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Capital B

ank 2008 Annual R

eport

Capital B

ank G

roupG

razS

alzburgVienna

Kitzbühel

Prague

According to an old Indian proverb, “When you realize you’re riding a dead horse, it’s time to dismount”. Strangely enough, not everyone opts for this solution. On the contrary, they set up a task force to resuscitate the horse or as-sume, as other people are riding dead horses, that this is the norm, or they invest more money in a bid to at least im-prove the horse’s performance in the future.

One of the most important skills in the financial world is the ability to make an accurate analysis. A stronger whip or a different rider would be the wrong way to address the scenario described above. However, there is no need to lose all hope. Horses have always met their maker and will continue to do so. What is important is to keep look-ing ahead, because a crisis is often the best catalyst for innovation. An example, you say? A few years ago the dot.com bubble burst, but it did not mark the demise of e-business. On the contrary, behemoths such as eBay and Google were established during the dot.com crisis. In terms of the Indian proverb, this means trusting in new horses, saddling them, bridling them and hitting the road. Google and eBay should be an example to us: horse and rider hit the road in the midst of the crisis and have been on a highly successful course ever since.

Our guest author for this an-nual report is Martin P. Selig-man, a pioneer of positive psychology who, by definition, believes that an optimist is slumbering in each of us and that it is precisely in times such as these that we need to wake them up.

DIRECTORS’ BLURBCHRISTIAN JAUKCHIef exeCutIVe OffICeR

there are few things that give more pleasure than analyzing a football match once the final whistle has blown. Obviously the four-man backfield defence was the wrong formation against these opponents and the midfielder was taken out far too early. Which takes us straight to the question of what is the coach doing for his money? But we all have 20/20 hindsight and surely it is unfair to judge after the event with-out having made a prognosis before it. the same applies in the financial world. No-one knows exactly what the con-sequences of a decision will be, which is why competition is so important. trying out various possibilities is the best way of finding the right solu-tion. People are successful when they can think freely, can think independently and can think optimistically; a principle that we have always felt duty bound to apply.

CONSTANTIN VEYDER-MALBERGMeMBeR Of tHe BOARd

A lot of people hear the word “crisis” and are overwhelmed by anxiety. Others hear the word “crisis” and start talking opportunity. We see a situ-ation in which initiative has a chance. to be sure, good news has been thin on the ground over recent months and anyone who refused to plug into the general mood of doom and gloom was at best labelled a congenital optimist, more usually an ignoramus. But no-one kept their cards close to their chest; on the contrary, they laid their cards on the table, which is always a good move in times of crisis.

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Performance and Figures

31.12.2007EUR K

735,829173,657234,691

22,55817,663

24.0 %5,143,665

171

31.12.2006EUR K

563,684133,356240,44521,90116,840

22.1 %4,170,209

141

31.12.2008EUR K

731,082143,447236,553

11,781175

24.6 %3,900,318

187

Balance sheet totalReceivables due from customersLiabilities due to customersOperating profi tProfi t on ordinary activitiesEquity capital in % of the assessment basis according tosection 22 para. 1 BWG (Austrian Banking Act)Volume of securities accountsEmployees (without subsidiaries)

PERFORMANCE AND FIGURES OF

CAPITAL BANK - GRAWE GRUPPE AG

58

Board of Directors

Christian Jauk, MBAChief Executive Offi cer

Mag. Constantin Veyder-MalbergMember of the Board

Supervisory Board

Mag. Dr. Othmar EdererChief Executive Offi cer of Grazer Wechselseitige VersicherungChairman of the Supervisory Board

Dr. Siegfried GriggDeputy Chief Executive Offi cer of Grazer Wechselseitige VersicherungDeputy Chairman of the Supervi-sory Board

DDIng. Mag. Dr. Günther PuchtlerMember of the Board of Directors of Grazer WechselseitigeVersicherungMember of the Supervisory Board

Dr. Dolf StockhausenIndustrialistMember of the Supervisory Board

Statutory Bodies of Capital Bank – GRAWEGruppe AGin the 2008fi nancial year

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Members Nominated by the Works Council

Rudolf LaudonChristina Wolf

Representatives of the Regulatory Authorities

Oberrätin Mag. Andrea MörtlState Commissioner

Mag. Peter MaerschalkDeputy State Commissioner

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2008 was the most diffi cult year for the global banking industry for decades. Capital Bank – GRAWE Gruppe AG (“Capital Bank”), a bank which focuses on private and invest-ment banking, was not able to escape this development in the last fi nancial year. The business model is too oriented on the performance of national and international fi nancial markets. However, the operative business mostly achieved the budget targets. The individual business divisions experienced greatly vary-ing performances, however. The overall results suff ered from the – in part very surprising – risk components.

In Investment Banking, the bank had to adjust its capacities to the changes, caused by the enormous increase in volatility on the stock market with simultaneously large falls in liquidity and lower trading volumes. In Shares, we are concen-trating on traditional equity sales with institutional customers. The Leveraged Finance and Corporate Finance divisions were positioned defensively as much as possible in the last fi nancial year because of the

Manage-ment Re-port 2008 of Capital Bank – GRAWE Gruppe AG

61

deteriorating market environment in the credit market.

The most signifi cant division, Private Banking, was restructured in 2008 as a result of effi ciency and costs considerations in order to allow for the altered general conditions. As a result, Corporate Invest-ments, which specialises in looking after corporate customers, Private Banking International and Private Banking Salzburg were merged and placed under a uniform management. The integration should put the bank in a stronger position, which is underlined in 2009 with a new location in Salzburg. The Profi t Centers in Graz and Vienna were able to defend their market position, even if income was down. The Family Offi ce remained true to its core business of looking after family businesses and private founda-tions but, like Private Banking, was also unable to avoid the crisis on the fi nancial markets and recorded a fall in customer securities volumes.

The third division, the so-called “platform business”, where Capital Bank’s role is reduced to the custodian of customers of independent licensed fi nancial service providers, recorded a considerable reduction in transaction volumes because of the negative performance of the fi nancial markets, on one hand, and due to the structural change of the market for independent fi nancial services providers on the other. In the last few weeks, an increase in this business was detected. In the 2008 fi nancial year, the platform recorded total revenue of EUR 682 million and

62

18,000 new custodian accounts were opened, bringing the total to around 110,000 custodian accounts as at 31.12.

Altered customer behaviour, and lower transaction volumes, resulted in the need to make adjustments to staff and services. These structural measures, which should guarantee the success of Capital Bank over the long-term, derive from a medium-term crisis situation.

