareincludedinthequarterlyRBCreport.
Operational Risk – Development in 2010
Intheyearunderreporttheself-assessmentmethodwasreplaced by the improved method of risk assessment,whichcomprisesthethreecomponentsofriskmap,self-assessmentandmore in-depthscenarioanalyses.Basedon objective information and a much simplified qualitative self-assessment,ariskmapisdeveloped,onthebasisofwhichscenariosintermsofriskareevaluatedbyexpertsinthosepartsofthecompanythatareconcerned.Theanaly-sis of group-wide scenarios and risk concentrations andtheperformanceofstresstestswerefurtherimprovedasaresultofthis.Theresultsareincludedintheinternalmodel,withwhichanincreaseinaccuracyofmeasurementsisas-sociatedandastrongerproceduralviewoftheoperationalrisksofthebankbecomespossible.
The internal model was applied across the group for the first timeintheperiodended31December2010.Tothisend,thepreviousmodelwasextended,subjectedtoadetailedrevalidationandexpandedtoincludeanallocationproce-dure. With the expansion of this model, conditions were fi-nallycreatedthatallowagroup-wideapplicationofanAMA.Itwaspossibletocompletethegroup-widestandardizedimplementationofallthemethodstoalargeextent.Thusuniformityofriskmanagementandgranularisationofthecontrolimpulsesderivedfromthemodelwereachieved.
AmountsqualifyingforrecognitionintermsofoperationalriskweredeterminedusingthestandardSolvVapproach.
Thefollowingtableshowsthedistributionof losseventsamong the risk categories in relation to the total lossamount.
Operational Risk – Outlook for 2011
In2011,theNORD/LBgroupisseekingregulatoryapprovalof the advanced measurement approach for operationalrisk.Thepreliminaryworktothisendisalmostcomplete;theapplicationisplannedforthethirdquarterof2011.Inaddition,theinternalmodelistobemademorecompleteinordertomeetAMArequirementsinaccordancewithSolvV.Steps being taken include the fine-tuning of the manage-mentofoperationalriskonthebasisoftheinternalmodeland the further expansion of the control of measures inop-riskmanagement.Toimprovetheinternalcontrolsys-tem,theoperationalriskcontrolmethodsaretobemadeincreasinglyprocess-oriented.Extensiveimprovementstothemethodsandprocessesthathavealreadybeenimple-mentedareplannedfor2011.Furthermore,2011willalsoseetheimplementationofearlywarningindicators.
Other Risks
Beyondthecredit,marketprice,liquidityandoperationalrisks already illustrated, there are no risks identified as sig-nificant. The relevant risks of the bank, which were identi-fied as insignificant, are however included in a risk buffer in themanagementoftherisk-bearingcapacity.
Summary and Outlook
Thebankhastakenaccountofallknownrisksbyemploy-ingprecautionarymeasures.Theappropriate toolshavebeenimplementedinordertoidentifyriskspromptly.Thecore element of the risk strategy is the risk-bearing ca-pacitymodel (RBCmodel).Thewillingnesstotakerisk isdeterminedonthebasisoftheriskstrategyandrisk-bear-ingcapacity;developmentsareregularlymonitoredusingthe RBC model. In the RBC model, the combined credit,
Man
agem
ent
Rep
ort
Loss event databankNet loss as a percentage of the total amount of loss
2010 2009
Externalinfluences 0 0
Internalprocedures 0 0
Staff 0 0
Technology 0 0
Risk Report
42
participation,marketprice,liquidityandoperationalrisksare compared to the respective risk potential availableonaquarterlybasis.ThequotientscalculatedintheRBCmodelshowthattheriskswerecoveredatalltimesintheperiod under report. According to the estimation of thebank,therearenorisksthreateningitsexistence.In2010,NORD/LB CFB constantly fulfilled the applicable regulatory provisionsoncapitalstockandliquidity.Likewise,thebankaccommodatedtheregulationsonlargelendinglimits inaccordancewithLuxembourgandGermanlawintheyearunderreportjustended.Themethodsandprocessesthatare currently used to control significant risks are subject to ongoing verification and are refined as necessary. The improvementsforparticulartypesofriskwhichwerespe-cifically targeted in 2011 have been covered in the relevant sections.
Asalreadydiscussedinthedescriptionofthebusinesssec-tors, a first class rating is an important component for the businessmodelofacoveredbondbank.Alossofthisratingoradowngradedirectlyorindirectlythroughtherelation-ships within the group could have an essential negativeinfluence on the success of the business. The bank mini-misedthisriskin2010withtheinclusionofasecondratingagency.
Beyondthisandthecredit,marketprice,liquidityandoper-ation risks already illustrated, there are no risks identified as significant. The relevant risks of the bank, which were identified as insignificant are however included in a risk bufferinthemanagementoftherisk-bearingcapacity.
Risk Report
43
AllmembersofstaffdeservetheparticularrecognitionoftheBoardofDirectorsandSupervisoryBoardforthebusi-nessresultsachieved.Thebank’ssuccessislargelydrivenby the professionalism and competence of its staff. TheBoardofDirectorsandSupervisoryBoardwouldthereforeliketoexpresstheirgratitudefortheirspecialdedicationandmotivationandfortheirfaithfulcooperation.
The bank takes the further development and qualifica-tions of its staff very seriously. Flat hierarchies enablefaster response times, which in a dynamic environmentare absolutely essential for lasting success. By offeringperformance related pay plus appropriate fringe benefits and promoting an innovative and dynamic team culture,thebankaimstocreateopportunitiesforthepersonalde-velopmentof itsstaffandamotivatingandconstructiveworkingenvironment.
Personnel Changes
Martin HalblaubMemberoftheBoardofDirectorsofNORD/LBNorddeut-scheLandesbankGirozentrale,lefttheSupervisoryBoardNORD/LBCFBon11January2010.
Ulrike BrouziGeneralManagerofNORD/LBNorddeutscheLandesbankGirozentrale, was elected to the Supervisory Board ofNORD/LBCFBwitheffect from1September2010.On17NovembertheSupervisoryBoardelectedMsBrouziasitschairwoman.
NORD/LB Cooperation
Market consequence, organisational and administrativefunctionsareperformedonthebasisofagencycontractsbytheparentcompany,NORD/LBLuxembourgorthegroupparentNORD/LBexceptforthefunctionsofinternalman-agement,complianceandcoverpoolmanagement.
ThestaffofNORD/LBLuxembourgandNORD/LBalsode-servesthethanksandrecognitionoftheBoardofDirectorsandSupervisoryBoardfortheirparticulardedication,mo-tivationandfaithfulcooperation.
Personnel Report
Number of Employees
Thebank’snumberofpersonnelisabovethelevelofthepreviousyear:
Reporting date 31-12-2010 31-12-2009 Absolute change Change (in %)
NORD/LBCFB 9 7 2 28.6%
Man
agem
ent
Rep
ort
Personnel Report
44
Supplementary Report There were no significant events between the balancesheetdateof31December2010andthepreparationofthepresent financial statements by the Board of Directors on 25February2011.
Statements Relating to the Future
Thisreportcontainsstatementsrelatingtothefuture.Theycanberecognisedthroughtermssuchas“expect”,“intend”,“plan”, “seek”, “estimate”andrelate tocurrentplansandestimates.Thesestatementscontainuncertainties,sincealargenumberoffactorsthathaveaneffectonthebusinesslie outside the sphere of influence of NORD/LB CFB. These include primarily the development of the financial markets andthechangesininterestratesandmarketprices.Theac-tualresultsanddevelopmentscandifferconsiderablyfromthestatementsmadetoday.NORD/LBCFBassumesnore-sponsibilityandalsodoesnotintendtoupdatethestate-mentsrelatingtothefutureortocorrectthemintheeventofadevelopmentotherthanthatexpected.
BoardofDirectorsLuxembourg,28February2011
Supplementary Report/Statements Relating to the Future
Annual Report 2010
NORD/LB Covered Finance Bank S.A.
46
Forcomputationalreasons,thefollowingtablesmaycontainroundingdifferences.Thenotesthatfollowareanintegralpartofthefinancialstatements.
Financial Statements
Fortheyearunderreportfrom1Januaryto31December2010:
Notes 2010(KEUR)
2009(KEUR)
Net interest income 16 8,589 8,725
Interestincome
Interestexpense
390,564
381,975
378,472
369,746
Loan loss provisions 17 – 1,013 – 289
Net commission income 18 – 1,201 – 903
Commissionincome
Commissionexpense
740
1,941
1,175
2,078
Profit/loss from financial instruments at fair value through profit or loss
19 – 587 665
Tradingprofit/loss
Profit/lossfromthefairvalueoption
–587
0
665
0
Profit/loss from hedge accounting 20 1,032 – 599
Profit/loss from financial assets 21 5,041 5,354
Administrative expenses 22 2,853 2,675
Staffexpenses
Otheradministrativeexpenses
Depreciationofproperty,plantandequipment
Depreciationonintangibleassets
1,530
1,315
6
1
1,107
1,360
28
181
Other operating profit/loss 23 – 2,296 – 2,323
Earnings before taxes (EBT) 6,714 7,955
Income taxes 24 482 – 1,591
Profit for the year 7,197 6,364
ofwhich:attributabletoshareholders
ofwhich:attributabletonon-controllingshares
7,197
0
6,364
0
Fina
ncia
l Sta
tem
ents
Financial Statements
47
Overall Profit and Loss Account
The total income for 2010 (2009) of NORD/LB CFB comprises the income and expenditure in the profit and loss account and thoserecordeddirectlyinequity.
IntermsofappropriationofearningsitisintendedtoallocateEUR2,000KtothestatutoryreservesandEUR1,000Ktothevoluntary reserves and to carry forward the remaining profit for the year in the sum of EUR 4,197 K.
The change in the revaluation reserve from AfS financial instruments results almost exclusively from changes in credit spread of Italian government securities. These securities are to be held until their final maturity.
2010 (KEUR)
2009 (KEUR)
Profit for the year 7,197 6,364
Increase/decreasefromavailableforsale(AfS)financialinstruments –12,692 9,425
ofwhich:unrealisedprofit/losses
ofwhich:reclassificationsonthegroundsofprofit/lossrealisation
–12,692
0
9,425
0
Actuarialgains/lossesfordefinedbenefitprovisionsforpensions –19 –5
Deferredtaxes 3,687 –2,923
Profit/loss recognised directly in equity – 9,024 6,498
Total income for the year – 1,827 12,862
ofwhich:attributabletoshareholders
ofwhich:attributabletonon-controllingshares–1,827
012,862
0
Overall Profit and Loss Account
48
Balance Sheet
Fina
ncia
l Sta
tem
ents
Assets Notes 31-12-2010(EUR million)
31-12-2009(EUR million)
Cashreserve 25 1.4 0.0
Loansandadvancestobanks 26 1,111.0 1,144.8
Loansandadvancestocustomers 27 821.4 856.8
Riskprovisions 28 –2.1 –1.0
Financialassetsatfairvaluethroughprofitorloss 29 45.1 11.1
Derivatives–fairvaluesfromhedgeaccounting 30 379.2 228.9
Financialassets 31 4,044.9 3,686.4
Property,plantandequipment 32 0.0 0.0
Intangibleassets 33 0.0 0.0
Incometaxassets 34 7.3 3.6
Otherassets 35 0.1 0.1
Total assets 6,408.5 5,930.6
Equity and liabilities Notes 31-12-2010(EUR million)
31-12-2009(EUR million)
Liabilitiestobanks 36 2,550.9 1,960.8
ofwhich:LettresdeGage 131.9 93.6
Liabilitiestocustomers 37 433.0 367.9
ofwhich:LettresdeGage 433.0 367.9
Securitisedliabilities 38 2,701.3 3,032.7
ofwhich:LettresdeGagee 2,701.3 3,032.7
Financialliabilitiesatfairvaluethroughprofitorloss 39 25.2 20.9
Derivatives–fairvaluesfromhedgeaccounting 40 586.8 432.0
Provisions 41 0.1 0.2
Incometaxliabilities 42 0.0 0.0
Otherliabilities 43 6.1 5.8
Subordinatedcapital 44 38.0 45.8
Equity 46
Issuedcapital Capitalreserves Revenuereserves Revaluationreserve Currencytranslationreserve
72.01.7
11.3–18.0
0.0
62.01.79.6
–9.00.0
Equity attributable to shareholders 67.0 64.3
Shareswithoutcontrollinginfluence 0.0 0.0
67.0 64.3
Total equity and liabilities 6,408.5 5,930.6
Balance Sheet
49
Cash Flow Statement
2010(EUR million)
2009(EUR million)
Profit for the year 7.2 6.4
Adjustmentfornon-cashitems
Depreciation,valueadjustmentsandwrite-upsofproperty,plantand equipment,write-downs,valueadjustmentsandwrite-upsoffinancialassets
Increase/decreaseinprovisions
Gains/lossesfromthedisposalofproperty,plantandequipmentand financialassets
Increase/decreaseinothernon-cashitems
Otheradjustments
0.6
–0.2
–5.0
4.9
–52.7
0.5
0.2
–5.4
–3.0
84.0
Sub-total – 45.2 82.7
Increase/decreaseinassetsandliabilitiesfromoperatingactivitiesafteradjustmentfornon-cashitems
Loansandadvancestobanksandcustomers
Otherassetsfromoperatingactivities
Liabilitiestobanksandcustomers
Securitisedliabilities
Otherliabilitiesfromoperatingactivities
Interestreceived
Dividendsreceived
Interestpaid
Incometaxespaid
58.3
0.0
641.6
–352.3
0.0
443.8
0.0
–452.7
0.5
410.8
0.0
–164.8
222.5
0.0
425.9
0.0
–437.2
–1.6
Cash flow from operating activities 294.0 538.3
Cashreceiptsfromthedisposalof
Financialassets
Property,plantandequipmentandintangibleassets
351.2
0.0
108.9
0.0
Cashpaymentsfortheacquisitionof
Financialassets
Property,plantandequipmentandintangibleassets
–635.8
0.0
–640.4
0.0
Increase/decreaseinfundsfromotherinvestmentactivity 0.0 0.0
Cash flow from investment activities – 284.6 – 531.5
Cash Flow Statement
50
Fina
ncia
l Sta
tem
ents
2010(EUR million)
2009(EUR million)
Cashreceiptsfromequitycontributions 0.0 0.0
Increase/decreaseinfundsfromothercapital 0.0 0.0
Interestexpenseonsubordinatedcapital –2.5 –2.9
Dividendspaid –5.5 –4.0
Cash flow from financing activities – 8.0 – 6.9
Cash and cash equivalents at end of the previous year 0.0 0.2
Cashflowfromoperatingactivities 294.0 538.3
Cashflowfrominvestmentactivities –284.6 –531.5
Cashflowfromfinancingactivities –8.0 –6.9
Cash flow total 1.4 – 0.2
Effectsofexchangeratedifferencesandvaluationchangesandchangesinthebasisofconsolidation
0.0 0.0
Cash and cash equivalents at end of the year under report 1.4 0.0
Cash Flow Statement
51
Statement of Changes in Equity
EUR million Issued capital
Capital reserves
Revenue reserves
Revalu-ation
reserve
Currency trans-lation
reserve
Equity before shares
without control-
ling influence
Shares without control-
ling influence
Equity
Equity at 01-01-2009 50.0 1.7 7.3 – 15.5 0.0 43.5 0.0 43.5
Distribution 0.0 0.0 –4.0 0.0 0.0 –4.0 0.0 –4.0
Profitfortheyear 0.0 0.0 6.4 0.0 0.0 6.4 0.0 6.4
Profit/lossrecogniseddirectlyinequity
0.0 0.0 0.0 6.5 0.0 6.5 0.0 6.5
Othercapitalchanges 12.0 0.0 0.0 0.0 0.0 12.0 0.0 12.0
Equity at 31-12-2009 62.0 1.7 9.6 – 9.0 0.0 64.3 0.0 64.3
Distribution 0.0 0.0 –5.5 0.0 0.0 –5.5 0.0 –5.5
Profitfortheyear 0.0 0.0 7.2 0.0 0.0 7.2 0.0 7.2
Profit/lossrecogniseddirectlyinequity
0.0 0.0 0.0 –9.0 0.0 –9.0 0.0 –9.0
Othercapitalchanges 10.0 0.0 0.0 0.0 0.0 10.0 0.0 10.0
Equity at 31-12-2010 72.0 1.7 11.3 – 18.0 0.0 67.0 0.0 67.0
In 2010 relating to year under report 2009 In 2009 relating to year under report 2008
Dividends(EUR) 5,500,000.00 4,000,000.00
Numberofshares 620,000 500,000
Dividendspershare(EUR) 8.87 8.00
Statement of Changes in Equity
Not
es
Notes
Accounting Policies
(1)PrinciplesforthePreparationoftheFinancialStatements(2)DiscretionaryDecisions,EstimatesandAssumptions(3)AdoptedandnewIFRS(4)CurrencyTranslation(5)FinancialInstruments(6)RiskProvisions(7)Property,PlantandEquipment(8)Leasing(9)IntangibleAssets(10)ProvisionsforPensionsandSimilarObligations(11)OtherProvisions(12)IncomeTaxAssetsandLiabilities(13)SubordinatedCapital
Segment Reporting (14) Classification by Business Segment(15)SegmentationbyGeographicalCharacteristics
Notes to the Income Statement
(16)NetInterestIncome(17)LoanLossProvisions(18)NetCommissionIncome(19) Profit/Loss from Financial Instruments at Fair Value through Profit or Loss(20) Profit/Loss from Hedge Accounting(21) Profit/Loss from Financial Assets(22)AdministrativeExpenses(23) Other Operating Profit/Loss(24)IncomeTaxes
Notes to the Balance Sheet
(25)CashReserve(26)LoansandAdvancestoBanks(27)LoansandAdvancestoCustomers(28)RiskProvisions(29) Financial Assets at Fair Value through Profit or Loss(30)FairValuesfromHedgeAccounting(31)FinancialAssets
56
56565758586263636363646465
66
6769
70
707172737474757676
78
78787979808181
(32)Property,PlantandEquipment(33)IntangibleAssets(34)IncomeTaxAssets(35)OtherAssets(36)LiabilitiestoBanks(37)LiabilitiestoCustomers(38)SecuritisedLiabilities(39) Financial Liabilities at Fair Value through Profit or Loss(40)FairValuesfromHedgeAccounting(41)Provisions(42)IncomeTaxLiabilities(43)OtherLiabilities(44)SubordinatedCapital
Other Disclosures
(45) Notes to the Overall Profit and Loss Account(46)NotestotheStatementofChangesinEquity(47)NotestotheCashFlowStatement
Notes to Financial Instruments(48)TermtoMaturityofFinancialLiabilitiesandContingentLiabilities(49)BookValuesaccordingtoValuationCategories(50)NetResultsaccordingtoValuationCategories(51)Impairments/ReversalofImpairmentsaccordingtoValuationCategories(52)FairValueHierarchy(53)FairValueofFinancialInstruments(54)DerivativeFinancialInstruments(55)UnderlyingTransactionsinEffectiveHedgingRelationships(56)NORD/LBCFBasAssignorandAssignee(57)SecuritiesRepurchaseAgreementsandSecuritiesLending
Other Notes(58)RegulatoryInformation(59)ForeignCurrencyVolumes(60)ContingentLiabilitiesandotherObligations(61)SubordinatedAssets(62)EventsaftertheBalanceSheetDate
Related Parties(63)NumberofEmployees(64)RelatedPartyDisclosures(65)MembersofExecutiveBodiesandtheirPositions(66)RemunerationofandLoanstoExecutiveBodies(67)Auditor’sFees(68)DepositGuarantee
83848586868787888889939494
95
959596
979798989999
102102104105106
107107108109110110
110110111113114114114
Annual Report 2010
NORD/LB Covered Finance Bank S.A.
