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OPERATIONS REPORT

GENERAL PERFORMANCE

DZ PRIVATBANK S.A. reported earnings after taxes of EUR 11.4 million for the 2016 financial year. The good level of operating profit of EUR 60.3 million was impacted by a number of one-off effects. The costs in connection with the closure of a subsidiary company, the collective general valuation adjustment and the allocation to provisions for depositary business risks reduced the annual financial performance by EUR 46.4 million. During the year under review, the Bank transferred EUR 1.8 million to the fund for general banking risks.

The balance sheet total as at 31 December 2016 rose slightly by EUR 0.2 billion to EUR 15.9 billion.

ASSETS

Amounts due from banks totalled EUR 4.1 billion (2015: EUR 4.3 billion), with EUR 0.6 billion (2015: EUR 0.6 billion) originating from currency loans to cooperative banks.

Loans and advances to customers decreased to EUR 5.5 billion (2015: EUR 5.7 billion). They included an amount of EUR 4.9 billion (2015: EUR 5.2 billion) customer loans guaranteed by local cooperative banks (LuxCredit). Investments in securities fell slightly by EUR 0.1 billion to EUR 4.0 billion. These included EUR 2.5 billion with banks and EUR 1.2 billion with public bodies. Certificates eligible for refinancing with the European Central Bank made up 86% of fixed-income securities.

LIABILITIES

Securitised liabilities rose by EUR 0.8 billion to EUR 4.4 billion, which was primarily attributable to higher demand due to the Bank's good rating.

As at the balance sheet date, amounts due to banks decreased by EUR 0.6 billion to EUR 2.0 billion; of this amount, 19% was attributable to cooperative banks.

Customer deposits rose by EUR 0.1 billion to EUR 8.4 billion. These consisted of deposits from private legal entities amounting to EUR 6.8 billion and deposits from natural persons amounting to EUR 1.6 billion. Together with securitised liabilities, these deposits represented 81% of the total refinancing funds.

According to the calculation regulations of the European CRR/CRD IV solvency guidelines, the Bank holds equity capital totalling EUR 653.2 million. The equity-to-capital ratio of DZ PRIVATBANK S.A. as at the balance sheet date was significantly higher at 19.9% than the statutory prescribed minimum standard in relation to the risks assumed.

PROFIT AND LOSS STATEMENT

Interest income including dividend income rose by 14% to EUR 88.8 million (2015: EUR 77.9 million). The reason for the increase was, in particular, a EUR 9.0 million boost in positive contributions from shares in affiliated companies.

As regards commissions income, the Bank had a slight decrease of barely 1.5% to EUR 124.9 million (2015: EUR 126.8 million) due to the risk aversion of investors, with major assets still being held in liquid investments and securities being avoided.

Financial transaction income of EUR 11.7 million (2015: EUR 20.2 million) resulted mainly from the EUR 7.8 million from currency brokerage and from the realised profits from sales of securities of EUR 2.2 million.

General administrative expenses, excluding depreciation on fixed assets, rose to EUR 154.9 million (2015: EUR 148.3 million). The EUR 5.9 million rise in personnel expenses to EUR 100.5 million was attributable to the increase in the workforce due to centralisation measures, regulatory issues and an expansion in business. General administrative expenditure rose by EUR 0.7 million to EUR 54.4 million (2015: EUR 53.7 million).

Scheduled depreciation on intangible and tangible assets fell by 39% to EUR 10.8 million (2015: EUR 17.5 million).

APPROVAL OF THE ANNUAL FINANCIAL STATEMENTS AND APPROPRIATION OF PROFIT

The Board of Management proposed to the ordinary general meeting that the annual financial statements be approved and that an unchanged dividend of EUR 0.5 per share (totalling EUR 11.4 million) be paid to shareholders from the annual profit.

EMPLOYEES

At the balance sheet date the Bank had 923 employees; this figure corresponds to an FTE figure of 847.

RISK MANAGEMENT SYSTEM

An important feature of banking control is to ensure an effective system of risk management, which is the precondition for quantifying and controlling market, liquidity, default and operational risks, while at the same time enabling business opportunities to be seized. This should be regarded, in particular, against the backdrop of overall operations, sophisticated products and multi-layered risk factors.