In the last fi nancial year, Capital Bank and HYPO-BANK BUR-GENLAND AG (“Bank Burgen-land”), together with their owner Grazer Wechselseitige Versicherung AG (“GRAWE”), reorganised their banking investments. The aim of this cooperation was to create a uniform banking group in order to optimise the banking activities of the GRAWE Group. In general, the main focus was on strategic consid-erations, such as the expansion of business and quality synergies, equity optimisation, reinforcing the competitive and success factors, and aspects of a joint tax group. Costs synergies did not represent a pri-

63

mary strategic goal of this cooperation. The realign-ment of the GRAWE Group’s banking activities was successfully completed and Capital Bank, including its subsidiaries and participations, were brought into Bank Burgenland.

In autumn 2008, the wholly-owned subsidiary of Capital Bank, Capital Bank International – GRAWE Group AG was renamed Brüll Kallmus Bank AG (“Brüll Kallmus Bank”). The focus of Brüll Kallmus Bank lies in looking after institutional customers in the areas of bonds, investment banking consultancy and alternative investments.

Capital Bank maintains branches in Graz, Salzburg, Kitzbühel and Vienna and a representation in Prague.

Capital Bank is constantly working to maintain the educational standards of its employees at a very high level. This is why numerous internal and external training courses have been held. Together with Karl-Franzens Universität, Graz, Capital Bank started a cooperation, which was expanded with an academically developed private banking course. The aim of this university training is to combine techni-cal and social competence. The academic leadership was assumed by the internationally recognised Univ.-Prof. Dr. Edwin O. Fischer.

Capital Bank is aware of its social responsibility as a member of the community. As a result, numerous free presentations about economic subjects are given.

64

At technical presentations to uni-versity institutions, the primary aim was always to provide the students with expert knowledge and to grant them a practice-related insight into the world of banking. In addition, Capital Bank supports numerous social and university-related institu-tions. In the coming fi nancial year, cooperation with the “Circle of Excellence”, which supports stu-dents with excellent services, nota-bly specifi c commitment outside studies and practical experience in Austria and abroad, will also be continued.

65

The General Economic Environment

The economic outlook for 2008 was already gloomy at the start of the year due to weak economic indicators. The fi nancial crisis led to a collapse in the global economy. Forecasts by international organisations signal a large economic deterioration in 2009 as well. The available economic data confi rm the forecasts, as the following representations show.

European Union

The eff ects of the fi nancial crisis on the real economy, in the form of higher fi nancing costs, falling business and consumer confi dence, and weaker foreign demand, have resulted in the fi rst recession in the EU area since the launch of the single currency. Economic growth in the EU area for 2008 totalled 0.9 %, according to fi rst extrapolations, with GDP growth in the Euro zone at 0.7 %. Compared to the previous quarter, GDP fell in the fourth quarter of 2008 both in the Euro zone and in the entire EU area by 1.5 %. This was calculated by Eurostat, the European Union’s statistical offi ce, in published quick estimates. The growth rate in both areas in the third quarter of 2008 totalled -0.2 %.

Compared to the corresponding quarter in the previ-ous year, the seasonally adjusted GDP in the fourth quarter of 2008 fell by 1.2 % in the Euro zone and 1.1 % in the EU area.

66

For 2009, a decrease in the size of the economy of the EU area of 0.5 % points is predicted. According to the OECD, a sustained recession is expected until at least the third quarter of 2009. The forecasts for 2010, according to current calcula-tions, assume a recovery and, accord-ingly, growth of 0.8 % to 1.2 %. However, the report points out that countries such as Ireland and Spain have to overcome a marked reces-sion in the next few years because of falling property prices.

The annual infl ation rate in the entire EU area was 2.2 % in Decem-ber 2008, compared to 2.8 % in November. One year previously, it was 3.2 %. At the same time, the seasonally-adjusted unemployment rate in December 2008 was 8.0 %, compared to 7.9 % in November, according to Eurostat calculations.

Eurostat also estimates that in December 2008, a total of 17,911 million men and women were unem-ployed across the EU. Austria, with an unemployment rate of 3.9 %, had one of the lowest rates, only beaten by the Netherlands with 2.7 %.

Sources: OeNB, Konjunkturaktuell, December 2008EURO-STAT, European Economic Indicators 2009OECD, World Economic Outlook

67

Interest rate development

At the end of the third quarter 2008, the ECB’s cycle of rising interest rates came to an end and a cycle of falling rates followed, which with four reductions brought interest rates to 2 % on 15.01.2009, with further downward corrections being announced for the fi rst quarter of 2009. The aim of a rapid capital fl ow stimulus at the interbank level has largely remained unattained, indeed confi dence in the capital market could not be restored and deposits with the ECB reached ever higher record levels by the end of 2008.

CYCLE OF FALLING INTEREST RATES

CYCLE OF RISING INTEREST RATES

08.10.2008: 3.75 percent (- 0.50 percentage points)06.11.2008: 3.25 percent (- 0.50 percentage points)04.12.2008: 2.50 percent (- 0.75 percentage points)15.01.2009: 2.00 percent (- 0.50 percentage points)

06.06.2007: 4.00 percent (+ 0.25 percentage points)03.07.2008: 4.25 percent (+ 0.25 percentage points)

68

Austrian economy

As a result of the fi nancial crisis and the predicted global economic decline for all of 2009, the Austrian economy did not escape from the recession. With negative growth of minus 0.2 % in the fourth quarter of 2008 compared to the third quarter, the Austrian economy shrunk for the fi rst time since 2001. For the 2008 fi nancial year, GDP still grew, according to calculations by the WIFO (Austrian Institute of Eco-nomic Research), by 1.8 % points in real terms. Austria’s gross domestic product (GDP) was therefore above the EU average of 0.9 % for the EU area.

This development was above all due to the recession in export-oriented manufacturing. Export demand in the fourth quarter in real terms remained 1 % below the level of the previous quarter and 4.2 % below that for the previous year.

Since 2002, actual consumer demand among private households has remained considerably behind the performance of actually avail-

69

able household income. This development slowed in 2007. Consumption spending by private households was slightly, 0.4 %, above the level for the previous quarter and 1 % above the comparable fi gure for the previous year. According to forecasts, 2009 will develop similarly. A continuing, increasing savings ratio is assumed for the past and coming fi nancial year.

For 2009, the WIFO expects a further fall in eco-nomic output across the EU by up to 1.2 %. This is why a fall in GDP in real terms is also expected in Austria in 2009 of 0.5 %, despite the massive counter measures of fi scal policy.

Infl ation accelerated to almost 4 % in mid-2008. By the end of the year, the infl ation rate had fallen back considerably to 3.2 % as a result of falling energy, raw material and food prices. According to the forecasts, price pressure is expected to decrease in 2009 and 2010 as well, and infl ation should fall to 1.2 % and 1.5 % respectively.