56
Accounting Policies
(1) Principles for the Preparation of the Financial Statements
The financial statements of NORD/LB Covered Finance Bank S.A. (NORD/LBCFB) to31December2010werepreparedincompliancewith the InternationalFinancialReportingStandards (IFRS) of the International Accounting Stand-ardsBoard(IASB).ThestandardsusedwerethosethathadbeenpublishedandadoptedbytheEuropeanUnionatthetime the financial statements were prepared (see Note (3) AdoptedandnewIFRS).
The financial statements of NORD/LB CFB to 31 December 2009werepassedbythegeneralmeetingheldon31March2010andformthebasisforthedeterminationandappro-priation of profit for the year under report 2009.
The financial statements at 31 December 2010 take into considerationthenational requirementsof the lawof17June 1992 on the annual accounts of credit institutionsestablishedunderLuxembourglaw(asatMarch2006).Thefinancial statements comprise the income statement, the overall profit and loss account, the balance sheet, the cash flow statement, the statement of changes in equity and the appendix(Notes).Thereportsonthesegmentsareinclud-edinthenotes.RiskreportinginaccordancewithIFRS7isessentiallycarriedoutintheseparatereportontherisksandrewardsoffuturedevelopment(riskreport)aspartofthemanagementreport.
Assetsaremeasuredinprincipleatamortisedcost,apartfrom financial instruments under IAS 39, which are meas-ured at fair value. These financial statements have been preparedunderthegoingconcernassumption.Incomeandexpenseareamortisedonaproratabasis.Theyarereport-edandshownintheperiodtowhichtheyareeconomicallyattributable.Thefundamentalaccountingpoliciesarede-scribedbelow.
The reporting and functional currency used in the finan-cial statements is the Euro. Unless stated otherwise, allamounts are shown in millions of Euros (EUR million)roundedtoonedecimalplace.Thestatementofpercent-agediscrepanciesrelatestonon-roundedamounts.
(2) Discretionary Decisions, Estimates and Assumptions
Theestimatesandassessmentsneededfromthemanage-ment in association with the preparation of the balancesheetinaccordancewithIFRSareinkeepingwiththere-spective standard. They are regularly checked and arebasedonexperienceandotherfactors,includingexpecta-tionsregardingfutureeventswhichappeartobesensibleunderthegivencircumstances.Ifbroadestimateswerere-quired, the relevant significant assumptions shall be stated. Theestimatesandjudgementsthemselves,andthefactorsunderlyingthejudgementsandestimatingprocesses,arecheckedandadjustedtotheactualeventsastheyoccur.Theparametersusedareappropriateandtenable.Changestoestimates,ifthechangeconcernsonlyoneperiod,areonlytakenintoaccountinthatperiod.Wherethechangeconcernsthecurrentandsubsequentreportingperiods,itistakenintoconsiderationinthoseperiods.
Theessentialmethodsareshownbelow:
a) Fair Value of Financial Instruments
If there are no active market listings for financial assets or financial liabilities, the fair value is determined using valua-tionmethods.Theparametersneededforthisarebasedasfaraspossibleonobservedmarketdata.Ifsuchinputdataisnotavailablethenvaluationmethodsareusedwhicharebasedonvolatilityandmarketliquidityamongotherthings.Changesintheassumptionsrelatingtotheseparameterscould have an effect on the reported fair value of financial instrumentscalculatedusingthesemethods.
ThereismoreinformationinNotes(5)and(6)and(52).
b) Pension Payments
Theexpenditurefromperformance-relatedplansandthecashvaluefrompensionobligationsaredeterminedwithreference toactuarialcalculations.Thesewerebasedonvariouswage,salaryandpensiondevelopment,mortalityrate and the discount rate assumptions. Because of thelongtermnatureof theunderlyingassumptionsandthecomplexcalculationmethods,changesmadetothoseas-sumptions can have significant consequences.
ThereismoreinformationinNote(10)andNote(41).
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c) Taxes
Deferredtaxclaimsareassessedforunusedtaxlossescar-riedforwardtotheextentthatitisprobablethatthetax-ableincomeforthispurposewillbeavailable,i.e.thatitwillactuallyalsobepossibletousethelossescarriedforward.Thetimeofentryandtheamountofthefuturetaxablein-come are made by a significant exercise of discretion.
ThereismoreinformationabouttaxesinNote(12).
(3) Adopted and New IFRS
NORD/LBCFBadoptsonlythoseIFRSthathavebeenen-dorsedbytheEU.
The financial statements of NORD/LB CFB at 31 December 2010arebasedontheconceptualframeworkoftheIASBandthefollowingIFRS:
IFRS2,3,4,5and6,IAS2,11,20,23,26,28,29,31,33,34,40and41,andIFRIC1,2,5,6,7,8,9,10,11,12,13,14,18,andSIC7,10,12,13,21,25,29,31and32,werenottakenintoaccountbecausetheyarenotrelevantornotobliga-tory for NORD/LB CFB for the financial statements to 31 De-cember2010.
Wewerepermittednottoproceedwiththeearlyadoptionofthefollowingstandards,whichdonothavetobeimple-menteduntilafter31December2010.
• IFRS 9 Financial InstrumentsArevisedversionofIFRS9waspublishedinOctober2010anditisobligatorytoapplyittoreportedyearsbeginningonorafter1January2013.Thestandardistograduallysu-persedethecurrentIAS39inthreephases.Thepublishedfirst phase includes regulations on the categorisation and evaluation of financial assets and financial liabilities. For the categorisation of financial assets in accordance with IFRS9thereareonlytwooptionsnow,thevaluationatnetbookvalueorthevaluationatfairvalue.Thecategorisa-tionwillbealignedwiththebusinessmodelofthebal-ancing entity and the contractually agreed payment flows oftheassetsinfuture.Therequirementsforembeddedderivatives and reclassification have also been amended. The requirements in relation to financial obligations are largelyunchangedincomparisontoIAS39.Creditworthi-ness-induced changes in the valuation of financial liabili-ties will be shown in other profit/loss in principle (other comprehensiveincome)onlywhenapplyingthefairvaluein the future. The final standards of the second and third phaseswiththetopicsofimpairmentandhedgeaccount-ingareexpectedin2011.
IAS 32 Financialinstruments:presentation
IAS 36 Impairmentofassets
IAS 37 Provisions,contingentliabilitiesandcontingentassets
IAS 38 Intangibleassets
IAS 39 Financialinstruments:recognitionandmeasurement(includingprovisionsontheuseofthefairvalueoption)
IFRIC 4 Determiningwhetheranarrangementcontainsalease
SIC 15 Operatingleases–incentives
SIC 27 Evaluatingthesubstanceoftransactionsinvolvingthelegalformofalease
IFRS 1 First-timeadoptionofInternationalFinancialReportingStandards
IFRS 7 Financialinstruments:disclosures
IFRS 8 Operatingsegments
IAS 1 Presentationoffinancialstatements
IAS 7 Cashflowstatements
IAS 8 Accountingpolicies,changesinaccountingestimatesanderrors
IAS 10 Eventsafterthebalancesheetdate
IAS 12 Incometaxes
IAS 16 Property,plantandequipment
IAS 17 Leases
IAS 18 Revenue
IAS 19 Employeebenefits
IAS 21 Theeffectsofchangesinforeignexchangerates
IAS 24 Relatedpartydisclosures
IAS 27 Consolidatedandseparatefinancialstatements
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• IAS 24 (rev. 2009) Related Party DisclosuresIAS24waspublishedinNovember2009andcomesintoeffectforreportingperiodsstartingonorafter1Janu-ary2011.Theaimofthereviewisessentiallytomakethedefinition of related companies and persons more pre-ciseortosupplement itandthe introductionofanex-emptionrulewithregardtotheinformationthatmustbepublishedforgovernment-relatedentities.
Furthermore, an early application of the changes to thestandardmadebecauseof
• theannualimprovementsprojectand• the amendments to IFRS 7 relating to the transfer of fi-
nancialassets
wasrefrained from.Theseareobligatory foryearsunderreportbeginningonorafter1January2011or1July2011,butsomepartshavenotbeentransposedintoEuropeanlawyet.
No significant effects on the balance sheet preparation or evaluation are expected for the first application in 2011.
(4) Currency Translation
Themethodsappliedtocurrencytranslationaredescribedbelow.
Translation into the Functional CurrencyWhen monetary assets and liabilities or non-monetaryitemsatfairvaluearedenominatedinforeigncurrenciestheymustbetranslatedattheECBreferencerateon31De-cember2010.Non-monetaryitemsthatarevaluedatcostaretranslatedatthehistoricalrates.Expenseandincomeinforeigncurrenciesaretranslatedatmarketratesonthevaluedate.Exchangeratedifferencesonmonetaryitemsare reflected in principle in the income statement.
(5) Financial Instruments
A financial instrument is defined as a contract that gives rise to a financial asset of one entity and a financial liabil-ity or equity instrument of another entity. The financial in-strumentsofNORD/LBCFBarerecognisedinitsaccountsaccordingly. They are classified in accordance with the re-quirementsofIAS39andmeasuredinlinewiththatclas-sification.
a) Recognition and Derecognition of Financial Instruments
A financial asset or a financial liability shall be recognised onthebalancesheetwhenthebankbecomesapartytothecontractual provisions of the financial instrument. The trade dateandsettlementdategenerallydivergewithregardtothe regular way purchase or sale of financial assets. An en-tityisentitledtochoosewhethertousetradedateaccount-ingorsettlementdateaccountingfortheseregularwaypur-chases or sales. All financial assets must be recognised on thebalancesheetusingsettlementdateaccounting.
ThederecognitionrequirementsofIAS39dependontheconceptofrisksandrewardsandoncontrol,withtheevalu-ationoftherisksandrewardsofownershiptakingprece-denceovertheevaluationofthetransferofcontrolwhenassessingwhetherderecognitionisappropriate.
Intheeventofonlyapartialtransferofrisksandrewardsandtheretentionofcontrol, thecontinuing involvementapproach is applied. The financial asset is then subject to specific accounting policies to the extent of the entity’s continuing involvement. The extent of the entity’s con-tinuinginvolvementisdeterminedbytheextenttowhichitcontinuestobeexposedtochangesinthevalueofthetransferredasset.
A financial liability (or part of a financial liability) is derec-ognisedwhenit isextinguished, i.e.whentheobligationspecified in the contract is discharged or cancelled or ex-pires.Thereacquisitionofdebtinstrumentsisalsocoveredby the derecognition of financial liabilities. At the time of repurchase, thedifferencebetweenthecarryingamountoftheliability(includingpremiumsanddiscounts)andtheconsideration paid is recognised through profit or loss; dis-posal at a later stage gives rise to a new financial liability, theacquisitioncostofwhichcorrespondstothedisposalproceeds. Differences between the new acquisition costandtheredemptionamountarespreadovertheremain-inglifeofthedebtinstrumentusingtheeffectiveinterestmethod.
b) Classification and Measurement
Financialassetsandliabilitiesareinitiallymeasuredatfairvalue. For financial instruments in the categories loansandreceivables (LaR),held-to-maturity (HtM),available-for-sale(AfS)andother liabilities(OL),transactioncostsareincludedintheacquisitioncostprovidedthattheyare
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directlyattributable.Theyareaccountedforinthecontextofspreadingpremiumsanddiscountsusingaconstantef-fectiverateatthenominalvalueorredemptionamount.For financial instruments in the category financial assets or financial liabilities at fair value through profit or loss (aFV), transaction costs are recognised immediately throughprofit or loss.
The subsequent measurement of financial assets and li-abilities depends on their classification under IAS 39 at the timeofacquisition:
• Loans and Receivables (LaR)This category includes non-derivative financial assets with fixed or determinable payments that are not quoted in an active market in so far as they are not classified as financial assets at fair value through profit or loss (aFV) oravailable-for-sale(AfS).Subsequentmeasurementisatamortisedcost.Ateachbalancesheetdateorifthereareindicationsofapotentialimpairment,thevalueofloansandreceivables(LaR)isreviewedandadjustedifneces-sary (see Note (6) Risk provisions). Reversal of impair-ment losses is through profit or loss. The upper limit for thereversalofimpairmentlossesistheamortisedcostthatwouldhavearisenatthetimeofmeasurementwith-outimpairment.
• Held-to-Maturity (HtM)This category includes non-derivative financial assets with fixed or determinable payments and a fixed lifethatanentity intendsand isable tohold tomaturity.Financialinstrumentsmaybeallocatedtothiscategoryin so far as they are not classified as financial assets at fair value through profit or loss (aFV), as available-for-sale(AfS)orasloansandreceivables(LaR).Subsequentmeasurementisatamortisedcost.Theheld-to-maturitycategory is not currently used in the financial statements ofNORD/LBCFB.
• Financial Assets or Financial Liabilities at Fair Value through Profit or Loss (aFV)
Thiscategoryisdividedintotwosub-categories:
a)Held-for-Trading(HfT)This sub-category comprises financial instruments (trad-ingassetsandtradingliabilities)thatwereacquiredwiththe intention of making profit from short term buying and selling. It includes all derivatives in so far as theyarenothedginginstruments.Tradingassetsareessen-tially composed of money market papers, bonds anddebtsecurities,aswellasderivativeswithpositivefair
value.Tradingliabilitiescomprise,inparticular,deriva-tiveswithnegativefairvalueaswellasshortsaledeliveryobligations.Thesubsequentmeasurementoftradingas-sets and trading liabilities is at fair value through profit orloss.Premiumsanddiscountsarenotamortisedusingtheeffectiveinterestrate.
b)DesignatedatFairValuethroughProfitorLoss(dFV)As long as they meet certain conditions, all financial in-strumentsmaybeallocatedtothissub-category,knownasthefairvalueoption.Usingthefairvalueoptionavoidsor significantly reduces the recognition and measure-mentdiscrepanciesthatarisefromthedifferentmeas-urement methods for financial assets and liabilities (e. g. bydesignatingeconomichedgingrelationshipswithouthavingtomeettherestrictiverequirementsofhedgeac-counting).FurtherexplanationsonthetypeandscopeofuseofthefairvalueoptionaregiveninNote(29)Finan-cial assets at fair value through profit or loss and Note (39) Financial liabilities at fair value through profit or loss. When the fair value option is applied to financial instru-mentstheyareincludedintherelevantitemonthebal-ancesheetandtheirsubsequentmeasurementisatfairvalue through profit or loss. Premiums and discounts are notamortisedusingtheeffectiveinterestrate.Thiscat-egory is not used in the financial statements of NORD/LB CFBatpresent.
• Available-for-Sale (AfS)This category includes all non-derivative financial assets thatarenotallocatedtoanyoftheabovecategories.Thisincludes,inparticular,bondsanddebtsecuritiesaswellassharesandparticipatinginterests.Subsequentmeas-urementisatfairvalue;ifthefairvaluecannotbedeter-mined reliably, measurement is at cost. The profit/loss fromthefairvaluemeasurementisshownasnotaffect-ing profit or loss in a separate equity item (revaluation reserve). Upon the disposal of financial assets, the meas-ured profit/loss included in the balance sheet under re-valuationreserveisremovedandincludedintheincomestatement.
Acreditworthiness-inducedimpairmentonlyoccurswitha permanent impairment. Checking the existence of apermanentimpairmentisdonewithreferencetocertainobjective factors. Objective factors in this connectionare the trigger events listed in IAS 39, such as financial difficulties of the issuer or debtor, or breach of contract, suchasdefault,ordelayininterestorredemptionpay-ments.Inthecaseofequitycapitalsecurities,alongsideother additional criteria, a significant fall in fair value
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belowcostofacquisitionisanobjectiveindicatorofanimpairment.
Whenimpairmentsareduetocreditrating,therevalua-tionreserveisadjustedbytheamountoftheimpairmentand the amount is accounted for in the income state-mentprovidedthatitisanimpairmentwithinthemean-ingofIAS39.Reversalsofimpairmentlossesrelatingtotheequityinstrumentsofanotherentityarerecognisedthrough profit or loss while reversals of impairment loss-esrelatingtoownequityinstrumentsarerecognisedinequity as not affecting profit or loss – unless they are val-uedatcost.Differencesbetweenacquisitioncostsandredemptionamountsareamortisedusingtheeffectiveinterest method through profit or loss.