The methods and procedures used within the risk management system and the stages of the process for identifying, quantifying, analysing, monitoring and controlling risk are regularly updated and improved. The Bank has an integrated risk-monitoring and control system to accomplish these tasks. All the risk limits and the Bank’s ability to bear risk are monitored at fixed intervals and the Bank’s risk, capital and liquidity strategy is adjusted when necessary.

Functioning independently, the Risk Control Department continuously ensures that all the measured risks remain within the limits approved by the Supervisory Board. All forms of risk are monitored and aggregated daily throughout the entire Bank and at Group level. All relevant committees and departments are kept up to date regarding the Bank's risk situation.

In addition to the balance sheet assets and liabilities, the Bank also uses derivative financial instruments to control risk. These essentially comprise currency and interest futures transactions. All these instruments are taken into account in full when controlling and monitoring market, default and liquidity risks.

Over the past year, the Bank complied, without exception, with the supervisory regulations relating to equity capital cover, liquidity and credit limits.

OUTLOOK

No significant events relating to the 2016 financial year occurred after the balance sheet date.

In view of the improving global economic outlook towards the end of 2016, DZ PRIVATBANK is cautiously optimistic about the new year. Important economic indicators in the USA, Japan, Europe and also major emerging countries have, after an initially weak start to the year, recently shown visible gains. This is particularly reflected in the recovery of commodities markets.

In Europe, the still weak euro and the continuing expansive monetary policy should continue to support the economic momentum. Although during the year there were signs of a slow move away from the current extremely expansive trend, a standardisation of monetary policy in the eurozone cannot, however, be expected for some time. The resulting improvement in the employment environment continues to favour private consumption; nevertheless, in view of the rising pressure on prices, the contributions to growth from this will not reach the previous year's level.

The growth dynamic in the USA is expected to increase. Visible momentum should come in particular from the recovery in the energy sector. In view of the rallying economic dynamic, the US central bank is likely to further tighten its monetary policy. Increased growth is also expected in Japan. In China, the government will definitely oppose a rapid decline in growth. However, the global economy is also exposed to risks. The still unclear economic policy of President Donald Trump is cause for considerable uncertainty. The UK Brexit negotiations and consequences will also be a stress factor. The eurozone's ongoing sovereign debt and banking crisis is also the cause of continuing uncertainty on the markets in 2017.

In view of this unsteady environment, investor sentiment is only cautiously optimistic. This is due to interest rate products not being expected to produce attractive returns in view of the still very low gains at present and the risks of price falls. On the other hand, the outlook on the international equities markets looks better, but the high risk environment will once again mean marked levels of volatility.

In our three business lines - private banking, loans and fund services - we expect continued growth in the current year. Nevertheless, the burdening effects of low and negative interest rates, pressures on margins and regulatory issues are still present, as is the case for the whole of the financial sector. Despite the careful cost management in our Bank, these continuing negative factors are likely to impact our earnings situation. As a consequence, we are also pursuing the initiatives to meet the constantly evolving digitisation strategy for DZ PRIVATBANK and establishing a management innovation approach across all sites.

PRIVATE BANKING

Along with DZ PRIVATBANK's business volume of over EUR 18 billion, in the relevant segments of high net
worth customers and private banking customers with assets of EUR 250,000 upwards (BVR net worth pyramid),
the cooperative banking group is now one of the leading providers to high net worth corporate and private customers.

This joint positioning was achieved as a result of DZ PRIVATBANK, along with its two foreign sites and ten sites located in Germany, establishing itself as a central subsidiary service provider in the cooperative finance group. The private banking market initiative launched in 2011 was successfully completed. The challenges which need to be anticipated in the market and competitive environment are, however, manifold. Cooperative banks are forming increasingly large structures by merging. Their cooperative private banking expertise centres are facing different demands, primarily in consultancy services and also in products and services, which need to adjust to market conditions and the continuing low-interest phase. The upcoming regulatory measures (including MiFID II) will create changes to the existing subsidiary partnership models. Customer expectations in the business segment continue to evolve with a growing need for diversified and customised products and solutions.

DZ PRIVATBANK has taken decisive steps to change course to meet these requirements for specific target customers. Due to proven expertise in attracting new customers, gross inflows of EUR 3.9 billion were generated from all sites, a remarkable result in a competitive market environment. This exceeds the growth achieved in previous years and confirms the successful joint servicing of target customers with roughly 500 partner banks. With AuM exceeding EUR 500 million in asset management for foundations, the excellent sales cooperation with the cooperative banks and the convincing services targeted at specific groups is exemplary.