The decline in economic output has already had a massive impact on the national labour market. While it was still possible in 2008 for the unemployment rate to fall to 5.8 % or 212,253, for 2009 the WIFO is predicting an increase in the number of unemployed of 27,000, and the number should increase by a slightly smaller amount in 2010.

70

In order to counter the fi nancial crisis and the accompanying reces-sion, fi scal measures have been taken worldwide. In many cases, the plans envisage an increase in government debt. For example, in Austria the total state budget defi cit, according to Maastricht 2008, will deteriorate to minus 0.7 of GDP, and in 2009 and 2010 to minus 1.9 % and 2.5 % respectively. The public borrowing ratio will increase to 63.1 %.

Balance Sheet

The balance sheet total of Capital Bank remained at the same level as the previous year at around EUR 731 million compared to EUR 736 million in the previous year. Recei-vables due from customers fell in the 2008 fi nancial year by 17.40 % from EUR 173.66 million to EUR 143.45 million. Receivables due from banks increased from EUR 115.22 million in 2007 to EUR 236.26 million. Liabilities due to customers (2008: EUR 236.55 million) and the volume of own issues (2008: EUR 263.37 million) increased insignifi -

Sources:WIFO, Statistik Austria, December 2008OeNB, Konjunkturaktuell, December 2008

1 ) ROE = Profi t on ordinary activities in relation to equity capital, without bal-ance sheet profi t and allocation to reserves

71

cantly compared to 2007 by 0.79 % and 1.74 % respectively. Liabilities due to banks increased only slightly from EUR 78.43 million to EUR 80.95 million.

The eligible equity capital according to Section 23 BWG (Austrian Banking Act) increased by 8.47 % from EUR 113.32 million in 2007 to EUR 122.92 million in 2008 as a result of the reorganisation. The required equity capital according to Section 22 para 1 BWG increased as a result of regulatory require-ments (consideration of the operational risk accord-ing to Basel II) by around 21.11 % from EUR 39.58 million in 2007 to EUR 47.93 million in 2008. As a result of this, the equity capital surplus totals around EUR 74.99 million and increased in the reporting period by 1.68 % compared to the previous year. Capital resources as a percentage of the basis for assessment remained at the same level at 24.58 %. Capital resources as a percentage of the required equity capital according to Section 21 para. 1 BWG decreased from 286.33 % in 2007 to 256.44 % in 2008, which is still above average. The reported equity capital does not include any supplementary capital, participation capital or other lower-ranking capital components.

Both the Return on Equity1 (ROE: 2007: 22.40 %; 2008: 0.20 %) and the Return on Capital Employed (ROCE 2007: 44.63 %; 2008: 0.37 %) fell compared to the previous year. This development can be explained by the altered general economic situation

72

and Capital Bank’s associated lower results from ordinary business.

As Capital Bank focuses on commis-sion business, the development of the balance sheet total and the comparison with traditional retail banking is less important for Capi-tal Bank. The long-term aim of Capital Bank is to earn risk-ade-quate returns in the owner’s interest and thus to increase further the profi tability of the company in future.

In the last fi nancial year, Capital Bank – and sadly also the bank’s customers – became victims to probably the world’s largest ever fi nancial fraud. Capital Bank off ers its private banking customers who invested in Herald USA legal sup-port in pursuing their claims. In this context, Capital Bank actively informed all its aff ected customers from day one. In terms of the balance sheet, suffi cient provisions have been formed for the capital guarantees and, specifi cally, for the Madoff case.

73

Volume of Securities Accounts

The bank’s volume of securities accounts as at 31.12.2008 totals EUR 3.90 billion. Compared to the previous year, this corresponds to a decrease of around 24.17 %. The reduction in the volume of securities accounts is due to the lower demand for securities transactions and the reallocation to savings and fi xed-term deposits, as a result of the collapse in global fi nancial markets. The number of active securities accounts as at 31.12.2008 totalled around 110,000.

Profi t and Loss Account

Both Private Banking and Investment Banking divisions of Capital Bank were aff ected by the fi nan-cial crisis. This is refl ected in the fall in profi t from ordinary activities from EUR 17.66 million in 2007 to EUR 175 K in 2008, which was reduced by risk provisions. For example, Capital Bank had to write-down receivables and make large allocations to provisions for contingent liabilities and credit risks, which mainly result from the Madoff fraud case. Capital Bank’s net interest income fell in the report-ing year by around 11.42 % from EUR 10.64 million in 2007 to EUR 9.43 million. This is primarily a result of the changed interest landscape. The com-mission and fi nancial results also decreased because of the negative development on the international fi nancial markets from EUR 32.28 million in 2007 by

74

around 53.37 % to EUR 15.05 mil-lion. Operating income recorded an absolute fall of EUR 14.13 million compared to the 2007 fi nancial year. Operating expenses, on the other hand, also fell from EUR 24.81 million in 2007 to 21.46 million in 2008. This is primarily due to the signifi cantly lower personnel expenses for Capital Bank’s per-formance-based remuneration system. These fell by 28.47 % from EUR 15.51 million in 2007 to EUR 11.09 million in 2008. Material costs, by contrast, increased by around 10.10 % from EUR 8.55 million in 2007 to EUR 9.42 million in 2008. The reasons for this are higher IT costs and higher costs for the seamless settlement of transactions on the fund platform. A decrease was recorded in the commission business as a result of the market situation described elsewhere. As a result, in 2008 Capital Bank reported an operating profi t of EUR 11.78 million. This corresponds to a decrease of around 47.78 % com-pared to the operating profi t of EUR 22.56 million in 2007. The Cost Income Ratio increased compared to the previous year from 53.38 % to

75

64.56 %. This is due to the reduced operating income. No particular or noteworthy events have occurred since the reporting date.

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Proposed Dividend

The balance sheet profi t reported for the 2008 fi nancial year of EUR 484 K is carried forward to the new accounts.

There were no particularly impor-tant events after the reporting date.

Outlook

There is no end in sight in 2009 to the fi nancial crisis. As the fi rst few weeks of the New Year showed, a recovery in the fi nancial markets cannot be assumed yet. The most important global stock indices, for example, lost far more than 10 % in just in the fi rst few months of the New Year. The ATX suff ered a fall in value of more than 17 % from 31.12.2008 to the end of February 2009. Despite these negative market conditions, Capital Bank will follow a long-term and broadly aligned investment banking strategy. Both traditional equity sales business and leveraged fi nance are still being pursued by a small but effi cient team.