• Other Liabilities (OL)Thiscategorycomprises,inparticular,liabilitiestobanksandcustomers,securitised liabilitiesandsubordinatedcapital.Subsequentmeasurementisatamortisedcostusingtheef-fectiveinterestmethod.
c) Determination of Fair Value
InMarch2009theIASBpublishedanamendmenttoIFRS7,whichmainlyrelatestodisclosurerequirementsinconnec-tion with the measurement of financial instruments at fair value.FollowingtheamendmentofIFRS7,thethree-tierhi-erarchywiththeterminologyprovidedforinIFRS7ofLevel1,Level2andLevel3hasbeenusedintheNORD/LBgroupsinceyearunderreport2009.
Therespectivelevelisdeterminedaccordingtotheinputdata that forms the basis for the valuation, and reflects the closenesstothemarketofthevariablesinputtodeterminethefairvalue.
Thebankinitiallyusespricesprovidedbymarketmakerstodeterminethefairvalue(mark-to-marketorLevel1).
Incasenomeaningfulpricecalculation ispossibleusingthismethod,thepricesarecalculatedviaMark-to-Matrixmodelsorobtainedfromexternalpricingservices, if thevaluationthereisdonewhollyorinpartviaspreadcurves(Level 2). In the field of financial instrument valuation, un-dernormalmarketconditionsmeasurementmodelsestab-lished on the market are used (e. g. discounted cash flow methods),wherethecalculationsarefundamentallybasedoninputparametersavailableonthemarket. Impactfac-tors which a market participant would take into account
when fixing the price must be included in the measure-ment.Whereverpossible, thecorrespondingparametersaretakenfromthemarketwheretheinstrumentwasissuedoracquired.
MeasurementmodelsareusedmainlyforOTCderivativesandforsecurities listedon inactivemarkets.Variouspa-rametersareincludedinthemodels,suchasmarketpricesandothermarket information, forexamplevolatilityandmarketliquidity.
Thesemark-to-matrixcalculations(Level2valuations)makeuseofmarketdatathathasalreadybeenusedasabasisforriskcontrol.InthecaseofDiscountedCashFlowmethods,allpaymentsarediscountedwiththerisk-freeinterestcurveadjustedbythecreditspreadofthecounterparty.Spreadsare determined on the basis of comparable financial instru-ments(forexample,takingintoaccounttherespectivemar-ketsegmentandthecreditworthinessoftheissuer).
Duringthecourseof2008partsofthemoneyandcapitalmarketslosttheirabilitytofunction,whichthenledtoun-certaintyamongstmarketparticipants,illiquidityincertainmarketsanddecreasing investment insecondarymarketproducts. As a consequence of this, useful sales pricingceased in the market for certain financial instruments, the conditionsofsomequotationsareoftencounterproductivetoeffectingsalesandsomesalesaretakingplaceunderfire sale conditions. Abnormal market conditions can be as-sumedforthesecases.
In the case of financial instruments for which there is no ac-tivemarketon31December2010andwhichcannolongerbemeasuredonthebasisofmarketprices,the2008andsubsequent financial statements will use a fair value deter-minedformeasurementpurposesusingamark-to-matrixprocess (Level 2) based on discounted cash flows that was establishedwithintheNORD/LBgroupin2008.
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The determination of which financial instrument is to be valuedinthismannerisdoneonthebasisofindividualse-curitiesandadistinctionbetweenactiveandinactivemar-ketsbasedonthis.Achangingestimationofthemarketisusedcontinuallyinthevaluation.
The measurement model for financial instruments in inac-tive markets is based on fixed term interest rates, the credit ratingoftherespectiveissuersandanappropriateinterestcalculationfortheequity.
In the case of financial instruments for which there is no longeranactivemarketandwhichcannolongerbemeas-uredonthebasisofmarketpricesorsolelyonthebasisofobservablemarketparameters,afairvalueisdeterminedformeasurementpurposesusingamark-to-modelprocess(Level3).
In contrast to the mark-to-matrix valuation (Level 2), inthese methods institution-specific models are used and data included which cannot be observed on the market.Theproportionoftheseparametersiskepttoaminimumand the inclusion of market-specific data is preferred, i.e. basicmarketsignalswhichcanbeobservedonthebalancesheetdateareincludedinthemethodology.
NORD/LBCFBessentiallyusesthismeasurementmodeltodetermine the fair value disclosures for portfolios classified asLaR.
Allthemeasurementmodelsusedareauditedperiodically.Therewerenochangesfromthepreviousyearintheproce-duresorthemodelsused.
Furtherinformationonthefairvaluehierarchyandthefairvalues of financial instruments can be found in Notes (52) –(54).
d) Structured Products
Structuredproductsaremadeupoftwocomponents–oneormoreembeddedderivatives(e.g.swaps,futures,caps)and a host contract (e. g. financial instruments, leasing agreements).Bothcomponentsaretheobjectofasinglecontract for the structured product, i.e. these productsforma legalentityandcannotbe treatedseparatelybe-causeofthesinglecontract.
IAS39requiresanembeddedderivativetobeseparatedfrom its host contract and accounted for as a derivative
whenthefollowingcriteriaarecumulativelymet:
• Theeconomiccharacteristicsandrisksoftheembeddedderivativearenotcloselyrelatedtotheeconomiccharac-teristicsandrisksofthehostcontract.
• Aseparatederivativewiththesametermsastheembed-dedderivativewouldmeetthedefinitionofaderivative.
• The structured product is not recognised at fair valuethroughprofitorloss(aFVcategory).
Currently there are no financial instruments that must be separatelyaccountedfor.
e) Hedge Accounting
Hedgeaccountingmeansshowinghedgingrelationshipsin the financial statements. This involves documenting the relationshipsbetween thehedging transactionsand theunderlying transactions. The objective is to avoid the fluc-tuations in annual profit/loss and equity that arise from the differentmeasurementofhedgingtransactionsandunder-lyingtransactions.
UnderIAS39,therearethreebasictypesofhedgeswhichmust be treated differently in hedge accounting. In fairvaluehedgeaccounting(portionsof)assetsand/orliabili-tiesarehedgedagainstchangesinfairvalue.Thebank’sissuing and lending business, and holdings for liquiditymanagementpurposes,providedtheyconsistofinterest-bearingsecurities,areparticularlysubjecttosuchamar-ket value risk. Fair value hedges are used for individualtransactions.Interestrateswapsarepredominantlyusedtohedgetheserisks.
The two other basic forms, cash flow hedge accounting and hedgeofanetinvestmentinaforeignoperation,arenotcurrentlyused.
Hedgingrelationshipsmayonlybereportedinaccordancewiththerulesofhedgeaccountingiftherestrictivecon-ditions laid down by IAS 39 are fulfilled. The requirements ofhedgeaccounting,particularlyprovinghedgeeffective-ness,mustbemetonallbalancesheetdatesand forallhedgingrelationships.Criticaltermmatchingandthemar-ketdatashiftmethodareusedwhereeffectivenesstestsmust prospectively be carried out. The modified dollar off-setmethodisappliedforretrospectiveeffectivenesstests.
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Inaccordancewiththerulesof fairvaluehedgeaccount-ing,derivativesatfairvalueusedinhedgingarereportedaspositiveornegativefairvaluesfromhedgeaccounting(Note(30)orNote(40)Fairvaluesfromhedgeaccounting).The valuation changes are recognised through profit or loss (Note (20) Profit/loss from hedge accounting). With re-gardtothehedgedassetorhedgedliability,thechangesinfairvalueattributabletothehedgedriskarealsostatedinrecognition of profit or loss under the item profit/loss from hedgeaccounting.
If financial instruments in the AfS category form part of a hedging relationship, the change in fair value is dividedintoahedgedcomponentandanunhedgedcomponent.Whenhedgeaccountingisused,theportionofthechangeinvaluethatrelatestohedgedrisksisrecognisedthroughprofit or loss under profit/loss from hedge accounting, whiletheportionthatisnotattributabletothehedgedriskisreportedundertherevaluationreserve.
Ahedgingrelationshipendswhenthehedgingtransactionorunderlyingtransactionexpiresorissoldorexercisedorwhentherequirementsofhedgeaccountingarenolongermet.
f) Securities Repurchase Agreements and Securities Lending
Inthecaseofgenuinesecuritiesrepurchaseagreements(repos),transferringthesecuritiessoldunderrepurchaseagreementsdoesnotleadtoderecognition,asthetransfer-ringentityessentiallyretainsalltherisksandrewardsas-sociatedwiththeownershipoftherepurchasedsecurities.Therefore,thetransferredassetshouldstillberecognisedbytherepurchasesellerandmeasuredinaccordancewiththerelevantcategory.Thepaymentreceivedistobeshownas a financial liability (either under liabilities to banks or liabilitiestocustomers,dependingonthecounterparty).Theagreedinterestpaymentsarerecognisedas interestexpensesinaccordancewiththeterm.
Reversereposarecorrespondinglyaccountedforasloansandadvancestobanksorcustomersandincludedintheloansandreceivables(LaR)category.Thesecuritiesboughtunder repurchase agreements on which the financial trans-actionisbasedarenotshowninthebalancesheet.Thein-terestarisingoutofthistransactionisrecognisedasinter-estincomeinaccordancewiththeterm.
Thebankdoesnotoperateanynon-genuinesecurityre-purchaseagreementsandnoneareoutstandingasof31December2010.
Theprinciplesofaccountingforgenuinerepurchaseagree-mentsaresimilartothoseforsecurities lending.Loanedsecuritiesareincludedinthesecuritiesportfolioandmeas-uredinaccordancewithIAS39,whereasborrowedsecuri-tiesarenotshownonthebalancesheet.
Cashcollateralprovidedforsecuritieslendingtransactionsis includedunder loansandadvancesandcashcollateralreceivedisshownasaliability.
WerefertothescopeandvolumeofsecuritiesrepurchaseagreementsunderNote(57)Securitiesrepurchaseagree-ments.Therewerenoreverserepotransactionsorsecuritylendingbusinessintheinventoryon31December2010.
(6) Risk Provisions
Therisksarisingfromthebalancesheetlendingbusinessareaccommodatedthroughtheformationofloanlosspro-visions,lumpsumprovisionsforlossesandportfolioprovi-sionsforlosses.
Checking of intrinsic value is done for all significant out-standingamountsat individualbusiness level.Loan lossprovisionscoveralldiscerniblecreditratingrisksbycreatingspecific value adjustments. A value adjustment is required whenitisprobable,basedonobservablecriteria,thatnotallinterestandrepaymentobligationsorotherobligationscanbemetingoodtime.Suchcriteriainclude90daysormoreofdefaultordelayininterestpaymentsorrepaymentoftheprincipal amount and the debtor having serious financial difficulties. The size of the value adjustment is calculated on
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thebasisofthedifferencebetweenthebookvalueandthecash value of the expected future cash flow.
For risks that have occurred but have not yet been identified bythebank,valueadjustmentsaremadeatportfoliolevelfor groups of financial assets with comparable credit risks. Thisportfolio-basedprovisionrelatingtocreditrating ismadeonthebasisofhistoricaldefaultprobabilitiesandlossgiven defaults. In addition, the portfolio-specific LIP factor (loss identification period) is applied in order to ensure that onlyincurredlossesaretakenintoconsideration.Thepa-rametersusedarederivedfromtheBaselIIsystem.
Riskprovisionsforoffbalancesheettransactions(guaran-tees, endorsement liabilities, loan commitments) are ac-countedforbycreatingaprovision.
Irrecoverable debts for which there was no specific value adjustmentarewrittenoffdirectly.Additionstodebtswrit-ten off are recognised through profit or loss.
A risk provision is not made for losses that have not yetbeenincurred.
Exceptforportfoliolossprovisions,thebankhasnothadtomakeanyprovisions/lossprovisionssofar.
(7) Property, Plant and Equipment
Property,plantandequipmentarerecognisedatcostattherecognitiondate.Withregardtosubsequentmeasurement,thedepreciableamountofproperty,plantandequipmentisallocatedonascheduledstraightlinebasisoveritsuse-fullife.Impairmentsarecarriedouttotheextentinwhichthecarryingamountexceedsthehighervalueofanasset’sfairvaluelesscoststosellanditsvalueinuse.Scheduleddepreciationandimpairmentsarerecognisedinadminis-trativeexpenses.Allproperty,plantandequipmentarede-preciatedoverausefullifeof3–15years.
Theacquisitioncostsofassetsofminorvalueareimmedi-atelyrecognisedasanexpenseonthebasisofmateriality.
(8) Leasing
InaccordancewithIAS17,leasingagreementsmustbeclas-sified as either finance leases or operating leases at their inception. A lease is classified as a finance lease if it sub-stantiallytransferstherisksandrewardsassociatedwith
ownershiptothelessee;theleasedpropertyisaccountedfor by the lessee. A lease is classified as an operating lease ifitdoesnotsubstantiallytransfertherisksandrewardsas-sociatedwithownershiptothelessee;theleasedpropertyisaccountedforbythelessor.
Finance Leases There are no finance leases at the reporting date.
Operating LeasesWithanoperating lease, the lesseerecognisesthe leasepaymentsmadeasanexpenseunderotheradministrativeexpenses.Thepaymentsmadedirectlyat inception(e.g.surveycosts)arerecognisedimmediatelyinrecognitionofprofit or loss.
Operating leases are of minor significance.
(9) Intangible Assets
Intangible assets purchased by the bank are recognisedatcost,asareself-createdintangibleassetsprovidedthattheymeettherecognitioncriteriasetoutunderIAS38.
Forintangibleassetswithlimitedusefullife,scheduledlin-eardepreciationsaretakenintoaccountaccordingtotheeconomicusefullife.Valuationadjustmentsareundertak-eninthecaseoftangibleassetswithlimitedusefullifeinthesumatwhichthebookvalueexceedsthehighervalueoffairvaluelesssalescostsandusefulvalueoftheasset.Ifthereasonsforimpairmentsnolongerapply,impairmentlossesare reversedbutmaynotexceed thedepreciatedcost.Scheduleddepreciationandimpairmentsarerecog-nisedinadministrativeexpenses.
Intangible assets with a finite useful life are amortised over three to five years.
NORD/LBCFBdoesnothaveanyintangibleassetswithanindefinite useful life.
(10) Provisions for Pensions and Similar Obligations
Thebank’soccupationalpensionschemeisbasedonvari-ouspensionschemes.Ontheonehand,employeesbuildup entitlement to pension rights through a fixed contribu-tion by the bank to an external pension provider (Defined Contribution Plan). These contributions to the pension
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schemearerecordedasacurrentexpenseundertheap-plicationoftheaccountingrequirementssetoutunderIAS19forcontributoryplans,sothatnopensionprovisionsaretobeformed.
Ontheotherhand,NORD/LBCFB’soccupationalpensionschemeisbasedonapensionschemeinwhichemployeesbuild up entitlement to pension rights, and benefits are de-terminedinlinewithfactorssuchasanticipatedwageandsalaryincreases,age,lengthofserviceandpensionfore-casts (Defined Benefit Plan). The accounting requirements set out under IAS 19 for defined benefit plans are applied to thispensionscheme.
The components of pension provisions that are throughprofit or loss are the service cost and the interest cost on thecashvalueoftheliability.Thepensionexpensesarere-ducedbytheanticipatednetincomefromtheplanassets.Where necessary, service cost must also be recognisedthrough profit or loss retrospectively. Interest cost and an-ticipatedincomefromtheplanassetsareshownundernetinterestincome.
Thebank recognisesactuarialgainsand losses in fullasnot affecting profit or loss in equity, so that there is no de-creaseor increaseinpensionexpensesasaresultoftheamortisationofpostedactuarialgainsor losses thatarenot yet through profit or loss.
Pension obligations arising from defined benefit plans are calculatedonthebalancesheetdatebyindependentactu-ariesusingtheprojectedunitcreditmethod.Thecalcula-tionalsotakesaccountofbiometricassumptionsrelatingtothediscountrateforhighqualitycorporatebondsandanticipatedfuturewageandpensiongrowthrates.
ThepensionschemesareoutsourcedtoaLuxembourgin-surancecompany.
(11) Other Provisions
Inaccordancewith IAS37,otherprovisionsaremadeforcontingentliabilitiestothirdpartiesandanticipatedlossesfrompendingtransactionsifanobligationisprobableanditssizecanbereliablydetermined.Theamountrecognisedasaprovisionshouldbethebestestimate.Thisestimateisbasedonthemanagement’sassessment,basedonexperi-enceand,wherenecessary,onexpertreports,andshouldtake risks and uncertainties into consideration. Futureevents that may influence the amount required to settle
anobligationaretakenintoaccountifthereareobjectivesignsthattheywilloccur.Provisionsarediscountedpro-videdthattheeffectismaterial.
Ifanobligationisnotprobableorifitsamountcannotbeestimated reliably, a contingent liability is shown in theNotes.
(12) Income Tax Assets and Liabilities
Current incometaxassetsand liabilitieswerecalculatedwithreferencetotheapplicabletaxrates,totheamountsinwhichthebankexpectshavingtomakepaymentstoorrecoverpaymentsfromtherelevanttaxauthority.
Deferred tax assets and liabilities are calculated on thebasisofthedifferencebetweenthecarryingamountofanassetorliabilityonthebalancesheetandthecorrespond-ingtaxamount.Deferredtaxassetsandliabilitiesprobablylead,duetotemporarydifferences,toincometaxburdensortaxreliefeffectsinfutureperiods.Theyweremeasuredatthetaxratesapplicablefortheperiodinwhichanassetisrealisedoraliabilityissettled.
Currentincometaxassetsandliabilitiesanddeferredtaxassetsandliabilitiesareoffsetiftheconditionsforoffset-tingaremet.Discountingisnotpermitted.Dependingonhowthecircumstancesaretreated,deferredtaxassetsorliabilities are recognised either as through profit or loss or not affecting profit or loss.
The income tax expense or benefit is shown under income taxintheincomestatement.ThesplitbetweencurrentanddeferredincometaxassetsandliabilitiesfortheyearunderreportcanbefoundintheNotes.Currentanddeferredin-cometaxassetsandliabilitiesarepresentedonthebalancesheetunderassetsorliabilities,withthecarryingamount
Not
es
Accounting Policies
65
of a deferred tax asset being reviewed at each balancesheetdate.
