sitecontent

• WestLB Group posts pre-tax profit of € 604 million after nine months 
• Customer business further strengthened – net interest income rises by € 51 million 
• Sustainable reduction in costs of € 127 million 
• CEO Heinz Hilgert: “The measures to streamline and focus the Bank are beginning to bite.”

WestLB already published key information about its results for the first nine months of the year on November 13, 2008. As announced, the Bank today presented its detailed Interim Report.

WestLB Group generated a profit before taxes of € 604 million (previous year: € -113 million) in the first nine months of the current financial year. Profit after taxes amounted to € 532 million (previous year: € -145 million). Despite the considerable market distortions caused by the financial crisis and the perceptible slowdown in the economy, WestLB was able to expand its customer business and achieve significant cost savings. Restructuring expenses, higher risk provisions and valuation losses on securities caused by acute market distortions, as well as the effects from the risk shield at the end of the first quarter, have all been included in the result.

Heinz Hilgert, Chairman of the Managing Board of WestLB AG, said: “The comprehensive measures to streamline and focus the Bank on its core competencies which we have taken are beginning to bite. Moreover, we are in a much better position today than many of our competitors thanks to the timely implementation of the risk shield by our owners. We are protected from material risks arising from the financial market crisis.” The chairman also emphasised that WestLB would play an active part in the forthcoming consolidation process.

Net Interest Income Rises to € 897 Million – Costs Reduced by € 127 Million

Net interest income rose by € 51 million to € 897 million (previous year:
€ 846 million) in the first nine months of the year, an increase of 6% on the year-earlier period. Even in the challenging third quarter, net interest income was higher than in the preceding quarter and in the same quarter of the previous year. The increase, which was achieved despite the burdens from the overall weak market environment and the deterioration in refinancing conditions, was driven in particular by a healthy customer and treasury business.

Customer business has been selectively expanded. WestLB has acquired over 230 new mid-cap clients, 60 more than in the same period of the previous year. WestLB also achieved improvements in the customer business in the areas of project finance, commercial real estate and payments. In the first nine months of the year, for example, the Bank reinforced its leading position in the project finance field, improving its global ranking from 18th to 7th (source: Thomson Reuters). In a global survey of clients, project sponsors and developers conducted by Project Finance magazine, WestLB was voted the bank with the “Best Overall Service as a Project Lender”.

Due to the worsening economic outlook, the impairment charge for credit losses was increased to € 345 million in the third quarter. Rating downgrades for individual borrowers and global charges required at the portfolio level were the main causes for this. The Bank made full allowance for its exposure to Icelandic banks amounting to € 196 million. The charges were allocated to the impairment charge for credit losses, the net trading result and the result from financial investments in accordance with the classification of the items. The gross allocations to credit risk provisions are in line with the previous forecast for the year, with full account being taken of all discernible risks.

Despite the restraint shown by customers due to the economic downturn, net fee and commission income decreased only moderately in the first nine months from € 322 million to € 289 million. Fee and commission business for the quarter proved highly stable overall, with third-quarter net fee and commission income up € 7 million from a year earlier. There were encouraging gains in the lending and syndicated lending business as well as payment transactions, compared with a drop in securities and custodial business.

The net trading result totalled € 631 million (previous year: € -494 million). The ring-fence gain in connection with the risk shield implemented at the end of the first quarter accounted for the bulk of this increase. The main offsetting items included valuation losses from securitisations, most of them state-guaranteed, valuation losses from public finance portfolios and valuation losses from portions of our exposure to Icelandic credit institutions. Through application of the amended IAS 39, financial instruments were reassigned from the held-for-trading category to the loans and receivables category. These reclassifications made it possible to avoid € 150 million in valuation losses otherwise reportable in the statement of income.

The decline in the result from financial investments from € 375 million to € 52 million is predominantly attributable to gains earned in the prior year on the sale of holdings in our private equity and equity investments business. We also incurred a loss on financial investments which was attributable to write-downs on available-for-sale securities.
There were total valuation losses of € 232 million on asset backed securities and public finance portfolios in the first nine months of the year. As a result of the market distortions, securities backed by U.S. student loans alone accounted for € 73 million of these losses; our public finance portfolios, which consist mostly of government bonds with very good ratings, accounted for € 129 million.

The measures introduced to reduce personnel and operating costs have begun to bite. Administrative expenses fell sharply in the first nine months by 11% from € 1,167 million in the year before to € 1,040 million. The cuts in personnel expenditure were achieved largely because of the reduction in headcount by 269 to 5,878 full-time employees and lower expenses for non-linear salary components. Other administrative expenses were also below the level of the previous year. The savings were partly offset, however, by one-off restructuring and project expenses.

The net figure for other operating income and expense, at € 237 million, was € 226 million above the year-earlier level. The deconsolidation of various structured investment vehicles in connection with the risk shield had a considerable bearing on this improvement. The resulting recognition of the ring-fence gain neutralised a significant portion of the charges to net interest income and the net trading result incurred prior to the transfer of the structured investment vehicles in the first quarter of 2008.

Expenses related to the restructuring measures totalled € 226 million in the first nine months of 2008. The sum of € 94 million was covered by the reversal of provisions from an earlier restructuring programme. The sum of € 117 million was reported directly as restructuring expenses and € 15 million as other administrative expenses. Accordingly, we now expect the expenditure for achieving the planned savings in personnel and operating costs to be less and reduced the net € 204 million expensed as restructuring expenses in the second quarter of 2008 by € 87 million.