77

2009 will also be extremely challenging for Capital Bank’s Private Banking division. The continuing and intensifying fi nancial crisis has aff ected customer confi dence in respect of the stability of the fi nancial system. The consequences are lower transaction volumes for shares and larger cash holdings. The investment behaviour of Private Banking customers has therefore altered fundamentally. Customers will give complex products less consideration and the demand for traditional and simpler investments will increase vehemently in 2009. A considerable real-location from securities investments to savings and fi xed-term deposits was already detected in 2008. It can therefore be expected that the margins in Pri-vate Banking will also fall in 2009.

In the Platform division, customers are acquired and advised exclusively through licensed fi nancial service providers. As a result, Capital Bank is not exposed to any advice risk in this business. The instigated discussion on possible false advice given to custom-ers by licensed fi nancial service providers and the associated legal uncertainty will also aff ect the growth of the platform business in 2009. In the current market situation, a considerable increase in transaction volumes is not expected.

But it is not only banks that are currently fi ghting against the diffi cult, dominant economic situation. The real economy is also aff ected, with a delay, by the fi nancial crisis. Short working hours and staff cuts

78

have become general terms for Austrian industry due to the poor order situation. The large exposure of Austrian banks to Eastern Europe has become the target of criticism in the media. The credit volume of Austrian banks in Eastern Europe, according to a study by the Bank For International Settlements, is currently EUR 201.2 billion. This corresponds to around 70 % of the Austrian gross domestic product, with a large concentration in the Czech Republic, Romania, Hungary and Slovakia. International experts assume credit defaults of up to EUR 31 billion. Above all, the EUR 10 billion exposure of Austrian banks in the Ukraine must be considered at threat, in particular, because of the precarious economic situation there. The result of this discussion is the fact that the reputation of Austrian banks is suff ering from its exposure in Eastern Europe.

For the fi rst half of 2009 at the least, we expect a further intensifi cation of the crisis on the fi nancial mar-kets. As a result of the new paths taken in consultancy for our cus-tomers and in portfolio manage-

79

ment, we believe we will be able to cope well with the challenges still to come in order to come of the crisis stronger. Because of the negative market environment and the dominant economic develop-ments, the 2009 fi nancial year will be diffi cult and challenging.

80

Since the start of the 2008 fi nancial year, Capital Bank – GRAWE Gruppe AG has implemented the legal requirements from BASEL II. Apart from the recalculation of the equity capital requirement, this means, above all, the active steering of all signifi cant risks within the framework of an internal risk man-agement according to column II (ICAAP). Of the methods provided for selection by Basel II, Capital Bank – GRAWE Gruppe AG has opted for the credit risk standard method. With regard to the opera-tional risk, the calculation is per-formed according to the basic indicator approach. The implemen-tation of the BASEL II conditions brought Capital Bank – GRAWE Gruppe AG a series of expansions and innovations in risk management during the reporting year – for example the risk capacity calcula-tion and ICAAP Report were created for the fi rst time across the entire reporting year, which refi nes the risk capacity calculation and revises the limit system. In addition, all signifi cant changes have been included in the risk manual and are documented in it.

Risk Report Capital Bank – GRAWE Gruppe AG

81

The main changes resulted not only from the intro-duction of BASEL II, but above all from restructur-ing in the Group. For Capital Bank – GRAWE Gruppe AG, the 2008 fi nancial year was character-ised by reorganisations within the Capital Bank Group and by bringing Capital Bank – GRAWE Gruppe AG and its subsidiaries into the group of HYPO-BANK BURGENLAND AG. The reorgani-sation of the entire group and the associated changes in the various divisions also represented a signifi cant component of the activities in 2008 in risk manage-ment. Reorganisations within the Capital Bank Group led to Capital Bank – GRAWE Gruppe AG now representing the superordinate bank of the Capital Bank Group. In autumn 2008, the wholly-owned subsidiary of Capital Bank, Capital Bank International – GRAWE Group AG was renamed Brüll Kallmus Bank. Furthermore, the reorganisation of the GRAWE banking group led to the inclusion of Capital Bank – GRAWE Gruppe AG, including all its subsidiaries and participations, into the banking group of HYPO-BANK BURGENLAND AG, which, as the superordinate bank, creates consoli-dated Annual Accounts for the banking group. The following representation shows the current group structure.

82

Ownership Structure ofCAPITAL BANK – GRAWE GRUPPE AG

Grazer Wechselseitige Versicherung AG

HYPO-BANK BURGENLAND Aktiengesellschaft

CAPITAL BANK – GRAWE GRUPPE AG

Security Kapital-anlage Aktien-gesellschaft

Brüll KallmusBank AG (Capital Bank Int. AG)

Corporate Finance –GRAWE Gruppe GmbH

CENTEC.AT Softwareent-wicklungs und Dienstleistungs GmbH

SecurityFinanz-serviceGmbH

SecurityFinanz-Software GmbH

CB Family Offi ce Service GmbH

100,00%

100,00%

100,00%

100,00%

100,00%

100,00%

100,00% 67,00% 100,00%

Risk Management

The objective of risk management is to identify, quantify and actively steer all the risks of the banking business (credit, market, interest and liquidity risks and operational risks). According to the conditions of Section 30 para. 7 BWG, HYPO-

83

BANK BURGENLAND AG as the parent bank is required to comply with the ICAAP conditions at the consolidated level. The consolidation group of HYPO-BANK BURGENLAND AG includes the Capital Bank Group, the Leasing Group and Sopron Bank as downstream bank in other EU countries.

Capital Bank – GRAWE Gruppe AG is a bank which specialises in private banking and investment bank-ing, but which also off ers business related to these areas. In addition, Capital Bank – GRAWE Gruppe AG off ers a clearing platform for independent fi nan-cial service providers. The aim is to maximise income for the given risk load. This is underlined by the principle that a return should be achieved for every transaction which is appropriate to the risk content. Measures regarding the actual risk are compared to the actual returns in a risk profi le. Apart from the goal of optimising a balanced ratio between risk and income, Capital Bank – GRAWE Gruppe AG aims to identify the risks resulting from banking opera-tions and to manage and restrict them actively through eff ective risk steering. The focus of these risk steering activities is on the most effi cient use of the available capital as possible, taking into account medium and long-term strategic goals and growth prospects. It can be seen that the ability of a bank to record and measure risks extensively, and to monitor and steer them timely, represents a crucial competi-tive factor. In order to facilitate the long-term suc-cess of Capital Bank – GRAWE Gruppe AG and

84

selective growth in the correspond-ing markets, risk management and risk controlling have been estab-lished within Capital Bank – GRAWE Gruppe AG. Risk man-agement represents a central unity in Capital Bank – GRAWE Gruppe AG which takes into account the type, extent and complexity of the transactions specifi c to the bank and the resulting risks for the bank, in addition to the general regulatory conditions based on the Austrian Banking Act (BWG) and various directives and guidelines. Capital Bank – GRAWE Gruppe AG interprets ‘risk management’ as the working processes of identifi cation, measurement, monitoring and steering various risks. The risk management of the Capital Bank Group is integrated into the risk management cycle of HYPO-BANK BURGENLAND AG.