A Grand Ducal regulation on the taxation of IFRS financial statementswaspublishedasadraftbill.Thisprovidesforthe measurement differences arising from financial instru-mentsshownintheincomestatementtobeincludedinthetaxbasis.Inaddition,thisregulationguaranteesthattax-payerswillhavetherighttochoosewhethertheypaytaxeson earnings from first-time adoption in the first year of IFRS accounting or spread these items over two to five years.
In a letter dated 2 August 2007, the Luxembourg financial authoritiesapprovedtheestablishmentofataxgroupwitheffectforcorporationandtradetaxcomprisingNorddeut-scheLandesbankLuxembourgS.A.andNORD/LBCoveredFinance Bank S.A. starting from financial year 2007. Pursu-anttoparagraph164bisL.I.R.,thetaxgroupwasallowedundertheconditionthat it ismaintainedforatimespanof at least five financial years. NORD/LB Luxembourg and NORD/LBCFBdeclaredtheirintentionofcontinuingthetaxgroup until at least the end of the required five year period, which ends on 31 December 2011, and that they will fulfil theconditionspursuanttoparagraph164bisL.I.R.
Thebankactsasthecontrolledcompany.
NORD/LBLuxembourghasobtainedbinding informationfromtheLuxembourgtaxauthoritiesontaxquestionsre-lating to the IFRS balance sheet preparation and first time adoptionandwillapplythepreviouslydescribedtaxmeas-urestothetaxgroup.Thisisaccordinglytakenintoaccountin the financial statements of NORD/LB CFB.
(13) Subordinated Capital
Theitemsubordinatedcapitalcomprisesunsecuritisedandsecuritisedsubordinatedliabilities.
Subordinated capital is accounted for at amortised cost.Premiumsanddiscountsarespreadoverthelifeandusingtheeffectiveinterestmethodenteredundernetinterestin-come in recognition of profit or loss. Accrued interest not yetdueisincludedundertheappropriateitemaspartofsubordinatedcapital.
SubordinatedliabilitiesaresetoutindetailinNote(44).
Accounting Policies
66
Segment Reporting
Classification by Business Segment
Segment reporting is done in accordance with IFRS 8. Itservestoprovide informationabout thebank’sbusinesssegmentsandiscarriedoutinlinewiththebank’sbusinessmodelonthebasisofinternalreporting.Thesegmentsaredefined as customer or product groups that are in line with thegroup’sorganisationalstructures.
Becauseofthebank’specialisationincoveredbondactivities,theonlydistinctionmadeinNORD/LBCFBisthatbetweentheFinancialMarketssegmentandGroupCooperation.
Net interest incomefortheindividualsegmentsisdeter-minedinaccordancewiththemarketinterestratemethod.Segmentexpenditurecomprisesoriginalexpensesaswellasexpensesallocatedonthebasisofcostandaccountingforservices.Riskprovisionswereassignedtothesegmentson the basis of actual cost. Classification of the use of in-terest from equity investments underwent a systematicchange.Bothmeasuresofsuccessarenolongerallocatedto the operative profit centres of the bank but rather to the GroupCooperationsegmentduetothelackoftaxabilityasaresultofthemarketsectors.
Abasecapitaladequacyof5%oftherisksontheassetssideappliesfortherisksontheassetssideofthesegmentsinaccordancewiththegroupguidelines(7%intheprevi-ousyear).Capitalcommitment in thesegments isdeter-mined on the basis of average annual figures.
Financial MarketsThe Public Finance and Treasury business segments ofNORD/LB CFB are recognised in this item. Primarily thestatelendingbusinesswithcentralstates,regionaladmin-istrative bodies and their downstream offices in the OECD falls within this, and loans and securities guaranteed bythesame.Theseareprimarilyopposedtocontributionstoprofit/loss arising from the issuing activities of the bank.
Group CooperationThissegmentshowsthelendingbusinessarrangedthroughthe group with the contributions to profit/loss incurred throughthesame.
Segmentation by Regions
Segmentationbygeographicalcharacteristicsfocusesonthe counterparty’s home country. Expenses and incomearedeterminedinrelationtothesegment’sassetsandli-abilities.
Not
es
Segment Reporting
67
(14) Classification by Business Segment
Segments
EUR million Financial markets
Group cooperation
Total
Net interest income
do.previousyear
5.2
7.0
3.4
1.6
8.6
8.6
Loan loss provisions
do.previousyear
– 0.9
0.0
– 0.1
–0.3
– 1.0
–0.3
Net interest income after loan loss provisions
do.previousyear
4.2
6.7
3.1
1.6
7.6
8.3
Net commission income
do.previousyear
– 0.5
–0.5
– 0.7
–0.3
– 1.2
–0.8
Profit/loss from financial instruments at fair value through profit or loss
do.previousyear
– 0.6
0.7
0.0
0.0
– 0.6
0.7
Profit/loss from hedge accounting
do.previousyear
1.0
–0.6
0.0
0.0
1.0
–0.6
Profit/loss from financial assets
do.previousyear
5.0
5.4
0.0
0.0
5.0
5.4
Profit/loss from equity-accounted investments
do.previousyear
0.0
0.0
0.0
0.0
0.0
0.0
Administrative expenses
do.previousyear
2.0
2.2
0.9
0.5
2.9
2.7
Other income/expenses
do.previousyear
– 1.4
–1.9
– 0.9
–0.4
– 2.3
–2.3
Operating profit/loss before taxes
do.previousyear
5.8
7.5
0.9
0.5
6.7
8.0
Taxes
do.previousyear
0.5
–1.5
0.0
–0.1
0.5
–1.6
Operating profit/loss after taxes
do.previousyear
6.3
6.0
0.9
0.4
7.2
6.4
Segment Reporting
68
Not
es
Further segment information
Eur million Financial markets
Group cooperation
Total
Property, plant and equipment, net
do.previousyear
0.0
0.0
0.0
0.0
0.0
0.0
Depreciation of property, plant and equipment, current year
do.previousyear
0.0
0.0
0.0
0.0
0.0
0.0
Intangible assets, net
do.previousyear
0.0
0.0
0.0
0.0
0.0
0.0
Depreciation of intangible assets, current year
do.previousyear
0.0
0.2
0.0
0.0
0.0
0.2
Value adjustments on financial assets
do.previousyear
0.0
0.0
0.0
0.0
0.0
0.0
Segments
EUR million Financial markets
Group cooperation
Total
Segment assets
do.previousyear
5,931.0
5,482.6
477.4
448.0
6,408.5
5,930.6
Segment liabilities (incl. equity)
do.previousyear
6,408.5
5,930.6
0.0
0.0
6,408.5
5,930.6
Risk-weighted assets (annual averages)
do.previousyear(annualaverages)
864.8
853.0
28.0
13.0
892.8
866.0
Capital backing (on basis of annual averages)
do.previousyear(onbasisofannualaverages)
43.0
43.0
– 2.0
1.0
41.0
44.0
CIR
do.previousyear
24.0 %
22.3 %
47.1 %
48.8 %
28.1 %
24.6 %
RoRaC/RoE*
do.previousyear
13.5 %
15.7 %
5.4 %
4.8 %
11.7 %
13.8 %
*RoRaC=Earningsbeforetaxes/Max(Limitforlocked-upcapitalorlocked-upcapital)
Segment Reporting
69
(15) Segmentation by Geographical Characteristics
Segments
EUR million Germany Luxem-bourg
Switzer-land
Rest of Europe
USA Rest of America
Other countries
Total
Operating profit/loss before taxes
do.previousyear
1.9
1.8
0.6
0.6
0.1
0.1
2.7
3.1
1.4
1.8
0.4
0.3
0.1
0.2
7.2
8.0
Segment assets
do.previousyear
1,661.7
1,348.1
558.8
473.3
69.2
75.9
2,396.8
2,342.7
1,242.0
1,320.2
353.7
234.9
126.2
135.8
6,408.5
5,930.6
Segment liabilities (incl. equity)
do.previousyear
975.4
798.9
4,940.9
4,851.0
10.3
9.5
427.4
191.0
17.9
40.3
36.5
26.1
0.0
14.2
6,408.5
5,930.6
Further segment information
Property, plant and equipment, net
do.previousyear
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
Intangible assets, net
do.previousyear
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
Segment Reporting
70
Not
es
2010(KEUR)
2009(KEUR)
Increase/Decrease (%)
Interest income 390,564 378,472 3
Interestincomefromlendingandmoneymarkettransactions 55,725 66,615 –16
Interestincomefromfixedincomeandbookentrysecurities 149,147 142,892 4
Currentincome 0 0 –
fromsharesandothervariableyieldsecurities
fromparticipatinginterests
0
0
0
0
–
–
Interestincomefromhedgederivatives 185,566 168,963 10
Otherinterestincomeandsimilarincome 126 2 >100
Interest expense – 381,975 – 369,746 3
Interestexpensefromlendingandmoneymarkettransactions –45,121 –51,904 –13
Interestexpensefromsecuritisedliabilities –91,532 –97,095 –6
Interestexpensefromsubordinatedcapital –2,460 –2,866 –14
Interestexpensefromhedgederivatives –242,802 –217,879 11
Interestexpenseforprovisionsandliabilities –4 –3 35
Otherinterestexpenseandsimilarexpense –55 0 –
Total 8,589 8,725 – 2
Notes to the Income Statement
(16) Net Interest Income
Aswellasinterestincomeandinterestexpense,theinterestincomeandinterestexpenseitemsincludeproratareduc-tions in premiums and discounts resulting from financial instruments.Interest income from positions in the trading book allocated to the held-for-trading (HfT) category and financial instru-ments that are voluntarily allocated to the designated at fair value through profit or loss (dFV) category are excluded in this case since they are reported in trading profit/loss or in the profit/loss from the fair value option.
Thenetinterestincomeandthetotaloftheinterestincomeandinterestexpenseareatthepreviousyear’slevels.Inthefirst half of 2010, a one-off amount of EUR 0.7 million was generated through the early termination of a borrowing commit-ment.Ontheotherhand,amortisationsinconnectionwithhedgedesignationsarealsoshowninthenetinterestincome.In2010thisitemamountedtoEUR–2.5million(comparisonperiod:EUR–1.6million).
Notes to the Income Statement
71
2010(KEUR)
2009(KEUR)
Increase/Decrease (%)
Income from loan loss provisions 0 0 –
Reductioninprovisionsforclaims 0 0 –
Reductionsinportfolio-basedprovisionsforreceivables 0 0 –
Reversalofprovisionsinlendingbusiness 0 0 –
Additionstoreceivableswrittenoff 0 0 –
Loan loss provision expense 1,013 289 > 100
Allocationstoprovisionsforclaims 0 0 –
Allocationtoportfolio-basedprovisionsforclaims 1,013 289 >100
Allocationtoprovisionsforlendingbusiness 0 0 –
Directwrite-offsofclaims 0 0 –
Total – 1,013 – 289 > 100
(17) Loan Loss Provisions
Notes to the Income Statement
72
Not
es
(18) Net Commission Income
Thebankmakesadistinctionincommissionincomebetweentransaction-dependentcommission,whichisdueanden-tered when the transaction is concluded, and term-related commission, which is allotted to a specific period and entered onastraight-linebasisoverthisperiod.Thereisnoeffectiveinterestspreadforterm-relatedcommission.
The bank shows commission expense and commission income in its profit/loss.
Thecommissionincomeisattributabletolendingprovisionsonaproratabasis.Theothercommissionincomeisdepend-entontransactions.
Theproratacommissionexpensesresultmainlyfromthelendingandguaranteetransactionsforhedginglargerisks.Theothercommissionexpensesaredependentontransactionsandresultmainlyfromdepositarycharges.
Thecommissionincomerelatestothelendingbusiness(KEUR740;previousyearKEUR1,175).
Thecommissionexpensesrelatesinparticulartothelendingandguaranteebusiness(KEUR1,436;previousyearKEUR1,516)andthesecuritiesandcustodianbusiness(KEUR461;previousyearKEUR458).
2010(KEUR)
2009(KEUR)
Increase/Decrease (%)
Commission income 740 1,175 – 37
fromsecurityandcustodytransactions 0 0 –
fromlendingandguaranteetransactions 740 1,175 –37
othercommissionincome 0 0 –
Commission expense 1,941 2,078 – 7
fromsecurityandcustodytransactions 461 458 1
fromlendingandguaranteetransactions 1,436 1,516 –5
othercommissionexpense 43 104 –59
Total – 1,201 – 903 33
Notes to the Income Statement
73
(19) Profit/Loss from Financial Instruments at Fair Value through Profit or Loss
Trading profit/loss includes the measurement gains/losses from trading activities (defined as unrealised expense and in-come from fair value measurement) as well as the realised profit/loss (defined as the difference between disposal proceeds andcarryingamountatthelastreportingdate).
The bank’s trading profit/loss results from derivative hedging instruments that do not meet the restrictive requirements of hedgeaccountingorfromaclosedderivativeposition.Theinterestontheclosedderivativepositionisshownunderotherprofit/loss in the trading profit/loss.
2010(KEUR)
2009(KEUR)
Increase/Decrease (%)
Trading profit/loss – 587 665 > 100
Realisedprofit/loss 0 0 –
fromdebtsecuritiesandotherfixedinterestsecurities
fromsharesandothervariableyieldsecurities
fromderivatives
fromothertradingtransactions
0
0
0
0
0
0
0
0
–
–
–
–
Measurementgains/losses –999 196 >100
fromdebtsecuritiesandotherfixedinterestsecurities
fromsharesandothervariableyieldsecurities
fromderivatives
fromothertradingtransactions
0
0
–999
0
0
0
196
0
–
–
>100
–
Foreignexchangeprofit/loss 412 109 >100
Otherprofit/loss 0 361 –100
Profit/loss from the fair value option 0 0 –
Total – 587 665 > 100
Notes to the Income Statement
74
Not
es
(20) Profit/Loss from Hedge Accounting
Profit/loss from hedge accounting includes offsetting fair value adjustments related to the hedged risk of an underlying trans-actionandoffsettingfairvalueadjustmentstohedginginstrumentsineffectivemicrofairvaluehedgingrelationships.
Thebankusesmicrofairvaluehedgeaccountingtohedgetheinterestraterisk.Hedgedunderlyingtransactionsareloansand advances and liabilities to banks and customers, financial assets and own issues.
(21) Profit/Loss from Financial Assets
Profit/loss from financial assets includes gains/losses from disposals and measurement gains/losses through profit or loss from securities in the financial asset portfolio and participating interests.
2010(KEUR)
2009(KEUR)
Increase/Decrease (%)
Profit/loss from micro fair value hedge transactions 1,032 – 599 > 100
fromhedgedunderlyingtransactions
fromderivativesusedashedginginstruments
49,231
–48,198–210,788
210,189>100
>100
Profit/loss from portfolio fair value hedge transactions 0 0 –
fromhedgedunderlyingtransactions
fromderivativesusedashedginginstruments
0
0
0
0
–
–
Total 1,032 – 599 > 100
2010(KEUR)
2009(KEUR)
Increase/Decrease (%)
Profit/loss from financial assets classified as LaR 1,653 0 –
Profit/loss from financial assets classified as AfS (no joint ownership)
3,388 5,354 – 37
ofdebtsecuritiesandotherfixedinterestsecurities
ofownissuesboughtbackforpricemanagement
ofsharesandothervariableyieldsecurities
ofotherfinancialassets
profit/lossfromvalueadjustmentsfordebtsecurities andotherfixedinterestsecurities
0
3,388
0
0
0
0
5,354
0
0
0
–
–37
–
–
–
Profit/loss from affiliated companies 0 0 –
Profit/loss from joint ventures and associated companies 0 0 –
Profit/loss from other participating interests 0 0 –
Total 5,041 5,354 – 6
Notes to the Income Statement
75
(22) Administrative Expenses
Theadministrativeexpensescomprisepersonnelexpenses,otheradministrativeexpensesanddepreciationandvalua-tionadjustments(impairments)ontangibleassetsandintangibleassets.
Thepersonnelexpensesincludescontributionstoemployees’oldagepensionsinaccordancewithaperformance-relatedplan (Defined Contribution Plan), which have to be shown as current expenditure according to IAS 19, in the sum of KEUR 18(previousyearKEUR9).FortheboardofdirectorsthisvaluewasKEUR0(previousyearKEUR0).Expensesinconnectionwith defined benefit obligations are shown in Note (41).
2010(KEUR)
2009(KEUR)
Increase/Decrease (%)
Staff expenses 1,530 1,107 38
Wagesandsalaries
Socialsecuritycontributions
Expensesforpensionprovision
Otherstaffexpenses
1,271
91
50
118
976
65
65
0
30
39
–23
–
Other administrative expenses 1,315 1,360 – 3
Expenseforoperatingandofficeequipmentandit
Legal,audit,surveyandprofessionalfees
Otheradministrativeexpenses
560
566
189
451
732
176
24
–23
7
Depreciation and impairments 7 209 – 97
Depreciationofproperty,plantandequipment
Depreciationofintangibleassets
Impairments
6
1
0
28
181
0
–77
–100
–
Total 2,853 2,675 7
Notes to the Income Statement
76
Not
es
(23) Other Operating Profit/Loss
TheotheroperatingexpensescompriseprimarilyexpenditureforservicesreceivedfromNORD/LB(KEUR748;previousyearKEUR450)andNORD/LBLuxembourg(KEUR1,790;previousyearKEUR1,591),andfromwealthtaxexpenditure.
(24) Income Taxes
Thefollowingtaxreconciliationshowsananalysisofthedifferencesbetweentheincometaxexpenditure,whichwouldarise by applying the Luxembourg income tax rate to the IFRS profit/loss before taxes, and the actually income tax ex-penditureshown.