In close cooperation with the partner banks, DZ PRIVATBANK is prioritising improving profitability in the business line. For this purpose, in the context of sales planning in close association with DZ Bank Group companies,
sales activities are being expanded and intensified. More consideration is being given to the integral approach
by means of ethically sustainable asset management. We are also working on expanding our portfolio management approaches. As part of the advisory quality process introduced by the cooperative banking group, DZ PRIVATBANK, along with BVR and selected cooperative banks, is setting the course for a customer-focussed expansion stage.

LOANS

DZ PRIVATBANK is well established as a financial specialist for monetary financing in the cooperative banking group. With a wide range of options for loans in all currencies marketed under the product name of LuxCredit,
the Bank intends, along with the cooperative banks, to further consolidate its competitive position. The lending business will, in 2017, once again be characterised by a diversification of the currency loan portfolio. The high proportion of loans thus far in Swiss francs under LuxCredit is therefore likely to further decrease. New business in Swiss francs is still especially concentrated in cross-border commuting regions, where customers should benefit from the continuing low interest rate environment. With the decline in Swiss franc loans, financing in euros and other currencies is becoming more and more the focus of our sales activities. Variable rate euro loans successfully round off the cooperative banks' own product offer.

We expect a further rise in demand for flexible finance options for pre- and intermediate financing as seasonal or EURIBOR loans with negative reference rates. By taking out loans in the relevant currency, future currency income, such as export losses, of an equivalent value of EUR 10,000 and upwards, can be hedged at the interest level of the target currency simply, flexibly and cheaply against possible currency fluctuations. This offer is increasingly appealing for corporate customers. For private customers, the flexibility of LuxCredit short-term and variable product options, for instance as a variable component for long-term financing of housing construction, is the most common source of demand and is driving growth accordingly. Simple and more secure processes are convincing our alliance partners to offer standardised euro loans as general consumer loans via DZ PRIVATBANK.

The market success of the cooperative banks in LuxCredit is conditional upon the constant improvement and expansion of our customer service concept, which encompasses on-site exchange in the cooperative banks along with training courses in our many forms of application. More training has been arranged for 2017 in the usage of our LuxCredit model calculator in the agree 21 bank application. Strategy and sales meetings, and on-the-job training along with regular telephone and mail contact are still important instruments in our sales support. Via various media, we notify our partner banks at regular intervals of sales and service topics. The new opportunities offered by digitalisation will also offer considerable advantages for targeted and timely communication. Our offer of webinars, which already had good participation rates last year, will be further expanded in 2017. They are designed and implemented based on specific product topics or individually for cooperative banks.

At a low administrative cost, LuxCredit finance supplements the product range of the cooperative banking group economically and flexibly. We would like to continue to maintain this standard.

FUND SERVICES

In 2017, DZ PRIVATBANK intends to generate further profitable growth in the fund services business segment and to consolidate its strong competitive position, which has been constantly expanded over the past few years with extensive fund services and the specialist expertise recognised in the market by the cooperative banking group companies, banks and independent asset managers The intensive cooperation with Union Investment, DZ Bank Group’s investment company, has been reflected in the comprehensive perception of the depository function and is also reflected in its growth strategy abroad.

In the business with fund initiators such as banks, asset managers or family offices, DZ PRIVATBANK, together with its IPConcept subsidiaries in Luxembourg and Switzerland, is planning to further expand its market leadership in its core German-speaking markets. By constantly optimising procedures, the modern and powerful IT infrastructure and the skills of our employees, customised service packages will be offered across the entire value-added fund management chain. These customised packages must fulfil the many and completely different needs of the fund initiators in order to create significant added value and to generate future growth for them.

In 2017, a further priority will be to adapt to new regulatory conditions. Primarily, the revision of the Markets in Financial Instruments Directive (MiFID II), which aims for increased market transparency, investor protection and harmonisation across the EU in the supervision of financial service companies, requires the commitment of substantial resources.

THANKS

We would like to thank our employees for their tireless service and outstanding commitment, which significantly contributed to the company’s success and to the achievement of our common goals in 2016. Our sincere thanks also go to the cooperative banks and to our private and institutional customers for their confidence in us.

Luxembourg, 17 February 2017

The Board of Management

Dr. Stefan Schwab
Ralf Bringmann
Richard Manger
Dr. Frank Müller