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The individual phases of the risk management process include

– Risk identifi cation – This includes recording, measuring and analysing all risks relevant to the bank.

– Risk steering – Risk steering is the entirety of all risks entered into consciously within the approved limits and the selective use of measures to deal with risks. The decision-making takes place in corre-sponding committees / departments irrespective of the market.

– Risk documentation – This includes written docu-mentation of the internal risk management in the form of a risk manual.

– Risk communication – The risk situation is worked out in risk reporting in a form suitable for and

n

n

RISK MANAGEMENT

Risk policy / Attitude to risk

Risk identifi cation

Risk quantifi cationRisk documentation

Risk monitoringRisk communication / Model validation

Risk steering

86

understandable to the respective recipients, transparently and com-prehensively, and is provided at regular intervals.

– Risk monitoring – Risk monitor-ing takes place through an internal control system which guarantees compliance with the limits and guidelines defi ned in the risk man-ual.

The focus of the Capital Bank – GRAWE Gruppe AG’s risk management lies on the following types of risk:

– Market risk – Operational risk – Credit risk – Liquidity risk

87

Principles of Risk Management

The risks to Capital Bank – GRAWE Gruppe AG are controlled and steered through a system of risk principles, risk measuring processes, limit structures and monitoring processes.

A signifi cant principle within the framework of the risk management process is the risk policy. Risk policy is part of the corporate strategy and defi nes the willingness and orientation for risk of the bank and the marginal conditions within which the opera-tive risk policy goals have to be implemented. The risk policy in Capital Bank – GRAWE Gruppe AG is determined by the Board of Directors corresponding to the business strategy. The risk policy includes the planned development of the overall business accord-ing to several dimensions. The defi nition of limits and the restriction of general risks take place through the Board of Directors or the Supervisory Board of Capital Bank – GRAWE Gruppe AG.

The risk appetite represents a signifi cant factor on the basic risk policy attitude of a fi nancial institu-tion. The risk appetite is defi ned as the level of preparedness of the bank, which can be expressed in fi gures, to enter into fi nancial risks in its core busi-ness. Defi ning an appropriate risk appetite is a basic operative requirement so that it becomes possible for the bank to set consistent risk limits. In Capital Bank – GRAWE Gruppe AG, a risk appetite is defi ned by the Board of Directors for the risk cat-

88

egories of operational risk, market, credit and interest change risk.

The following principles have been defi ned in Capital Bank – GRAWE Gruppe AG:

– The management and all employ-ees are subject to the risk-policy principles and also make their decisions in accordance with these guidelines.

– In order to maintain a desired risk/return ratio, the individual business divisions are limited by risk and/or volume requirements taking into account the risk-capacity of the company.

– The methods of risk evaluation and measurement are arranged and implemented according to the respective extent, complexity and risk content of the transactions. In principle, not only risks of retail business are recorded, but also those which result from an overall bank consideration. The fl exibility in the method selection should facilitate sensible developments.

89

– In order to guarantee a consistent and coherent risk management process, uniform methods of risk assessment and limitation are used.

– Within the framework of risk steering, a suitable limit system has to be applied and constantly moni-tored. Limit systems have to be derived and defi ned from the total bank limits for the various sub-risks and also for the various subsidiaries.

– Risk steering and controlling processes correspond to the current statutory requirements and are ad-justed to the changing conditions.

– For the main risk types which threaten the existence, if applicable, a risk management is striven for at a level which corresponds to comparable institutions in terms of structure and size (“best practice”).

– Risk management is performed at the group level. Additionally, each employee is required to identify risk potential and to take corresponding measures.

– The organisation of the risk management is subject to the principle of separation of functions between trading and backoffi ce and has to guarantee that confl icts of interest are avoided at all decision-mak-ing levels.

– For the current risk steering, the Board of Direc-tors and the decision-making committee, both at the

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group and individual bank levels, have to report regularly on the risk situation of the bank. The respec-tive organisational units are respon-sible for risk documentation and reporting.

New Products, New Markets

Capital Bank – GRAWE Gruppe AG is committed in principle to those business fi elds where the company has long been active and where there is a corresponding monitoring or the possibility to assess specifi c risks.

The development of new business fi elds or new products requires an adequate analysis of the business-specifi c risks. A product authorisa-tion process has been defi ned for this point in Capital Bank – GRAWE Gruppe AG. This product authorisation process defi nes the process-organisation regulations which determine the procedures for issues or investments in new prod-ucts or the inclusion or entrance into new markets. Within the framework of the product authori-

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sation process, certain information must be provided by the applicant of the new product, which is then examined by Internal Audit, the Legal Department and the compliance offi cer. If it is necessary to involve other departments in the product authorisa-tion process, these are informed by the Risk Man-agement Department of the product authorisation process and are asked for an opinion. The main prerequisite for a positive opinion from risk manage-ment is the reproducibility of the products in the risk systems. A fi nal report is only prepared after all opinions have been received, and is sent to the Board of Directors which then decides to accept or reject the product.

Resources

The technical-organisational resources and the staff and material resources correspond to the needs, the business activities, the strategy and the risk situa-tion. Continual training and development measures ensure that the level of staff qualifi cations cor-responds to the current state of developments.

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Documentation

In Capital Bank – GRAWE Gruppe AG, a comprehensive set of regula-tions is used as the basis for docu-mentation in addition to the risk strategy and the risk-policy princi-ples. As part of the ICAAP imple-mentation, Capital Bank – GRAWE Gruppe AG decided to defi ne the comprehensive regulations regard-ing individual risks in a multi-stage documentation. The fi rst level is the Risk Manual which defi nes the strategic attitude to risk manage-ment in the bank. In addition to formulating the strategic attitude of the bank, the bank’s risk strategy is also defi ned. Based on the principle that the information in the risk manual generally covers longer periods, the risk manual is amended as necessary or, for example, when signifi cant changes in the business divisions or other reporting or valuation changes enter into force. The next level down contains the individual or specifi c books which have a higher degree of detail due to the greater complexity. This level contains a detailed explanation of the methods and instruments of

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risk controlling and management applied. The main content at this level represents the subjects relevant for the individual books. The regulations in the individual books represent a refi ned level of detail and are designed for the specifi cations and problems relating to this area. The lowest level contains docu-mentation with the highest degree of detail. It mainly contains offi cial instructions and databases which regulate specifi c topics, but also general requirements, and are subject to frequent modifi ca-tion. Within the framework of the limit database, the Board of Directors set limits for individual divisions and for the various types of risk. As a result of the changes made in 2008 in the group structure, the necessary documentation has been successively adapted and synchronised with that of HYPO-BANK BURGENLAND AG.