2010(KEUR)
2009(KEUR)
Increase/Decrease (%)
Currentincometaxes 482 –1,591 >100
Deferredtaxes 0 0 –
Total 482 – 1,591 > 100
2010(KEUR)
2009(KEUR)
Increase/Decrease (%)
Other operating income 584 111 > 100
fromthereversalofprovisions
otherincome
159
426
0
111
–
>100
Other operating expenses 2,880 2,434 18
fromtheallocationofprovisions
fromaccountingforservices
otherexpenses
0
2,538
342
0
2,041
393
–
24
–13
Total – 2,296 – 2,323 – 1
Notes to the Income Statement
77
Theexpectedincometaxexpenditureinthetaxreconciliationiscalculatedfromthecorporationandtradetaxburdenap-plicableinLuxembourgfor2010inthesumof28.59%(previousyear28.59%).
ThebankandNORD/LBLuxembourgformataxgroupinaccordancewithArticle164bisoftheLuxembourgincometaxlaw.Nocurrentincometaxesareincurredinthetaxgroupin2010.
2010(KEUR)
2009(KEUR)
IFRS earnings before taxes (EBT) 6,714 7,955
Expectedincometaxexpense –1,920 –2,274
Effects of reconciliation:
Effectsofdifferenttaxrates 0 0
Taxesfrompreviousyearsrecognisedintheyearunderreport 482 –
Effectsoftaxratechanges 0 0
Non-allowableincometaxes 0 0
Non-deductibleoperatingexpenses –101 –9
Effectsoftax-freeincome 0 0
Effectsofpermanenteffectsaffectingthebalancesheet 0 0
Othereffects 2,021 693
Income tax expense shown 482 – 1,591
Notes to the Income Statement
78
Not
es
Notes to the Balance Sheet
(25) Cash Reserve
EUR1.4million(previousyearEUR0.0million)ofbalancesdepositedwithcentralbanksaredepositedattheLuxembourgCentralBankandconstitutetheplannedminimumreserve.
(26) Loans and Advances to Banks
Ofthetotalamount,EUR822.1million(previousyearEUR858.4million)relatetoloansandadvancestoforeignbanks.ApartialamountofEUR653.5million(previousyearEUR681.7million)oftheloansandadvancestobanksisnotdueforovertwelvemonths.
AshareinthesumofEUR341.0millionresultsfromcollateralsecurity.
31-12-2010(EUR million)
31-12-2009(EUR million)
Increase/Decrease (%)
Receivables from money market transactions 416.0 361.4 15
Luxembourgbanks
Foreignbanks
0.0
416.0
0.0
361.4
–
15
Other receivables 695.0 783.4 – 11
Luxembourgbanks 288.9 286.4 1
dueondemand
deferred
0.3
288.6
0.6
285.8
–58
1
Foreignbanks 406.1 496.9 –18
dueondemand
deferred
0.0
406.1
0.0
496.9
–
–18
Total 1,111.0 1,144.8 – 3
31-12-2010(EUR million)
31-12-2009(EUR million)
Increase/Decrease (%)
Cash 0.0 0.0 –
Balanceswithcentralbanks 1.4 0.0 >100
Total 1.4 0.0 > 100
Notes to the Balance Sheet
79
(27) Loans and Advances to Customers
Thetotalamountismadeupbyloansandadvancestoforeigncustomers.Ofthetotalamount,EUR722.1million(previousyearEUR807.72million)isonlydueinmorethantwelvemonths.
(28) Risk Provisions
31-12-2010(EUR million)
31-12-2009(EUR million)
Increase/Decrease (%)
Individual value adjustments for receivables 0.0 0.0 –
Foreignbanks
Luxembourgcustomers
Foreigncustomers
0.0
0.0
0.0
0.0
0.0
0.0
–
–
–
Portfolio-based provisions for receivables – 2.1 – 1.0 97
Total – 2.1 – 1.0 97
31-12-2010(EUR million)
31-12-2009(EUR million)
Increase/Decrease (%)
Receivables from money market transactions 0.0 0.0 –
Luxembourgcustomers
Foreigncustomers
0.0
0.0
0.0
0.0
–
–
Other receivables 821.4 856.8 – 4
Luxembourgcustomers 0.0 0.0 –
dueondemand
deferred
0.0
0.0
0.0
0.0
–
–
Foreigncustomers 821.4 856.8 –4
dueondemand
deferred
0.0
821.4
0.0
856.8
–
–4
Total 821.4 856.8 – 4
Notes to the Balance Sheet
80
Not
es
Ontheassetsside,riskprovisionsandprovisionsinlendingbusinesshavechangedasfollows:
(29) Financial Assets at Fair Value through Profit or Loss
This item includes trading assets (HfT) and financial assets designated at fair value (dFV). Trading activities comprise trad-ing in debt securities and other fixed-interest securities, shares and other variable-yield securities, and derivatives that arenotusedinhedgeaccounting.
31-12-2010(EUR million)
31-12-2009(EUR million)
Increase/Decrease (%)
Trading assets 45.1 11.1 > 100
Debtsecuritiesandotherfixedinterestsecurities 0.0 0.0 –
Sharesandothervariableyieldsecurities 0.0 0.0 –
Positivefairvaluesfromderivativesinconnectionwith: 45.1 11.1 >100
Interestraterisks
Currencyrisks
Shareandotherpricerisks
Tradingportfolioclaims
22.6
22.5
0.0
0.0
5.0
6.1
0.0
0.0
>100
>100
–
–
Financial assets designated at fair value 0.0 0.0 –
Loansandadvancestobanksandcustomers 0.0 0.0 –
Debtsecuritiesandotherfixedinterestsecurities 0.0 0.0 –
Sharesandothervariableyieldsecurities 0.0 0.0 –
Total 45.1 11.1 > 100
EUR million Specific value adjustments
Portfolio-based provisions
Provisions in lending business
Total
01-01-2009 0.0 0.8 0.0 0.8
Allocations 0.0 0.3 0.0 0.3
Reductions 0.0 0.0 0.0 0.0
Utilisation 0.0 0.0 0.0 0.0
31-12-2009 0.0 1.0 0.0 1.0
Allocations 0.0 1.0 0.0 1.0
Reductions 0.0 0.0 0.0 0.0
Utilisation 0.0 0.0 0.0 0.0
31-12-2010 0.0 2.1 0.0 2.1
Notes to the Balance Sheet
81
Ofthetotalamount,EUR33.5millionisonlydueaftermorethan12months(previousyearEUR9.6million).
(30) Fair Values from Hedge Accounting
Thisitemcomprisespositivefairvaluesfromhedginginstrumentsineffectivemicroandportfoliofairvaluehedgingre-lationships.
Thebankusesmicrofairvaluehedgeaccountingtohedgetheinterestraterisk.HedgederivativeswithafairvalueofEUR362.0millionareduein12monthsattheearliest.
(31) Financial Assets
The financial assets balance sheet item essentially includes all the debt securities and other fixed-interest securities and shares and other variable-yield securities that are classified as available for sale and are not for trading.
The volume of financial assets, which were issued by central governments in the PIIGS zone, amounts to a nominal EUR 102.0million.ThesearetwodebtsecuritiesoftheItalianstatewithtermsto2018and2033.
Of the financial assets, EUR 3,882.9 million are only due after more than twelve months (previous year EUR 3,376.1 million).
31-12-2010(EUR million)
31-12-2009(EUR million)
Increase/Decrease (%)
Positivefairvaluesfromallocatedmicrofairvaluehedgederivatives 379.2 228.9 66
Fairvaluesfromderivativesinportfoliofairvaluehedgeaccounting 0.0 0.0 –
Total 379.2 228.9 66
31-12-2010(EUR million)
31-12-2009(EUR million)
Increase/Decrease (%)
Financial assets classified as LaR 3,391.8 3,262.0 4
Bondsanddebtsecurities 3,391.8 3,262.0 4
frompublicissuers
fromotherissuers
1,851.0
1,540.8
1,803.2
1,458.8
3
6
Financial assets classified as AfS 653.0 424.4 54
Bondsanddebtsecurities 653.0 424.4 54
frompublicissuers
fromotherissuers
150.7
502.3
113.7
310.7
33
62
Sharesandothervariableyieldsecurities 0.0 0.0 –
Sharesincompanies 0.0 0.0 –
Total 4,044.9 3,686.4 10
Notes to the Balance Sheet
82
Not
es
The bank made use of the options under IAS 39.50E and reclassified 18 securities designated as AfS (bonds and debt se-curities)asLaRin2008.Atthesametime,bondsanddebtsecuritieswheretherewasclearlynointentiontosellortradethemintheshort-termon1July2008,andwhichwereintendedtobekeptintheinventoryfortheforeseeablefutureinstead,wererecategorised.InaccordancewiththeamendedIAS39,therecategorisationtookplacewitheffectfrom1July2008atthefairvaluecalculatedonthisreportingdate.Intheyears2009and2010nofurtherrecategorisationswereundertaken.
With the recategorisation, the balance sheet presentation was also changed (reclassification). The following table shows the book values and the fair values of the reclassified assets.
The reclassification was done at book value with expected achievable cash flows of EUR 1,038.5 million.
The results not affecting profit/loss recorded in the equity from the reclassified securities amounted to EUR – 13.2 million at the time of the reclassification.
TheprorataresolutionofthisitemisinaccordancewithIAS39.54inrelationtonetinterestincome.Theeffectiveinterestrateforeachsecuritywasdeterminedforthispurpose.Thesewereinabandwidthof2.53%–6.46%.
Intheyearunderreport2010theproratareductionwasKEUR703(previousyearKEUR676)attheexpenseofnetinterestincome.
Without reclassification the following additional effects in equity would have occurred (cumulative to the reporting date ineachcase):
31-12-2010 31-12-2009 31-12-2008
EUR million Book value on transfer
date
Carrying amount
Fair value
Book value on transfer
date
Carrying amount
Fair value
Book value on transfer
date
Carrying amount
Fair value
Reclassifiedfinancialassets
645.6 660.3 627.9 645.6 731.4 712.1 645.6 746.7 719.5
KEUR 31-12-2010 31-12-2009 31-12-2008 01-07-2008
Unrealisedprofit/lossbeforetaxesattimeofconversion –13,193.6
ProratareductionsinaccordancewithIAS39.54 703 676 316
EUR million 31-12-2010 31-12-2009 31-12-2008 01-07-2008
Unrealisedprofit/lossbeforetaxes –32.4 –19.3 –27.1 –13.2
Deferredtaxes 9.3 5.5 8.0 3.9
Net effect in equity from reclassified financial assets available for sale
– 23.1 – 13.8 – 19.1 – 9.3
Notes to the Balance Sheet
83
(32) Property, Plant and Equipment
Theacquisitionandmanufacturingcostsandthecumulativedepreciationforproperty,plantandequipmentandinvest-mentpropertieschangedasfollows:
31-12-2010(EUR million)
31-12-2009(EUR million)
Increase/Decrease (%)
Landandbuildings 0.0 0.0 –
Operatingandofficeequipment 0.0 0.0 –
Otherproperty,plantandequipment 0.0 0.0 –
Total 0.0 0.0 –
KEUR Land and buildings
BGA Other property, plant and
equipment
Total
Acquisition and manufacturing costs at 01-01-2009 0 89 0 89
Accruals 0 7 0 7
Disposals 0 15 0 15
Transfers 0 0 0 0
Total 31-12-2009 0 81 0 81
Cumulative depreciation at 01-01-2009 0 41 0 41
Scheduleddepreciation 0 28 0 28
Total 31-12-2009 0 69 0 69
Closing balance at 31-12-2009 0 12 0 12
Acquisition and manufacturing costs at 01-01-2010 0 81 0 81
Accruals 0 15 0 15
Disposals 0 0 0 0
Transfers 0 0 0 0
Total 31-12-2010 0 96 0 96
Cumulative depreciation at 01-01-2010 0 69 0 69
Scheduleddepreciation 0 6 0 6
Total 31-12-2010 0 75 0 75
Closing balance at 31-12-2010 0 20 0 20
Notes to the Balance Sheet
84
Not
es
(33) Intangible Assets
NORD/LBCFBcontinuestousefullydepreciatedsoftware.
Intangibleassetsdevelopedasfollows:
31-12-2010(EUR million)
31-12-2009(EUR million)
Increase/Decrease (%)
Software 0.0 0.0 –
acquiredforconsideration
self-produced
0.0
0.0
0.0
0.0
–
–
Intangibleassetsunderdevelopment 0.0 0.0 –
Other 0.0 0.0 –
Total 0.0 0.0 –
KEUR Software Other Total
Acquired for consideration
Self-produced
Acquired for consideration
Self-produced
Acquisition and manufacturing costs at 01-01-2009
344 0 0 0 344
Accruals 9 0 0 0 9
Disposals 0 0 0 0 0
Transfers 0 0 0 0 0
Total 31-12-2009 353 0 0 0 353
Cumulative depreciation at 01-01-2009 172 0 0 0 172
Scheduleddepreciation 181 0 0 0 181
Total 31-12-2009 353 0 0 0 353
Closing balance at 31-12-2009 0 0 0 0 0
Acquisition and manufacturing costs at 01-01-2010
353 0 0 0 353
Accruals 7 0 0 0 7
Disposals 0 0 0 0 0
Transfers 0 0 0 0 0
Total 31-12-2010 360 0 0 0 360
Cumulative depreciation at 01-01-2010 353 0 0 0 353
Scheduleddepreciation 1 0 0 0 1
Total 31-12-2010 354 0 0 0 354
Closing balance at 31-12-2010 7 0 0 0 7
Notes to the Balance Sheet
85
(34) Income Tax Assets
Incometaxassetsarebrokendownasfollows:
Activedeferredtaxesformthepotentialincometaxreliefresultingfromtemporarydifferencesbetweenassetsandliabili-tiesintheIFRSbalancesheetandthebalancesheetaccordingtothetaxprovisions.
ThetaxprovisionsoftheIFRSagreementhavebeenappliedsincethereportedyear2008.Thismeansthatmanyofthetemporary differences no longer apply. The active deferred taxes relate exclusively to financial assets classified as AfS.
Deferredincometaxassetswereshowninconnectionwiththefollowingbalancesheetitems:
31-12-2010(EUR million)
31-12-2009(EUR million)
Increase/Decrease (%)
Currentincometaxassets 0.0 0.0 –
Activedeferredtaxes 7.3 3.6 >100
Total 7.3 3.6 > 100
31-12-2010(EUR million)
31-12-2009(EUR million)
Increase/Decrease (%)
Assets
Riskprovisions 0.0 0.0 –
Financialassets 7.3 3.6 >100
Property,plantandequipment 0.0 0.0 –
Otherassets 0.0 0.0 –
Equity and liabilities
Financialliabilitiesatfairvaluethroughprofitorloss 0.0 0.0 –
Fairvaluesfromhedgeaccounting 0.0 0.0 –
Provisions 0.0 0.0 –
Otherliabilities 0.0 0.0 –
Taxlossescarriedforward 0.0 0.0 –
Total 7.3 3.6 > 100
Notes to the Balance Sheet
86
Not
es
(35) Other Assets
(36) Liabilities to Banks
EUR783.3million(previousyearEUR422.0million)ofthetotalamountrelatestoliabilitiesthatarenotdueforovertwelvemonths.
RegisteredcoveredbondsinthesumofEUR131.9million(previousyearEUR307.7million)areincludedintheliabilitiestobanks.
31-12-2010(EUR million)
31-12-2009(EUR million)
Increase/Decrease (%)
Taxreimbursementrightsfromothertaxes 0.1 0.0 >100
Otherassets 0.0 0.1 –
Otherassetsincludingaccrualsanddeferredincome 0.0 0.0 –
Total 0.1 0.1 34
31-12-2010(EUR million)
31-12-2009(EUR million)
Increase/Decrease (%)
Deposits from other banks 854.5 0.0 –
Luxembourgbanks
Foreignbanks
699.7
154.8
0.0
0.0
–
–
Liabilities arising from money market transactions 1,696.1 1,960.8 – 13
Luxembourgbanks
Foreignbanks
1,474.5
221.6
1,566.1
394.7
–6
–44
Other liabilities 0.2 0.0 > 100
Luxembourgbanks 0.2 0.0 >100
dueondemand
deferred
0.2
0.0
0.0
0.0
>100
–
Foreignbanks 0.0 0.0 –
dueondemand
deferred
0.0
0.0
0.0
0.0
–
–
Total 2,550.9 1,960.8 30
Notes to the Balance Sheet
87
(37) Liabilities to Customers
Theliabilitiestocustomersareexclusivelydueafter12months(previousyearEUR367.9million).Inbothyears,thisbal-ancesheetitemresultsexclusivelyfromregisteredcoveredbonds.
(38) Securitised Liabilities
EUR2,528.9million(previousyearEUR2,437.9million)ofthetotalamountrelatestoliabilitiesthatarenotdueforovertwelvemonths.AllissueddebtsecuritiesarecoveredbondsunderLuxembourglaw(LettresdeGage)(previousyearEUR3,032.7million),whicharelistedontheLuxembourgexchangeinavolumeofEUR2,348.2million(previousyearEUR2,738.4million).LettresdeGagetoacountervalueofEUR220.2millionarelistedontheSwissexchange(previousyearEUR180.3million).
31-12-2010(EUR million)
31-12-2009(EUR million)
Increase/Decrease (%)
Savings deposits 0.0 0.0 –
Liabilities arising from money market transactions 0.0 0.0 –
Luxembourgcustomers
Foreigncustomers
0.0
0.0
0.0
0.0
–
–
Other liabilities 433.0 367.9 18
Luxembourgcustomers 0.0 0.0 –98
dueondemand
deferred
0.0
0.0
0.0
0.0–98
–
Luxembourgcustomers 433.0 367.9 18
dueondemand
deferred
0.0
433.0
0.0
367.9
–
18
Total 433.0 367.9 18
31-12-2010(EUR million)
31-12-2009(EUR million)
Increase/Decrease (%)
Issueddebtsecurities 2,701.3 3,032.7 –11
Moneymarketpapers/commercialpapers 0.0 0.0 –
Othersecuritisedliabilities 0.0 0.0 –
Total 2,701.3 3,032.7 – 11
Notes to the Balance Sheet
88
Not
es
(39) Financial Liabilities at Fair Value through Profit or Loss
This item includes trading liabilities (HfT) and financial liabilities designated at fair value (dFV).