Customer Business Further Expanded

Customer business was further expanded in the first nine months of the year. Operating income improved from the previous year despite the challenging market environment. Even with higher refinancing costs, net interest income in the Corporates & Sparkassen segment increased from € 467 million to € 553 million. The rise was largely attributable to improved real estate business and the positive development of payments business. The segment´s net fee and commission income, at € 287 million, was on a par with the year-earlier period despite the economic downturn. The risk audit performed in the second quarter, together with rating downgrades for individual borrowers, had a contrary effect. The segment´s profit before taxes amounted to € -7 million, which is attributable exclusively to the higher impairment charge for credit losses.

Pre-tax profit in the Capital Markets segment fell to € -555 million (previous year: € -327 million). The collapse of Lehman Brothers, in particular, led to further extreme credit spread widening in connection with state-guaranteed securitisations, public finance portfolios and exposure to Icelandic banks. In addition, the weak stock markets and, more particularly, the persisting uncertainty in the financial markets resulted in a significantly lower securities business.

In the Asset Liability Management segment, pre-tax profit increased by € 142 million to € 200 million compared to the previous year. In an extremely volatile market environment, the segment successfully exploited available opportunities in operational treasury activities and markedly increased income in the treasury business. Another positive contribution came from the active management of credit collateral. Earnings were hit, however, by higher costs for liquidity building. WestLB AG´s liquidity ratio stood at 1.12 as of September 30, 2008.

Total Assets Strategically Reduced

The scheduled decrease in WestLB Group´s total assets by € 13.5 billion to € 273.1 billion in the first nine months of the year is predominantly attributable to the systematic reduction in non-customer-related assets. The decrease was slowed, among other things, by the stronger U.S. Dollar in the third quarter.

As a result of the amendment of IAS 39, we reassigned certain trading assets and financial assets with a total carrying value of € 4.6 billion to loans and advances to banks and loans and advances to customers effective July 1, 2008. Loans and advances to customers rose by € 24.6 billion to € 105.9 billion, mainly because of the acquisition, in connection with the risk shield, of the notes issued by the independent special purpose vehicle to fund its operations. Whilst loans and advances to banks rose by € 4.9 billion to € 16.2 billion, trading assets fell by € 27.7 billion to € 65.7 billion. Financial investments decreased by € 9.3 billion to € 12.6 billion.

On the refinancing side, liabilities to banks fell by € 5.3 billion to € 21.8 billion, whilst liabilities to customers rose by € 0.4 billion to € 25.3 billion. Certificated liabilities decreased by € 8.1 billion to € 34.9 billion, predominantly because of repayments and the changes made to the scope of consolidation in the first quarter of 2008. The Bank´s equity rose by 12% to € 5.0 billion. Whist the overall ratio increased from 8.6% to 8.8%, the core capital ratio fell slightly from 5.6% at the end of 2007 to 5.4%, predominantly because of a change in the calculation of the ratio, which effective January 1, 2008 is determined by comparing core capital to total risk-weighted assets (under BIS, core capital was divided solely by counterparty default risks). The increase in risk-weighted assets, particularly in the third quarter of the year, is attributable, moreover, to rating downgrades in the lending business and, especially, to securitisations, above all the refinancing notes acquired as part of the risk shield. The refinancing of the special purpose vehicle set up within the framework of the risk shield is currently being restructured by an external credit rating of the notes. This will lead to a significant reduction in risk-weighted assets. Taking this effect into account, the core capital ratio stood at 6.8% at the end of the third quarter.

Restructuring Making Good Progress

WestLB is making considerable progress with the restructuring and realignment of its business model. Important measures for streamlining and focusing the Bank on its core business segments (Capital Markets, Verbund & Mid Caps, Real Estate Finance and Transaction Banking) have meanwhile been implemented or initiated. The focus is on a reduction of risk-weighted assets, a sustainable lowering of costs and the systematic expansion of the customer business. Accordingly, the organisational structure has been streamlined and the Bank has successfully begun to reduce its total assets in line with the new strategic orientation. Furthermore, the negotiations with the staff council concerning a reconciliation of interests and a redundancy scheme were concluded at the end of September. Under the agreement reached, the required headcount reductions are to be achieved as far as possible in a socially acceptable manner and without compulsory redundancies. Of the targeted reduction in headcount of a minimum 1,350 full-time employees by the end of 2009, approximately 400 are expected to have been achieved by the end of 2008.

Outlook

WestLB is working diligently to implement the restructuring process introduced and take steps to further strengthen its business model in an environment which is still dominated by the crisis in the financial markets. The demand for complex, innovative financial products has dropped considerably. A decrease in volumes coupled with a shift towards simple, standardised products, which offer lower margins, has put pressure on the general earnings trend. Adding to this effect is the unprecedented volatility seen in the market value of securities portfolios, irrespective of the quality of their underlying assets, owing to the escalation of the crisis in September and October 2008. Chief Financial Officer Dr. Hans-Jürgen Niehaus said: “WestLB remains cautious for the full year 2008 because of these market distortions and the as yet unclear impact of reclassifications and other measures designed to bolster the financial statements. Further burdens have to be expected.”

Enclosures:
Group Statement of Income January 1 – September 30, 2008
Group Balance Sheet at September 30, 2008

The full interim report is available on our website at www.westlb.com/ir
The Annual Report 2007 can be inspected and downloaded at www.westlb.com