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Disclosure According to Section 26 BWG and the Regulation Covering Disclosure

Data that change annually are published in the consolidated Annual Accounts of HYPO-BANK BURGENLAND AG, from which the consolidated fi nancial situation can be seen.Link: www.bank-bgld.at

Organisation of the risk management

A risk management system has been set up within the group to identify, evaluate and monitor risks, which includes the Market Risk, Risk Controlling and Financial Control-ling Departments. The activities of the risk management units are performed in accordance with the guidelines on risk policy defi ned by the Board of Directors, which defi ne the risk steering and the qualifi ed and timely monitoring of risks in conjunction with the various company divisions and the inde-pendent risk function. The follow-ing representation provides an overview of the risk management

95

areas and their tasks. Risk management at the group level is performed by the parent bank HYPO-BANK BURGENLAND AG. Alongside Capital Bank – GRAWE Gruppe AG, the consolidation group of HYPO-BANK BURGENLAND AG also includes Bank Burgenland Leasing and Sopron Bank as a downstream bank in other EU countries. The risk management of Capital Bank – GRAWE Gruppe AG and its subsidiaries continues to be performed by the Capital Bank – GRAWE Gruppe AG risk manage-ment. Within the framework of the implementation of the group risk management, there is close coop-eration between the Bank Burgenland risk manage-ment and Capital Bank – GRAWE Gruppe AG.

Risk Management

Group Risk Management / Group Financial Controlling

Risk Controlling Financial ControllingMarket Risk

– Strategic risk – Operative market risk – Interest change risk – Liquidity risk – Currency risk – Product approval

– Overall banking control / BASEL II / ICAAP

– Strategic credit risk – Operational risk – Investment risk – Counterparty risk – Risk reports

Risk Management Unitsin the GRAWE Banking Group

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Apart from the risk management units Market Risk, Risk Controlling and Financial Controlling, the following committees are defi ned in the GRAWE banking group for risk management:

– Overall Banking Risk CommitteeRisk steering at the group overall banking level takes place in the overall banking risk committee under the leadership of the Board of Directors and with the involvement of the boards of the subsidiaries and with representatives from the risk management units and the market. The Overall Banking Risk Commit-tee deals with risk policy, strategic and structural matters of principle and risk at the superordinate level, the company-wide risk policy and strategic tasks of overall bank steering. The monitoring and steer-ing of the risk capacity and the setting of risk limits also take place the overall bank level in the Overall Banking Risk Committee.

– Risk Management Committee (RIMCO)The RIMCO represents an occa-sional committee in the Capital

97

Bank Group, where the risks in the banking division are discussed and decisions about risk potential are made, and where the aim of limiting risk for Capital Bank – GRAWE Gruppe AG and its subsidiaries is pursued by classifying, quantifying and steering risk. RIMCO comprises the directors, and representa-tives of risk management, Accounting, Internal Audit, Compliance and a representative from the Credit Management and Legal Departments. When sitting on the RIMCO, committee members are considered as being of equal rank to the Directors and are therefore not under instruction. The Head of the Internal Audit Department has no voting rights but attends in a consulting capacity. The individuals involved have to provide presentations or reports on risk-relevant topics during the meetings. Following the presentations, the RIMCO has to evaluate the current risk situation and come to the relevant decisions regarding the measures to be taken. Deci-sions in the RIMCO are always made in considera-tion of the overall banking risk situation and the decisions of the overall banking risk committee. It should be noted that the RIMCO is responsible for the entire banking group – i.e. Capital Bank – GRAWE Gruppe AG, Brüll Kallmus Bank AG and Security KAG.

– Investment Committee (IC)In the Capital Bank Group, the IC assumes the position of an investment committee whose main task is to make decisions on the bank’s own invest-ments in securities, which extend beyond the activi-

98

ties of the Treasury and which are not regulated by the limit system. The voting members of the IC com-prise the directors and a risk man-agement representative. Represent-atives from Treasury, Accounting and Trading participate in the meetings of the IC as non-voting members. Decisions in the IC are always made in consideration of the overall banking risk situation and the decisions of the overall banking risk committee.

Risk Management ofSpecifi c Risk Types

Within the framework of the over-all banking risk steering, a distinc-tion is drawn in the Capital Bank Group between the following risk categories:

– Market risk – Operational risk – Credit risk – Liquidity risk – Other risks

Because of its specialisation in the areas of private and investment

99

banking, the main risks arise, above all, in the area of market and operational risks, which are signifi cant within the framework of the monitoring and steering process.

Market Risk

The Capital Bank Group defi nes market risk as the potential possible loss which comprises price changes or changes to the underlying parameters (interest, exchange rates, share prices, gold and raw material prices). This risk category includes positions of the trading book as well as positions of the bank-ing book. These risky positions arise either through customer transactions or through the conscious assumption of positions. The Capital Bank Group defi nes interest rate changes, foreign currency and credit spread risks as risk subtypes, along with the securities risk. The interest change risk is the risk of price fl uctuations of interest-bearing securities which arise from changes in the capital market interest rates.

Market Risk in the Trading and Banking Book

The steering and monitoring of market risks in the trading and banking book are performed by the Market Risk Department. Apart from the daily representation of the risk and income, and prescrib-ing the limit structure on the basis of the economic

100

capital available to the Board of Directors, the department’s main tasks include developing the risk measurement system further and monitoring the market risk and counterparty limits.

A central element of the market risk steering in Capital Bank – GRAWE Gruppe AG is the limit system. The overall limit is set by the Board, taking into account the risk capac-ity and the group limits. The indi-vidual limits are set by the Board on the basis of the proposal from risk management in cooperation with the respective division. A desired degree of diversifi cation in the portfolios, and the trading strategy, are important factors for developing the limit structure. Apart from volume and positions limits, sensi-tivity limits (delta, gamma, vega) and country limits are taken into account when setting limits. Option positions may only be concluded through correspondingly trained dealers. In its risk strategy, the Capital Bank Group has defi ned the foundation for dealing with market risks. The limit provided for enter-ing into market risks restricts the

101

extent of the market risks entered into to a contrac-tual and desirable extent for the group, and leads to a risk mix which has been optimised from a risk/return perspective. The Market Risk Department examines positions and limits daily.