The trading liabilities position comprises negative fair values from derivative financial instruments, which do not corre-spond to the specifications of hedge accounting, and short sale delivery obligations from securities. However short sales werenotundertakenbythebank.Thereisalsonointentiontoconcludeany.
The category comprising financial liabilities designated at fair value is not currently used.
ApartialamountofEUR24.2millionofthetradingliabilitiesisonlydueaftermorethan12months(previousyearEUR11.2million).
(40) Fair Values from Hedge Accounting
Thisitemcomprisesnegativefairvaluesfromhedginginstrumentsfromeffectivemicrofairvaluehedgingrelationships.
Thebankusesmicrofairvaluehedgeaccountingtohedgetheinterestraterisk.HedgederivativeswithanegativefairvalueofEUR581.0millionaredueafter12monthsattheearliest(previousyearEUR412.0million).
31-12-2010(EUR million)
31-12-2009(EUR million)
Increase/Decrease (%)
Fairvaluesfromallocatedmicrofairvaluehedgederivatives 586.8 432.0 36
Fairvaluesintermsofportfoliofairvaluehedgeaccounting 0.0 0.0 –
Total 586.8 432.0 36
31-12-2010(EUR million)
31-12-2009(EUR million)
Increase/Decrease (%)
Trading liabilities 25.2 20.9 20
Negativefairvaluesfromderivativesinconnectionwith: 25.2 20.9 20
Interestraterisks
Currencyrisks
Shareandotherpricerisks
Creditderivatives
22.6
2.6
0.0
0.0
1.3
19.6
0.0
0.0
>100
–87
–
–
Shortsaledeliveryobligations 0.0 0.0 –
Financial liabilities designated at fair value 0.0 0.0 –
Liabilitiestobanksandcustomers 0.0 0.0 –
Securitisedliabilities 0.0 0.0 –
Total 25.2 20.9 20
Notes to the Balance Sheet
89
(41) Provisions
Provisionsarebrokendownasfollows:
ProvisionsinthesumofKEUR30representamountsforuncertainliabilities,whichwillbedueinthecomingthreeyears(previousyearKEUR220).
Provisions for Pensions and similar ObligationsCalculationsarebasedonthefollowingactuarialassumptions:
31-12-2010(KEUR)
31-12-2009(KEUR)
Increase/Decrease (%)
Provisions for pensions and similar obligations 40.5 23.7 71
Otherprovisions 30.0 220.0 –86
Provisionsinlendingbusiness
Restructuringprovisions
Provisionsforthreatenedlosses
Provisionsforuncertainliabilities
Insurancebusinessprovisions
0.0
0.0
0.0
30.0
0.0
0.0
0.0
0.0
220.0
0.0
–
–
–
–86
–
Total 70.5 243.7 – 71
Actuarial assumptions 31-12-2010(%)
31-12-2009(%)
Increase/Decrease (%)
Annualsalarygrowth 1.50 1.50 –
Annualinflationrate 2.50 2.50 –
AnnualBBGcontributionceiling(includingcostoflivingindex) 3.63 3.69 –2
Discountrate 5.25 5.50 –5
Mortalitytable StatisticalvaluespublishedintheGrandDucalregulationof15January2001andthatgoverning
theminimumfundingofoccupationalpensions
Expectedreturnonplanassets 3.25 3.25 –
Turnoverrate 0.00 0.00 –
Notes to the Balance Sheet
90
Not
es
Provisionsforpensionsandsimilarobligationsareasfollows:
The cash value of the defined benefit obligation can be carried over from the opening to the closing balance for the period bytakingintoaccounttheeffectsofthementioneditems:
Furthermore,theperformance-relatedobligationmustbesplitintoamountsfromtheperformance-relatedplans,whichare not financed via a fund, and amounts from performance-related plans which are fully or partially financed from a fund, for the period to the reporting date. The latter applies to the NORD/LB CFB defined benefit obligation.
According to the insurance firm, experience adjustments on plan liabilities and plan assets amount to KEUR 7 and KEUR 0 respectively.
31-12-2010(KEUR)
31-12-2009(KEUR)
Increase/Decrease (%)
Opening balance 75.5 53.5 41
Currentservicecost 18.7 15.3 23
Interestexpense 4.0 2.9 35
Contributionsbyplanparticipants 0.0 0.0 –
Actuarialgains/lossesfromtheliability 12.3 3.8 >100
Increases/decreasesfromcurrencytranslations 0.0 0.0 –
Benefitspaid 0.0 0.0 –
Pastservicecost 0.0 0.0 –
Effectsofcurtailments 0.0 0.0 –
Effectsofsettlements 0.0 0.0 –
Closing balance 110.5 75.5 46
31-12-2010(KEUR)
31-12-2009(KEUR)
Increase/Decrease (%)
Cashvalueoftheperformance-relatedobligation 110.5 75.5 46
Deductionforthefairvalueofplanassets 77.0 55.9 38
Surplusnotshownasanasset 0.0 0.0 –
Otheramountsshowninthebalancesheet(lumpsumtax) 7.0 4.1 71
Deductionforthepastservicecost 0.0 0.0 –
Total 40.5 23.7 71
Notes to the Balance Sheet
91
Thefairvalueoftheplanassetscanbeshowntohavechangedasfollows:
Thefairvalueoftheplanassetsiscomposedasfollows:
ThefairvalueoftheplanassetsincludesequityinstrumentsinthesumofKEUR3(previousyearKEUR2),equityinstru-mentsofanotherentityinthesumofKEUR68(previousyearKEUR49)andotherassetsinthesumofKEUR6(previousyearKEUR5).Theoverallexpectedyieldof3.25%resultsfromtheweightedaverageoftheexpectedincomefromtheinvestmentcategoriesheldthroughtheplanassets.
It is expected that a total of KEUR 19 will be paid into the plan assets of the defined benefit obligations during the next reportingperiod.
31-12-2010(KEUR)
31-12-2009(KEUR)
Increase/Decrease (%)
Opening balance 55.9 40.7 37
Expectedreturnonplanassets 2.4 1.8 35
Actuarialgains/lossesonplanassets 0.7 –0.7 >100
Increases/decreasesfromcurrencytranslations 0.0 0.0 –
Employercontributions 18.0 14.1 28
Contributionsbyplanparticipants 0.0 0.0 –
Benefitspaid 0.0 0.0 –
Effectsofsettlements 0.0 0.0 –
Closing balance 77.0 55.9 38
31-12-2010(%)
31-12-2009(%)
Increase/Decrease (%)
Equityinstruments 4 4 7
Equityinstrumentsofanotherentity 88 87 1
Realestate 4 4 –3
Otherassets 4 5 –22
Notes to the Balance Sheet
92
Not
es
Pensioncostsaremadeupasfollows:
Summaryoftheamountsinthecurrentreportingperiodandthepreviousreportingperiods:
31-12-2010(KEUR)
31-12-2009(KEUR)
Increase/Decrease (%)
Currentservicecost 18.7 15.3 23
Interestexpense 4.0 2.9 35
Expectedreturnonplanassets –2.4 –1.8 35
Pastservicecost 0.0 0.0 –
Effectsofplanchanges 0.0 0.0 –
Expectedreturnonreimbursementrights 11.6 4.5 >100
Total 31.9 20.9 52
31-12-2010(KEUR)
31-12-2009(KEUR)
31-12-2008(KEUR)
31-12-2007(KEUR)
Pensionobligation(DBO) 110.5 75.5 53.5 47.6
Planassets –76.9 –55.9 –40.7 –30.9
Shortfall 33.5 19.6 12.8 16.7
Actuarialprofit/losses –11.6 –4.5 5.3 0.9
Experienceadjustmentsto:
Pensionobligation(DBO)
Planassets
7.0
0.0
7.7
0.7
–0.1
0.7
–*)
–*)
*)Thisinformationisnotavailablefortheperiod2007
Notes to the Balance Sheet
93
Otherprovisionschangedduringtheyearunderreportasfollows:
(42) Income Tax Liabilities
Incometaxliabilitiesarebrokendownasfollows:
ThetaxprovisionsoftheIFRSagreementhavebeenappliedsincethereportedyear2008.Thismeansthatmanyofthetemporarydifferencesnolongerapply.Becauseofthetaxgroup,thebankshowstheliabilitiestothecontrollingcompanyandnottothetaxauthorities.
31-12-2010(EUR million)
31-12-2009(EUR million)
Increase/Decrease (%)
Currentincometaxliabilities 0.0 0.0 –
Passivedeferredtaxes 0.0 0.0 –
Total 0.0 0.0 –
EUR million Provisions in lending
business
Restructuring provisions
Provisions for impend-
ing losses
Provisions for uncertain liabilities
Provisions for insurance
business
Total
Frompersonnelfield
Other
Opening balance 0.0 0.0 0.0 0.0 220.0 0.0 220.0
Increases/decreas-esfromcurrencytranslations
0.0 0.0 0.0 0.0 0.0 0.0 0.0
Utilisation 0.0 0.0 0.0 0.0 31.4 0.0 31.4
Reductions 0.0 0.0 0.0 0.0 158.6 0.0 158.6
Transfers 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Allocations 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Closing balance 0.0 0.0 0.0 0.0 30.0 0.0 30.0
Notes to the Balance Sheet
94
Not
es
(43) Other Liabilities
TheotherliabilitiesresultprimarilyfromtaxespayabletotheparentcompanyNORD/LBLuxembourg.
(44) Subordinated Capital
Subordinated liabilities are only repaid after the claims of all senior lenders have been settled. They fulfil in the full amount the conditionsofCircularCSSF06/273initsamendedversioninrelationtotheoffsettingasregulatorysupplementarycapital.
TheexpensesforsubordinateliabilitiesamountedtoKEUR2,460(previousyearKEUR2,866)intheyearunderreport.
In2008,aMandatoryConvertibleBondinthesumofEUR30.0millionwasplaced.AftertwopartialconversionsintosharesundertakeninthepreviousyearinthesumofEUR6.0millioneach,therewasafurtherpartialconversioninthesumofEUR10.0millioninthecurrentyearunderreport.
Thefollowingtableshowsthesubordinatedtransactionsindetail:
31-12-2010(EUR million)
31-12-2009(EUR million)
Increase/Decrease (%)
Liabilitiesfromoutstandinginvoices 2.2 1.8 19
Liabilitiesfromcontributions 0.0 0.0 –
Liabilitiesfromshorttermremunerationofworkers 0.0 0.0 –
Accrualsanddeferredincome 0.0 0.0 –
Liabilityfromtaxesandsocialsecuritycontributionsnotyetdeducted 0.5 0.0 >100
Liabilitiesoninterimaccounts 0.0 0.0 –
Insurance-relatedliabilities 0.0 0.0 –
Otherliabilities 3.5 4.0 –12
Total 6.1 5.8 5
31-12-2010(EUR million)
31-12-2009(EUR million)
Increase/Decrease (%)
Subordinatedliabilities 38.0 45.8 –17
Profitparticipationcapital 0.0 0.0 –
Contributionsfromsilentpartners 0.0 0.0 –
Total 38.0 45.8 – 17
Type of transaction Nominal amount
(millions)
Accrued interest
(millions)
Rate at 31-12-2010
Balance sheet value
(EUR million)
Term (in years)
Interest rates (%)
Maturity
Subordinatedloans USD40.0 USD0.0 1.3362 30.0 15 6.400 27.12.22
MandatoryConvertibleBond
EUR8.0 EUR0.0 1 8.0 10 4.553 01.04.19
Total 38.0
Notes to the Balance Sheet
95
Other Disclosures
(45) Notes to the Overall Profit and Loss Account
The income tax effects are allotted to the individual components of the components of the profit/loss recorded directly in theequityasfollows:
KEUR Amount before
taxes 2010
Income tax effect
2010
Amount after taxes
2010
Amount before
taxes 2009
Income tax effect
2009
Amount after taxes
2009
Increase/decreasefromavailableforsale(AfS)financialinstruments
–12,692 3,682 –9,011 9,425 –2,923 6,501
Actuarialgains/lossesfordefinedbenefitprovisionsforpensions
–19 5 –13 –5 1 –4
Profit/loss recognised directly in equity
–12,711 3,687 –9,024 9,420 –2,923 6,498
ofwhich:duetoshareholders ofNORD/LUX
ofwhich:attributableto non-controllingshares
–12,711
0
3,687
0
–9,024
0
9,420
0
–2,923
0
6,498
0
(46) Notes to the Statement of Changes in Equity
Thecompany’ssubscribedcapitalamountstoEUR72mil-lionat31December2010(previousyearEUR62million).Itisdividedinto720,000registeredshareswithoutnominalvalue(previousyear620,000registeredshares).Thesub-scribedcapitalisfullypaidup.
DuringthecourseoftheyearunderreportinashareofEUR10.0million in themandatoryconvertiblebondwascon-vertedintosharecapital.
A dividend, relating to year under report 2009, was paidouttotheshareholderintheyearunderreport,inthesumofKEUR5,500(previousyearKEUR4,000).Theindividualcomponents of the equity and their development in theyears2009and2010canbeseeninthestatementofchang-esinequity.
The revenue reserves comprise the legal reserves, profit and loss carried forward and the first-time adoption reserve.
Therevenuereservesmainlyincludethelegalreservere-quiredbyArticle72ofthelawof10August1915,inaccord-ance with which at least 5 % of the profit for the year must beallocatedtothelegalreserveuntilitisequivalentto10%ofthesubscribedcapital.Thebank’slegalreserveamountstoEUR3.6millionor5%ofthesubscribedcapitalandmusttherefore be appropriated at least 5 % of the profit for the yearwithinthescopeoftheappropriationofearnings.
The effects of measuring available-for-sale (AfS) financial instrumentsareshownundertherevaluationreserveitem.
Inpreviousyears,thebankmadeuseofthetaxoptionofoffsettingtheyear’swealthtax.Fivetimestheamountoftheoffsetwealthtaxofthepreviousyearsconcernedwereearmarkedinthevoluntaryreservesbytheparentcompanytaking into consideration the five-year binding period.
Other Disclosures
96
Not
es
(47) Notes to the Cash Flow Statement
The cash flow statement shows changes in cash and cash equivalents for the year under report due to payment flows from operating activities, investment activities and financ-ingactivities.
Cash and cash equivalents are defined as a cash reserve (cashandbalanceswithcentralbanksaswellastreasurybills and other bills eligible for refinancing with the central bank).
The cash flow statement is prepared using indirect meth-ods. This involves determining the cash flow from operat-ing activities based on the profit for the year having first addedthenon-cashexpensesanddeductedthenon-cashincomefortheyearunderreport.Inaddition,allcashex-pensesandincomeareeliminatediftheyarenotincludedunderoperatingbusiness.Thesepaymentsaretakenintoaccount under cash flows from investment activities or fi-nancingactivities.
As recommended by the IASB, cash flow from operating activitiesshowspaymenttransactionsfromloansandad-vancestobanksandcustomers,tradingportfoliosecuri-ties,liabilitiestobanksandcustomersandsecuritisedli-abilities.
Cash flow from investment activities comprises payment transactionsforthe investmentsandsecuritiesportfoliounder financial assets and cash receipts and payments for property,plantandequipment.
Cash flow from financing activities includes payment flows fromcapitaladjustments, interestpaymentsonsubordi-natedcapitalanddividendpaymentstotheshareholdersofNORD/LBCFB.
PleaserefertothenotesintheriskreportsectionofthemanagementreportwithregardtoNORD/LBCFB’scontroloftheliquidityrisk.
Year Wealth tax NORD/LB CFB(EUR million)
Locked in until
2005 0.0 31-12-2010
2006 0.0 31-12-2011
2007 0.2 31-12-2012
2008 0.2 31-12-2013
2009 0.2 31-12-2014
2010 0.0 31-12-2015
Total 0.6
Other Disclosures
97
Notes to Financial Instruments
(48) Term to Maturity of Financial Liabilities and Contingent Liabilities
At31December2010:
At31December2009:
Term to maturity is defined as the time remaining from the reporting date to the contractual maturity date.
EUR million < 1 month 1 month < 3 months
3 months < 1 year
1 year < 5 years
> 5 years Total
Liabilitiestobanks 607.2 837.6 322.9 179.1 604.2 2,550.9
Liabilitiestocustomers 0.0 0.0 0.0 25.5 407.4 433.0
Securitisedliabilities 49.4 0.0 123.1 1,113.9 1,415.0 2,701.3
Financialliabilitiesatfairvaluethroughprofitorloss(withoutderivatives)
0.0 0.0 0.0 0.0 0.0 0.0
Subordinatedcapital 0.0 0.0 0.0 0.0 38.0 38.0
Irrevocablecreditcommitments 0.0 0.0 6.4 0.1 0.1 6.6
Total 656.6 837.6 452.4 1,318.6 2,464.7 5,729.8
EUR million < 1 month 1 month < 3 months
3 months < 1 year
1 year < 5 years
> 5 years Total
Liabilitiestobanks 822.7 485.7 230.4 190.5 231.5 1,960.8
Liabilitiestocustomers 0.0 0.0 0.0 0.0 367.9 367.9
Securitisedliabilities 0.0 230.2 342.8 446.8 2,012.9 3,032.7
Financialliabilitiesatfairvaluethroughprofitorloss(withoutderivatives)
0.0 0.0 0.0 0.0 0.0 0.0
Subordinatedcapital 0.0 0.0 0.0 0.0 45.8 45.8
Irrevocablecreditcommitments 0.0 10.8 70.0 0.0 0.0 80.8
Total 822.8 726.7 643.2 637.3 2,658.2 5,488.1
Other Disclosures
98
Not
es
(49) Book Values according to Valuation Categories
ThefairvaluesofunderlyingtransactionsfromhedgeaccountingwithinthemeaningofIAS39areallocatedtotherespec-tive category, the fair values of securities transactions can be found again in the items HfT. Only financial instruments were consideredhere.