Market risks are hedged if their active assumption is not desired. Insofar as market risks are knowingly entered into, this is done with the aim of earning income.

In the 2008 fi nancial year, a special point of focus for risk management was the equity sector. In order to monitor the positions of the equity sector, a position management system is used in risk management, with which constant risk monitoring can be per-formed and guaranteed. By using this position man-agement system, it is possible for risk management to judge the positions and risk of the individual traders at any time, and to produce risk reports. In addition to the quarterly risk reports, the Board receives a daily report with an overview of the profi t/loss fi gures, a statement on the capacity remaining within the limits and the representation of the worst case scenario. In addition to the ongoing review of the risk situation and limit monitoring, risk manage-ment also lists the price gains/losses from accounting sources. This list is issued and presented to the Board of Directors on a regular basis.

As specifi ed in the Austrian Banking Act, Capital Bank – GRAWE Gruppe AG keeps a ‘large trading

102

portfolio’. The market risk of the Capital Bank – GRAWE Gruppe AG large trading portfolio is mainly characterised by the share price risk and default risk (OTC transactions) which derive from the equity divi-sion located within Capital Bank – GRAWE Gruppe AG, and by the interest rate risk. Capital Bank – GRAWE Gruppe AG applies the standard method according to Section 22o para. 2 BWG to calcu-late the required equity capital for the trading portfolio. The following chart shows the distribution of the risks from the securities trading portfolio compared to equity capital.

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In the 2008 fi nancial year, the risk management software “portfolio.riskmanager” from ZEB was installed in order to represent the risks deriving from the market risk. The installation of this software allowed Capital Bank – GRAWE Gruppe AG to apply the Value at Risk fi gures for the fi rst time in order to represent the market risks. The knowledge gained from the Value at Risk calculation aids the internal representation, and is currently still in the test phase. As part of the group restructuring, the aim is to standardise the Value at Risk calculations of the various banks and to bring these to a joint calculation basis.

January 2008February 2008

March 2008April 2008May 2008

June 2008July 2008

August 2008September 2008

October 2008November 2008December 2008

Option riskCounterparty default risk from securities trading

Interest rate riskShare risk

Values in EUR m

Distribution of the Risks from the Securities Trading Portfo-lio Compared to Equity Capital

0 2.000 6.0004.000

104

A particular focus within the framework of the market risk for Capital Bank – GRAWE Gruppe AG is represented by the guarantees issued in conjunction with the securities transaction. Capital Bank has issued capital guarantees for some products designed and marketed by Capital Bank itself and for products marketed by insurance companies. Under the terms of these guarantees, where the product loses value, the bank stands liable for the diff erence between the current market value and the amount invested by the customer.

This amount therefore represents a risk for the bank. Within the framework of risk management, therefore, the management and performance of the capital guaran-tees are monitored and necessary steps to limit risks are arranged. One of the measures required under the risk management system involves monthly inspection of the sum guaranteed against the market value and an examination of the plausibility of the data. The markets are kept under constant observation (through the setting of limits) in

105

order to be able to take measures at any time in the event of a threat.

With reference to the capital guarantees, particular importance is attached to the ‘Prämienbegünstigte Zukunftsvorsorge’ or PZV (state-aided pension provision), a new tax-exempt and state-supported pension product off ered by fi nancial institutions in Austria, because Capital Bank – GRAWE Gruppe AG furnished the capital guarantee in accordance with the statutory regulations (Article 108 Paragraph 1 (3) EStG (Austrian Income Tax Act)). Under the terms of this capital guarantee, the bank guarantees that the amounts paid-up plus the State subsidy will be paid out to the customer as a minimum. The bank therefore guarantees the remaining diff erence if the total of the amounts paid up plus the State subsidy is less than the amount paid out by the PZV. The PZV risk is therefore closely monitored by the risk management. Before furnishing the capital guarantee, therefore, an approval process was held, where the product operation was explained in more detail and problems arising were discussed and resolved both in-house (Risk Management, Account-ing Department, Legal Department) and with third parties (KPMG, the Austrian Financial Market Authority). Every month, under constant monitoring by the Risk Management Department, the current guarantee sum is compared against the market values of the underlying fund and a review of the invest-ment strategy in the underlying fund is performed by Security KAG or the underlying assumptions are

106

evaluated. The performance of the underlying fund is also constantly reviewed and its quality analysed. Regular reports on the PZV are also provided at the RIMCO meetings. In addition, the PZV regularly meets with representatives from Security KAG and Capital Bank – GRAWE Gruppe AG to discuss a general report on the development of the PZV and special subjects.

As at the balance sheet date, the outstanding guarantees totalled roughly EUR 243 million. This is a change compared to the previous year of -14 %. These guarantees are matched with corresponding balance sheet items with intrinsic value.

Within the framework of the interest rate risk, it must be stated that the new version of the EU Directive 200/12/EU (Basel II) does not envisage any separate equity reinforcement for interest rate risks in the banking portfolio but instead envisages a monitoring of these risks through the regulatory authorities. To this end, the regula-tory authorities demand quarterly

107

interest risk statistics which are calculated on the basis of balance sheet and off -balance sheet positions and the allocation of term bands corresponding to the statutory conditions and which assumes a 200 basis points interest shift. The interest rate risk as at 31/12/2008 calculated in this way is 0.54 % of the available equity.

The table shows that the limit of 20 % of equity capital as defi ned by the regulatory authorities has been complied with and that there is suffi cient buff er, and that the overall banking risk is less com-pared to the previous year. In addition, it shows that the interest rate risk of Capital Bank Group is a very small proportion of the overall banking risk.

Previous year31.12.2006

6,1127.71 %

Average5,841

6.18 %

Max.6,914

7.33 %

Year’s end4,161

4.22 %Interest rate riskIn % of equity capital

Interest rate risk 2008 – 2007 BP shift in EUR K

Previous year31.12.2007

4,1614.22 %

Average3,070

2.58 %

Max.4,629

4.11 %

Year’s end647

0.54 %Interest rate riskIn % of equity capital

Interest rate risk 2008 – 2008 BP shift in EUR K

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Over the Counter FinancialDerivatives (OTCs)

Depending on the underlying fi nancial instrument, OTC deriva-tives are divided into interest rate contracts, exchange rate contracts, and securities-based contracts. The majority of the derivative volume is handled in interbank trading, how-ever the proportion of customer trading in 2008 became less impor-tant than in 2007.