(50) Net Results according to Valuation Categories
Theresultfromhedgeaccountingisnotincludedinthenetresultsbecauseitisnotallocatedtoanyofthecategories.Theriskprovisioninthelendingbusiness,whichisalsonotincludedhere,isexplainedinthefollowingnotes.
31-12-2010(EUR million)
31-12-2009(EUR million)
Increase/Decrease (%)
Assets
Financialassetsatfairvaluethroughprofitorloss 424.3 240.0 77
Financialassetsheldfortrading
Financialassetsdesignatedatfairvaluethroughprofitorloss
424.3
0.0
240.0
0.0
77
–
Availableforsaleassets 653.0 424.4 54
Loansandreceivables 5,323.7 5,262.6 1
Total 6,401.0 5,926.9 8
Equity and liabilities
Financialliabilitiesatfairvaluethroughprofitorloss 612.0 452.9 35
Financialliabilitiesheldfortrading
Financialliabilitiesdesignatedatfairvaluethroughprofitorloss
612.0
0.0
452.9
0.035
–
Otherliabilities 5,723.2 5,407.3 6
Total 6,335.2 5,860.2 8
2010(KEUR)
2009(KEUR)
Increase/Decrease (%)
Financialinstrumentsatfairvaluethroughprofitorloss –57,697 –48,250 20
Financialinstrumentsheldfortrading
Financialinstrumentsdesignatedatfairvaluethroughprofitorloss
–57,697
0.0
–48,250
0.0
20
–
Availableforsaleassets 16,934 13,403 26
Loansandreceivables 192,979 201,459 –4
Otherliabilities –139,173 –151,867 –8
Total 13,043 14,745 – 12
Other Disclosures
99
(51) Impairments/Reversal of Impairments according to Valuation Categories
(52) Fair Value Hierarchy
The following table shows the application of the fair value hierarchy for financial assets and liabilities stated at fair value through profit or loss or not affecting profit or loss:
31-12-2010EUR million
Level 1(Mark-to-
Market)
Level 2(Mark-to-
Matrix)
Level 3(Mark-to-
Model)
Total
Tradingassets 0.0 45.1 0.0 45.1
Financialassetsdesignatedatfairvalue 0.0 0.0 0.0 0.0
Positivefairvaluesfromhedgeaccountingderivatives 0.0 379.2 0.0 379.2
Financialassets(measuredatfairvalue) 96.8 540.6 15.7 653.0
Assets 96.8 964.9 15.7 1,077.4
Tradingliabilities 0.0 25.2 0.0 25.2
Financialliabilitiesdesignatedatfairvalue 0.0 0.0 0.0 0.0
Negativefairvaluesfromhedgeaccountingderivatives 0.0 586.8 0.0 586.8
Equity and liabilities 0.0 612.0 0.0 612.0
2010(KEUR)
2009(KEUR)
Increase/Decrease (%)
Availableforsaleassets
Resultfromvaluationadjustmentsofafsfinancialassets
Resultfromdirectwrite-downofuncollectiblereceivables/ receiptsonwrittendownreceivables
0.0
0.0
0.0
0.0
–
–
Total 0.0 0.0 –
Loansandreceivables
Resultfromvaluationadjustmentsoflarfinancialassets
Resultfromportfoliobasedvaluationadjustmentsoflar financialassets
Resultfromdirectwrite-downofuncollectiblereceivables/ receiptsonwrittendownreceivables
0.0
–1,012.6
0.0
0.0
–289.3
0.0
–
>100
–
Total – 1,012.6 – 289.3 > 100
Other Disclosures
100
Not
es
Only bonds are included in the financial assets which fall under the Level 3 valuation. In the case of the mark-to-model valuation(Level3)theamountofthefairvaluedependsontherelevantassumptions,sothatchangesinassumptionscanresult in fluctuations in the fair value. Significant effects of these value fluctuations that can be traced back to changes in the assumptions are checked for the fair values recorded in the financial statements using a sensitivity analysis. To calcu-latethesensitivity,eachratingcategoryispushedonestepupordown.Bothcalculatedvaluesrepresentthesumoftheabsolutedifferencetotheoriginalmodelvalueandisdividedbytwo.
Under this stress scenario in regard to the rating category, the fluctuation of the fair value of Level 3 securities is KEUR 62.
Thetransferswithinthefairvaluehierarchyareasfollows:
TheleveltransferfromLevel2intoLevel1wasasecurityforwhichtherewasamarketpriceonthereportingdate.Twose-curitieschangedfromamodelvaluation(Level3)tomatrixvaluation(Level2),onesecuritychangedfromLevel2toLevel3asaresultofaninactivemarket.
01-01 – 31-12-2010EUR million
Fromlevel 1 to
level 2
Fromlevel 1 to
level 3
From level 2 to
level 1
From level 2 to
level 3
From level 3 to
level 1
Fromlevel 3 to
level 2
Tradingassets 0.0 0.0 0.0 0.0 0.0 0.0
Financialassetsdesignatedatfairvalue 0.0 0.0 0.0 0.0 0.0 0.0
Positivefairvaluesfromhedgeaccountingderivatives
0.0 0.0 0.0 0.0 0.0 0.0
Financialassets(measuredatfairvalue) 0.0 0.0 10.7 15.7 0.0 75.0
Assets 0.0 0.0 10.7 15.7 0.0 75.0
Tradingliabilities 0.0 0.0 0.0 0.0 0.0 0.0
Financialliabilitiesdesignatedatfairvalue 0.0 0.0 0.0 0.0 0.0 0.0
Negativefairvaluesfromhedgeaccountingderivatives
0.0 0.0 0.0 0.0 0.0 0.0
Equity and liabilities 0.0 0.0 0.0 0.0 0.0 0.0
Other Disclosures
101
There were no financial liabilities in Level 3 of the Fair Value Hierarchy in either the year under report or the previous year; the development of the financial assets in Level 3 of the Fair Value Hierarchy is as follows:
The addition of financial assets and liabilities is done at market prices at the time of acquisition. There was no initial valuation at Level 3 in either period under report. A day-one profit or loss consequently did not occur.
EUR million Trading assets
Financial assets designated at fair value
Positive fair values from
hedge account-ing derivatives
Financial assets (measured at
fair value)
Total assets
Opening balance as of 01-01-2009 0.0 0.0 0.0 84.1 84.1
Profit/losseffect 0.0 0.0 0.0 –4.5 –4.5
Equityeffect 0.0 0.0 0.0 6.4 6.4
Purchases 0.0 0.0 0.0 0.0 0.0
Sales 0.0 0.0 0.0 0.0 0.0
Amortisations 0.0 0.0 0.0 0.0 0.0
Movedfromlevel1and2 0.0 0.0 0.0 0.0 0.0
Movedtolevel1and2 0.0 0.0 0.0 0.0 0.0
Closing balance at 31-12-2009 0.0 0.0 0.0 86.0 86.0
Opening balance as of 01-01-2010 0.0 0.0 0.0 86.0 86.0
Profit/losseffect 0.0 0.0 0.0 2.8 2.8
Equityeffect 0.0 0.0 0.0 –13.8 –13.8
Purchases 0.0 0.0 0.0 0.0 0.0
Sales 0.0 0.0 0.0 0.0 0.0
Amortisations 0.0 0.0 0.0 0.0 0.0
Movedfromlevel1and2 0.0 0.0 0.0 15.7 15.7
Movedtolevel1and2 0.0 0.0 0.0 –75.0 –75.0
Closing balance at 31-12-2010 0.0 0.0 0.0 15.7 15.7
Other Disclosures
102
Not
es
(53) Fair Value of Financial Instruments
The fair values of financial instruments that are recognised in the balance sheet at amortised cost or with the hedge fair valuearecontrastedwiththecarryingamountsinthefollowingtable:
Fair values are determined in accordance with the discounted cash flow method on the basis of the interest structure curve effectiveonthebalancesheetdate.
Theamountsshowninthe“Carryingamount”columnincludetheassetsandliabilitiesshowninthebalancesheetatam-ortisedcostorwiththehedgefairvalue.Whereahedgefairvalueisshownasacarryingamountthisvalueisalsoshowninthe“Fairvalue”column.
(54) Derivative Financial Instruments
NORD/LB CFB uses derivative financial instruments for hedging purposes as part of asset/liability management.
Derivative financial instruments denominated in foreign currencies are mainly negotiated in the form of forward ex-changetransactions,currencyswaps,andinterestrate/currencyswaps.Interestratederivativesareprimarilyinterestrateswaps.
Thenominalvaluesarethegrossvolumeofallpurchasesandsales.Thisvalueisareferenceamountusedtodeterminemutuallyagreedadjustmentpayments,butdoesnotincludereceivablesorliabilitiesthatareeligibleforrecognition.
EUR million Fair value31-12-2010
Book value31-12-2010
Difference31-12-2010
Fair value31-12-2009
Book value31-12-2009
Difference31-12-2009
Assets 5,785.9 5,976.7 – 190.8 5,528.7 5,686.9 – 158.2
Cash reserve 1.4 1.4 0.0 0.0 0.0 0.0
Loansandadvancestobanks
Loansandadvancesto customers
Riskprovisions
Financialassets
1,124.0
808.6
0.0
3,851.8
1,111.0
821.4
–2.1
4,044.9
13.0
–12.8
2.1
–193.1
1,151.4
834.9
0.0
3,542.5
1,144.8
856.8
–1.0
3,686.4
6.6
–21.9
1.0
–143.9
Loans and advances after risk provisions
5,784.4 5,975.3 – 190.8 5,528.7 5,686.9 – 158.2
Equity and liabilities 5,778.6 5,723.2 55.4 5,441.3 5,407.3 34.1
Liabilities to banks 2,560.9 2,550.9 10.0 1,957.8 1,960.8 – 3.0
Liabilities to customers 449.0 433.0 16.0 385.0 367.9 17.1
Securitised liabilities 2,726.9 2,701.3 25.6 3,050.3 3,032.7 17.6
Subordinated capital 41.8 38.0 3.8 48.2 45.8 2.4
Other Disclosures
103
Thecompositionofthederivativeportfolioisasfollows:
EUR million Nominal values
31-12-2010
Nominal values
31-12-2009
Market values
positive 31-12-2010
Market values
positive 31-12-2009
Market values
negative 31-12-2010
Market values
negative 31-12-2009
Interest rate risks 7,694.3 5,219.5 199.7 142.0 482.5 370.9
Interestrateswaps 7,694.3 5,219.5 199.7 142.0 482.5 370.9
FRAs 0.0 0.0 0.0 0.0 0.0 0.0
Interestrateoptions
Purchases
Sales
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
Caps,floors 0.0 0.0 0.0 0.0 0.0 0.0
Stockexchangecontracts 0.0 0.0 0.0 0.0 0.0 0.0
Otherforwardinterestratetransactions
0.0 0.0 0.0 0.0 0.0 0.0
Currency risks 1,908.3 2,139.3 224.7 98.0 129.5 82.1
Forwardexchangecontracts 0.3 0.3 0.0 0.0 0.0 0.0
Currencyswaps/ interestrate-currencyswaps
1,907.9 2,139.0 224.7 98.0 129.5 82.1
Currencyoptions
Purchases
Sales
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
Stockexchangecontracts 0.0 0.0 0.0 0.0 0.0 0.0
Othercurrencytransactions 0.0 0.0 0.0 0.0 0.0 0.0
Share and other price risks 0.0 0.0 0.0 0.0 0.0 0.0
Forwardsharetransactions 0.0 0.0 0.0 0.0 0.0 0.0
Shareswaps 0.0 0.0 0.0 0.0 0.0 0.0
Shareoptions
Purchases
Sales
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
Stockexchangecontracts 0.0 0.0 0.0 0.0 0.0 0.0
Otherforwardtransactions 0.0 0.0 0.0 0.0 0.0 0.0
Credit derivatives 0.0 0.0 0.0 0.0 0.0 0.0
Securedparty 0.0 0.0 0.0 0.0 0.0 0.0
Guarantor 0.0 0.0 0.0 0.0 0.0 0.0
Total 9,602.6 7,358.8 424.3 240.0 612.0 452.9
Other Disclosures
104
Not
es
The following table shows the term to maturity of derivative financial instruments.
Thetermtomaturityistheperiodoftimebetweenthebalancesheetdateandthecontractualmaturity.
Thetablebelowbreaksdownthepositiveandnegativemarketvaluesforderivativetransactionsaccordingtotherelevantcounterparty.
(55) Underlying Transactions in Effective Hedging Relationships
Financialassetsandliabilities,whicharepartofahedgingrelationshipasunderlyingtransactionsaccordingtoIAS39,continuetobeshowntogetherwiththeunhedgedtransactionsintherespectivebalancesheetitem,sincethehedgingdoesnotchangethenatureandfunctionoftheunderlyingtransaction.
The balance sheet approach of the financial instruments otherwise shown on the balance sheet (categories LaR and OL) is howevercorrectedbythefairvaluechangeresultingfromthehedgedrisk.
Nominal value (EUR million)
Interest rate risks Currency risks Share and other price risks
Credit derivatives
31-12-2010
31-12-2009
31-12-2010
31-12-2009
31-12-2010
31-12-2009
31-12-2010
31-12-2009
Term to maturity
upto3months 16.5 102.7 200.1 685.4 0.0 0.0 0.0 0.0
over3monthsandupto1year 303.8 426.3 70.1 14.7 0.0 0.0 0.0 0.0
over1yearandupto5years 1,650.3 1,105.9 526.3 289.4 0.0 0.0 0.0 0.0
over5years 5,723.7 3,584.5 1,111.9 1,149.9 0.0 0.0 0.0 0.0
Total 7,694.3 5,219.5 1,908.3 2,139.4 0.0 0.0 0.0 0.0
EUR million Nominal values
31-12-2010
Nominal values
31-12-2009
Market values
positive 31-12-2010
Market values
positive 31-12-2009
Market values
negative 31-12-2010
Market values
negative 31-12-2009
BanksinOECDcountries 9,602.6 7,358.8 424.3 240.0 612.0 452.9
BanksoutsideOECDcountries 0.0 0.0 0.0 0.0 0.0 0.0
Publicsectorentitiesin OECDcountries
0.0 0.0 0.0 0.0 0.0 0.0
Othercounterparties (incl.exchangecontracts)
0.0 0.0 0.0 0.0 0.0 0.0
Total 9,602.6 7,358.8 424.3 240.0 612.0 452.9
Other Disclosures
105
The balance sheet reporting of financial instruments of the category AfS continues to be done at full fair value. The finan-cialassetsandliabilities,whicharepartofaneffectivemicrofairvaluehedgerelationshipashedgedunderlyingtransac-tions,areshownbelowforinformationpurposes:
(56) NORD/LB CFB as Assignor and Assignee
Thefollowingassetswereassignedbythebankassecurityforliabilities:
The furnishing of security for financial assets in order to borrow funds took the form of repurchase agreements (repos) withamaximumremainingtermof4months.Expensesandincomefromthepledgedsecuritiescontinuetobeduetothebank.
Thefurnishingofsecurityintheformofdepositsatbankstookplaceatstandardmarketinterestratesandpredominantlycoversvaluechangesinderivativetransactions.TherelevantremainingtermsareshowninNote(54).
31-12-2010(EUR million)
31-12-2009(EUR million)
Loansandadvancestobanks 341.0 0.0
Loansandadvancestocustomers 0.0 0.0
Financialinstrumentsatfairvaluethroughprofitorloss 0.0 0.0
Financialassets 733.8 688.9
Total 1,074.8 688.9
31-12-2010(EUR million)
31-12-2009(EUR million)
Increase/Decrease (%)
Assets
Loansandadvancestobanks 299.3 350.6 –15
Loansandadvancestocustomers 317.6 232.3 37
Financialassets 3,501.7 3,054.2 15
Total 4,118.6 3,637.2 13
Equity and liabilities
Liabilitiestobanks 152.6 99.3 54
Liabilitiestocustomers 433.0 367.9 18
Securitisedliabilities 1,718.2 1,394.1 23
Subordinatedcapital 0.0 0.0 –
Total 2,303.8 1,861.3 24
Other Disclosures
106
Not
es
Theaboveassetswereassignedassecurityforthefollowingliabilitiesintheamountsstated:
(57) Securities Repurchase Agreements and Securities Lending
31-12-2010(EUR million)
31-12-2009(EUR million)
Liabilitiestobanks 734.7 689.7
Liabilitiestocustomers 0.0 0.0
Total 734.7 689.7
31-12-2010(EUR million)
31-12-2009(EUR million)
Genuinerepurchaseagreementsasarepurchasebuyer(reverserepos) 0.0 0.0
Loansandadvancestobanks
Loansandadvancestocustomers
0.0
0.0
0.0
0.0
Genuinerepurchaseagreementsasarepurchaseseller(repos) 734.7 689.7
Liabilitiestobanks
Liabilitiestocustomers
734.7
0.0
689.7
0.0
31-12-2010(EUR million)
31-12-2009(EUR million)
Loanedsecurities 0.0 0.0
Loanedsecuritiesatfairvaluethroughprofitorloss
Loanedsecuritiesfromfinancialassets
0.0
0.0
0.0
0.0
Borrowedsecurities 0.0 0.0
31-12-2010(EUR million)
31-12-2009(EUR million)
Securitiessoldunderrepurchaseagreements 733.8 688.9
Securitiessoldunderrepurchaseagreementsatfairvaluethrough profitorloss
Securitiessoldunderrepurchaseagreementsfromfinancialassets
0.0
733.8
0.0
688.9
Securitiesboughtunderrepurchaseagreements 0.0 0.0
Other Disclosures
107
Other Notes
(58) Regulatory Information
Therisk-weightedassetvaluesandtheregulatoryequityhavebeenbasedontherulesoftheSolvencyRegulationandonthebasisoftheIFRSsincethereportedyear2008.
Risk-weighted Asset ValuesThebankusesinternalapproacheswithinthescopeofriskdetermination.
TheIRBapproachusedbythebankledtoalowerequitycostin2010comparedwiththeearlierregulation.Inthiscase,theSolvencyRegulationprovidesfortheequitycosttobegraduallyreducedtothelowervalueduringatransitionalperiod.Tothis end, a floor in the risk assets was taken into account in 2010.
Regulatory Equity
Revaluationreservesarenottakenintoaccountintheregulatoryequity.Thebankexerciseditsrighttochooseaccordingly.
31-12-2010(EUR million)
31-12-2009(EUR million)
Contributedcapital 72.0 62.0
Otherreserves 5.8 5.0
Remainingcomponents 0.0 0.0
Core capital 77.8 67.0
Mandatoryconvertiblebond(first-classtier2capital) 8.0 18.0
Subordinatedebtsecurities(creditablepart)(supplementarysection2ndregulation)
29.9 27.8
Supplementary capital 37.9 45.8
Liable equity 115.8 112.7
Tierthreefunds 0.0 0.0
Equity capital 115.8 112.7
31-12-2010(EUR million)
31-12-2009(EUR million)
Riskassets 830.2 875.0
Weightedoperationalrisks 24.1 15.5
Marketriskpositions 7.4 17.0
Floor 39.9 0.0
Total 901.6 907.6
Other Disclosures
108
Not
es
Minimum Capital RatiosThebankhascompliedwiththeregulatoryminimumcapitalratiosin2009and2010.Attherespectiveyear-endsthebankhadthefollowingratios:
Large Borrowers RequirementsIn2010,thebankcompliedwiththeapplicableregulatoryrequirementsforequityandliquidityatalltimes.Likewise,thebankaccommodatedtheregulationsonlargeborrowinglimitsintheyearunderreport.
Onapplicationofthebank,theregulatorybodyCSSFreleasedthebankfromcompliancewiththelargerisklimitforcom-paniesintheNORD/LBgroupinaccordancewithSectionXVI,point24ofCircular06/273.Thereareitemsofaccountsre-ceivablefromgroupcompaniesinthesumofEUR1,722.4million(previousyear.EUR392.8million).
(59) Foreign Currency Volumes
Asat31December2010therewerethefollowingassetsandliabilitiesinforeigncurrencies:
31-12-2010 31-12-2009
Overallcoefficient 12.84% 12.42%
Corecapitalratio 8.63% 7.38%
EUR million USD JPY CHF Other Total
Assets
Cashreserve 0.0 0.0 0.0 0.0 0.0
Loansandadvancestobanks 30.1 0.0 57.9 0.0 88.0
Loansandadvancestocustomers 0.0 63.3 0.0 0.0 63.3
Riskprovisions 0.0 0.0 0.0 0.0 0.0
Financialassetsatfairvaluethroughprofitorloss –325.3 0.0 117.5 0.0 –207.8
Positivefairvaluesfromhedgeaccounting –7.7 439.2 113.1 225.2 769.8
Financialassets 1,772.7 165.6 120.9 242.4 2,301.6
Otherassets 0.0 0.0 0.0 0.0 0.0
Total 1,469.9 668.1 409.5 467.6 3,015.0
Other Disclosures
109
(60) Contingent Liabilities and other Obligations
Liabilitiesfromguaranteesandotherindemnityagreementsincludecreditguarantees,trade-relatedguaranteesandcon-tingentliabilitiesfromotherguaranteesandotherindemnityagreements.
Disclosures on the estimation of financial effects and the uncertainty with regard to the amount or timing of asset outflows andonthepossibilityofadjustmentpaymentsarenotinaccordancewithIAS37.91.
31-12-2010(EUR million)
31-12-2009(EUR million)
Contingentliabilities 0.0 0.0
Contingentliabilitiesunderrediscountedbillsofexchange
Liabilitiesfromguaranteesandotherindemnityagreements
0.0
0.0
0.0
0.0
Irrevocablecreditcommitments 6.6 80.8
Total 6.6 80.8
EUR million USD JPY CHF Other Total
Equity and liabilities
Liabilitiestobanks 98.5 0.0 181.0 0.0 279.5
Liabilitiestocustomers 0.0 0.0 0.0 0.0 0.0
Securitisedliabilities 633.0 439.0 353.1 231.2 1,656.2
Financialliabilitiesatfairvaluethroughprofitorloss 65.2 0.0 1.0 0.0 66.2
Negativefairvaluesfromhedgeaccounting 476.0 224.8 11.1 243.8 955.7
Otherliabilities 0.0 0.0 0.0 0.0 0.0
Subordinatedcapital 30.0 0.0 0.0 0.0 30.0
Total 1,302.7 663.8 546.2 475.0 2,987.7
Other Disclosures
110
Not
es
(61) Subordinated Assets
Assetsareregardedassubordinatediftheclaimstheyrepresentintheeventoftheliquidationorinsolvencyofadebtorareonlysettledaftertheclaimsofothercreditors.ThebankisholdingtwosubordinateissuesfromAustrianbanksinitsowninventory,whichhaveguarantorliabilityfromAustrianfederalstatesaccordingtoformerlegislation.
(62) Events after the Balance Sheet Date
There were no significant events after the balance sheet date of 31 December 2010 and the preparation of the present financial statements by the Board of Directors on 25 February 2011.
Related Parties
(63) Number of Employees
Theaveragenumberofemployeesduringthereportingperiodcanbebrokendownasfollows:
TheemployeesandBoardofDirectorsaresplitdownacrossthefollowingfunctions:
31-12-2010(EUR million)
31-12-2009(EUR million)
Loansandadvancestobanks 45.0 20.0
Loansandadvancestocustomers 0.0 0.0
Financialinstrumentsatfairvalue 0.0 0.0
Financialassets 0.0 0.0
Total 45.0 20.0
Male2010
Male2009
Female 2010
Female 2009
Total2010
Total 2009
NORD/LBCFB 6.8 4.9 2.0 1.8 8.8 6.8
Group 2010 2009
Board 1.0 1.0
Seniorstaff 3.0 2.3
Employees 4.8 3.4
Total 8.8 6.8
Other Disclosures
111
One of the Board positions is filled by Mr Christian Veit, deputy chairman of the Board of Directors of NORD/LB Covered FinanceBankS.A.andofNorddeutscheLandesbankLuxembourgS.A..
(64) Related Party Disclosures
The shareholder NORD/LB Luxembourg qualifies as a related party. NORD/LB (parent company of NORD/LB Luxembourg) andcompaniescoveredbyIAS24.9(f)arealsoregardedasrelatedparties.
NaturalpersonswhoareregardedasrelatedpartiesinaccordancewithIAS24aremembersoftheBoardofDirectorsandSupervisoryBoardofNORD/LBCFBandtheirclosefamilymembers.
Withinthescopeofordinarybusinessactivities,transactionswithrelatedpartiesareconcludedundernormalmarkettermsandconditions.Thesetransactionsaresubjecttothemarketconformitymonitoringusedinthebank.
Thescopeofthetransactionswithrelatedpartiesintheyears2010and2009canbeseenfromtheschedulesbelow:
At31December2010:
KEUR Shareholders Persons in key functions
Other related parties
Outstandingloansandadvances
tobanks
tocustomers
288,832
0
0
5
0
0
Otherassets 106,953 0 92,806
Total assets 395,785 5 92,806
Outstandingliabilities
tobanks
tocustomers
2,153,333
0
0
0
100
0
Otherliabilities 675,822 100 431,381
Total equity and liabilities 2,829,155 100 431,481
Guarantees/sureties granted 0 0 0
Interestexpense 77,102 0 72,314
Interestincome 44,767 0 56,039
Commissionexpense 1,231 0 0
Commissionincome 0 0 0
Otherincomeandexpense 46,583 –797 –7,395
Total contributions to income 13,017 – 797 – 23,670
Other Disclosures
112
Not
es
ThebankhastransferredatotalofKEUR2,538(previousyearKEUR2,041)toNORD/LBLuxembourgandNORD/LBforser-vicesrenderedwithregardtopersonnel,useofbuildingsandothermaterialcosts.At31December2009:
AllpaymentsandloanstoexecutivebodiesinaccordancewiththeprovisionsrelatingtotradearesetoutinNote(66)Re-munerationofandloanstoexecutivebodies.
KEUR Shareholders Persons in key functions
Other related parties
Outstandingloansandadvances
tobanks
tocustomers
286,417
0
0
5
0
0
Otherassets 0 0 2,746
Total assets 286,417 5 2,746
Outstandingliabilities
tobanks
tocustomers
1,445,240
0
0
0
34,400
0
Otherliabilities 49,990 71 20,272
Total equity and liabilities 1,495,230 71 54,672
Guarantees/sureties granted 0 0 0
Interestexpense 78,936 0 –71,497
Interestincome 24,897 0 62,311
Commissionexpense 1,421 0 0
Commissionincome 0 0 30
Otherincomeandexpense –3,337 –603 –19,262
Total contributions to income – 58,796 – 603 114,576
Other Disclosures
113
(65) Members of Executive Bodies and their Positions
Supervisory BoardThebank’sSupervisoryBoardwascomposedofthefollow-ingpeopleintheyearunderreport:
• MartinHalblaub,MemberoftheBoardofDirectorsofNORD/LBNorddeutscheLandesbankGirozentrale,
Hanover(until11January2010,Chairman)
• UlrikeBrouzi,GeneralManagerof NORD/LBNorddeutscheLandesbankGirozentrale, Hanover(since1September2010, Chairmansince17November2010)
• HarryRosenbaum,ChairmanoftheBoardof NORD/LBNorddeutscheLandesbankLuxembourgS.A., Luxembourg(DeputyChairman)
• JürgenMachalett,GeneralManagerof NORD/LBNorddeutscheLandesbankGirozentrale, Hanover• WolfgangGöhlich,GlobalHeadofTreasuryof NORD/LBNorddeutscheLandesbankGirozentrale, Hanover
Members of the Board of DirectorsThefollowingpeopleweremembersoftheBoardofDirec-torsintheyearunderreport:
• MarkusThesen,Plein(Chairman)
• ChristianVeit,Luxembourg(DeputyChairman)
PositionsAsof31December2010thefollowingpositionsweretakenupbythemembersoftheBoardofDirectorsofNORD/LBCFB:
Markus Thesen • InstitutdeFormationBancaireLuxembourg(IFBL), Luxembourg,MemberoftheSupervisoryBoard
Christian Veit • NORD/LBNorddeutscheLandesbankLuxembourgS.A., Luxembourg,DeputyChairman
• NORD/LBG-MTNS.A.,Luxembourg, DeputyChairmanoftheSupervisoryBoard
Other Disclosures
114
Not
es
(66) Remuneration of and Loans to Executive Bodies
(67) Auditor’s Fees
Nofeesinregardtoservicesfortaxadviceorotherfeesshowninthetablewerepaidtotheauditors.TheamountsincludestatutoryVAT.
(68) Deposit Guarantee
ThebankisamemberoftheLuxembourgdepositguaranteeassociation(AssociationpourlaGarantiedesDépôts,ab-breviatedasAGDL).ThecorporateobjectoftheAGDLwasoriginallytoestablishasystemtomutuallysecurecustomers’depositsoftheAGDLmemberinstitutes.
Since2001theAGDLhasalsobeenprotectingcustomers’assetsheldincustody.ThusdepositsandcustodyassetsareguaranteeduptoanamountofEUR100,000andEUR20,000respectively.Intheeventofdefault,theannualpaymentob-ligationforeachmemberoftheAGDLislimitedto5%ofequity.
Sincethebankdoesnotacceptdepositsfromnaturalpersonsorsmallincorporatedcompaniesthereisnoliabilityintheeventofloss.
2010(in KEUR)
2009(in KEUR)
Auditor’sfeesfor:
Auditing
Otherconfirmationservices
Otherservices
152
35
14
132
109
0
2010(in KEUR)
2009(in KEUR)
Paymentstoactiveexecutivebodymembers
Extendedmanagement*
BoardofDirectors
767
30
573
30
Pensionobligations
Extendedmanagement*
BoardofDirectors
100
0
71
0
Advances,loansandliabilities
Extendedmanagement*
BoardofDirectors
5
0
5
0
*BoardofDirectorsandseniorstaff
Other Disclosures
Annual Report 2010
NORD/LB Covered Finance Bank S.A.
116
Responsibility
Statement
We confirm to the best of our knowledge that the annual financial statements, in accordance with the applicable account-ing standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the bank, and that the managementreportincludesafairreviewofthedevelopmentandperformanceofthebusinessandthepositiontogetherwithadescriptionofthemainopportunitiesandrisksassociatedwiththeexpecteddevelopmentofthebank.
Luxembourg,28February2011NORD/LBCoveredFinanceBankS.A.
MarkusThesen ChristianVeit
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Responsibility Statement
Annual Report 2010
NORD/LB Covered Finance Bank S.A.
118
Auditor’s Report
TotheBoardofDirectorsofNORD/LBCoveredFinanceBankS.A.26,Routed’ArlonL-1140Luxembourg
Report on the Financial Statements
Inaccordancewiththeinstructionsreceivedfromthebank’sBoardofDirectorson16November2010,wehaveauditedthe attached annual financial statements of NORD/LB Covered Finance Bank S.A., which comprise the balance sheet at 31 December2010,theincomestatement,thestatementofincomeandexpense,thestatementofchangesinequity,thecashflow statement and the notes for the financial year ended on this date.
Responsibility of the Board of Directors for the Annual Financial StatementsThe Board of Directors is responsible for the compilation of the annual financial statements and the representation that correspondstotheactualcircumstancesinaccordancewiththeInternationalFinancialReportingStandards(IFRS),asapplicable in the European Union for the compilation and representation of the annual financial statements, and for the establishmentofaninternalcontrolsystemwhichtheBoardofDirectorsconsidersnecessaryforthecompilationandrep-resentation of the annual financial statements.
Auditor’s ResponsibilityOur responsibility is to express an opinion on these financial statements based on our audit.
We carried out our audit of the annual financial statements according to the International Standards on Auditing adopted bytheCommissiondeSurveillanceduSecteurFinancier(CSSF).Thesestandardsrequirethatwecomplywithethicalre-quirements and that we plan and perform the audit to obtain reasonable assurance that the financial statements are free frommaterialmisstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements.Theselectionoftheproceduresdependontheauditor’sjudgement,aswellastheassessmentoftheriskofmaterial misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in ordertodesignauditproceduresthatareappropriateinthecircumstances,butnotforthepurposeofexpressinganopin-ionontheeffectivenessoftheentity’sinternalcontrol.
Anauditalsoincludesevaluatingtheappropriatenessoftheaccountingpoliciesusedandthereasonablenessofaccount-ing estimates made by the Board of Directors, as well as the overall presentation of the financial statements.
We believe that the audit evidence obtained is sufficient and appropriate to provide a basis for our opinion.
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Auditor’s Report
119
OpinionWe believe that the annual financial statements, in accordance with the International Financial Reporting Standards as applicable in the EU for the compilation and representation of the annual financial statements, give a view that represents the actual circumstances of the assets and financial situation of NORD/LB Covered Finance Bank S.A. at 31-12-10 and of the earnings and payment flows for the financial year ending on this date.
Report on other legal and regulatory Requirements
The management report for financial year 2010, which is the responsibility of the Board of Directors, is in accordance with the annual financial statements.
ERNST&YOUNGSociétéAnonymeCabinetderévisionagréé
ChristophHAAS
Luxembourg,28.February2011
Auditor’s Report
Annual Report 2010
NORD/LB Covered Finance Bank S.A.
121
Report of the Supervisory Board
Proposal to be Put to VoteTheBoardofDirectorsofthebankbriefedtheSupervisoryBoardandthecommitteesithasappointedintheyearunderreportregularlyaboutthedevelopmentofthebusinessandthepositionofthebank.TheSupervisoryBoardmetonatotalofthreeoccasionsduringtheyearunderreport2010.
TheSupervisoryBoardpassedresolutionsonthebusinessmatterspresentedtoitandonothermattersrequiringthedecisionofthisbodyinaccordancewiththeArticlesofAssociationandregulationspertainingtotheseArticlesofAssocia-tion.Fundamentalissuesrelatingtobusinessstrategyandoperationswerediscussedindetailatseveralmeetings.
Ernst & Young S.A., Luxembourg has audited the financial statements of NORD/LB Covered Finance Bank for the year under report 2010 and issued it with an unqualified auditor’s opinion. In addition, the auditor attended the meeting to discuss the financial statements held by the Supervisory Board on 16 March 2011 and reported on the results of the audit.
TheSupervisoryBoardapprovedtheresultsoftheauditconductedbytheauditorsand,afterconsolidatingtheresultsofitsownassessment,didnotraiseanyobjections.
At its meeting on 16 March 2011, the Supervisory Board approved the management report and the financial statements at 31December2010,whicharethereforeformallyapproved.
TheSupervisoryBoardproposestotheAnnualGeneralMeetingtoapprovetheactionsoftheBoardofDirectorsandtocarryforwardthenetincomefortheyearunderreport2010ofNORD/LBCoveredFinanceBank–afterallocationtothestatutoryandvoluntaryreservesofEUR2.0millionandEUR1.0millionrespectively–inthesumofEUR4.2million.
TheSupervisoryBoardthanksthebank’sBoardofDirectorsfortheirfaithfulcooperationandexpressesitsappreciationtotheBoardandtoallthebank’semployeesfortheworkperformedbythemin2010.
LuxembourgMarch2011
UlrikeBrouziGeneralManagerNORD/LBNorddeutscheLandesbankGirozentrale,Hanover
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Report of the Supervisory Board
Address26,routed’ArlonL-1140LuxembourgR.C.S.LuxembourgB116546
Mailing AddressP.O.Box121L-2011Luxembourg
TelephoneGeneral (+352)452211-1ALM (+352)452211-411Telefax (+352)452211-411 General (+352)452211-321 Settlements–MoneyMarketandForeignExchange (+352)452211-363 Settlements–Securities (+352)452211-351 Loans (+352)452211-496 Accounting,Controlling (+352)452211-349 IT (+352)452211-381 HumanRessources (+352)452211-319 Security&Administration
S.W.I.F.T.NOLALULL SupervisionCommissiondeSurveillanceduSecteurFinancier [email protected]