For risk management purposes, derivative contracts are valued at spot prices or current market prices using acknowledged models.

A list of the over the counter deriva-tive fi nancial instruments held by Capital Bank – GRAWE Gruppe AG is contained in the notes on the balance sheet.

Operational Risk

In the Capital Bank Group, the operational risk is defi ned analo-gously to the statutory banking provisions as the “Risk of unantici-

109

pated losses which arise as a result of the inappropri-ateness or failure of internal procedures, people and systems or of external events, including legal risk”. For example, failures in IT systems, material damage, incorrect processing, fraud, natural or other catastro-phes and changes in the external environment should be subject to a more precise and, above all, consoli-dated risk assessment and steering in the future.

In order to implement the BASEL II requirements, a corresponding risk management process has been developed within the Capital Bank Group. The objective is to provide risk management with all relevant information in conjunction with operational risks. To this end, and for a more precise quantifi ca-tion of the operational risk and for enhanced steer-ing and weak point analysis, the Capital Bank Group collects claims from operational risks in a database. The losses from operational defects are recorded in a structured and uniform form according to business process, event type and business fi eld. Based on this database, held since 2006, of operational risk records, various assessments are carried out in order to identify possible sources of defects and to derive measure for improvements. These assessments are regularly reported to the Board of Directors and the respective departmental heads. In the event of serious claims, the Board of Directors is advised immediately on an ad hoc basis of the extent and the underlying cause of this loss case. This creates a control circuit comprising risk co-identifi cation, risk quantifi cation and risk steering.

110

In order to minimise the opera-tional risk, Capital Bank – GRAWE Gruppe AG also uses internal control systems, including Internal Audit, clear and documented inter-nal guidelines (“work procedures”), the separation of functions (“four-eyes” principle”), allocation and limitation of decision competences and a constant qualifi cation assur-ance and enhancement for employ-ees through training and develop-ment (“staff development”). These control and steering measures, which are integrated into the busi-ness processes, should ensure an appropriate and accepted risk level in the company.

In order to secure a group-wide uniform procedure, all steering and monitoring measures for these risks are coordinated through risk man-agement at Capital Bank – GRAWE Gruppe AG. This refers to the methods used to collect claims, the defi nition of indicators and the further development of the software solution used to record claims from operational risks. The central committee for steering operational risks is the RIMCO.

111

Capital Bank – GRAWE Gruppe AG uses the basis indicator method for the capital securitisation for the operational risk according to BASEL II, in which the equity requirements for operational risks are calculated on the gross income, weighted with 15 %. The equity capital requirement for the operational risk for Capital Bank – GRAWE Gruppe AG and its subsidiaries totalled EUR 8.004 million in the 2008 reporting year.

Credit Risk

The credit risk is the risk of a deterioration in value as a result of a credit-related event (e.g. change in a borrower’s credit rating or a default). The risk lies in the fact that these receivables due to Capital Bank – GRAWE Gruppe AG may not be fulfi lled in full or on time. This can result both from developments among individual contractual partners and from general developments which aff ect a large number of contractual partners. Credit risks can also result from specifi c forms of product arrangements or the business fi eld. The responsibility for the competent management of all credit risks lies with credit management and risk controlling. The strategic credit risk management is the responsibility of the Risk Controlling Department and concentrates on identifying, measuring, summarising, planning and steering, as well as monitoring, the credit risk. The agenda of the strategic credit risk management in the Capital Bank Group are extended successively

112

and are standardised with the strategic credit risk management of HYPO-BANK BURGENLAND AG within the framework of the group reorganisations. The opera-tive credit risk management sup-ports the active bank operations through the compliant risk and credit rating audit of all applications for fi nancing and their accuracy, the evaluation of the compliance with the assessment guidelines and the identifi cation of early warning indicators.

Risk management with regard to lending in the Capital Bank Group is performed according to the principles laid down in the ‘Lending Guidelines’ and the principles approved by the Board of Directors. These guidelines comply with the minimum lending requirements and guidelines issued by the Austrian Financial Market Authority and are adapted to changes in the business fi eld or legal fi eld. Additional ware-housing limits are set by the Board of Directors for risk steering in the warehousing division.

113

One of the lending principles at Capital Bank Group is a clear credit policy. The keystone of this policy is that loans should be granted fi rst and foremost in exchange for suffi cient collateral. Corresponding securities are the main form of collateral used. The loan-to-value-ratios for securities are diff erentiated according to various criteria. The evaluation of the economic standing of the borrower is only of impor-tance if suffi cient collateral is not available. Capital Bank Group applies a 10 or 4-step system for this purpose.

The credit volume (before individual write-downs and Section 57 reserve deduction) fell in the 2008 fi nancial year by approximately 25 % compared to 2007 to EUR 158 million.

Apart from the principle of issuing loans only if there is suffi cient collateral, every loan decision requires the consent of the Board of Directors. It receives a list of the current loan and credit risk situation monthly or quarterly within the framework of the RIMCO meetings. Factors for the credit risk are also defi ned within the framework of the intro-duction of the ICAAP process which are reported quarterly to the Board of Directors. Stress scenarios are also defi ned for Lombard credits in order to highlight changes in market prices in the securities provided as collateral and to represent their eff ect on the collateral.

114

Liquidity Risk

The short-term liquidity risk repre-sents the danger that the bank will not be able to fulfi l its due payment obligations on time or in full. The refi nancing risk represents the danger that additional refi nancing funds will only be able to be pro-cured at higher market interest rates.

Liquidity is steered in the Capital Bank Group by the liquidity man-ager and the Treasury. Since Capital Bank – GRAWE Gruppe AG and its subsidiaries were brought into the banking group of HYPO-BANK BURGENLAND AG, the liquidity management of the Capital Bank Group is performed in consul-tation with the Treasury of HYPO-BANK BURGENLAND AG.

According to regulatory require-ments, the liquidity of a bank is secured if the weighted funds cover the callable weighted payment obligations for a period. In 2008, Capital Bank – GRAWE Gruppe AG was above the fi gures required by the regulatory authorities. The

115

provisions for an unforeseeable, increased liquidity requirement of a short-term liquidity procurement is guaranteed through the following options: Apart from using open refi nancing lines from other banks, any additional liquidity requirement can be obtained at (relatively) short notice from the sale of securities on the books, which are not pledged. A statement of the current use of credit lines and of the sellable securities currently on the books is presented to the Board of Directors quarterly.

In order to restrict the liquidity risk, liquidity limits are also set for certain business divisions.

In 2008, Capital Bank – GRAWE Gruppe AG was in a situation of surplus liquidity.

Risk Capacity

The central instrument of the overall banking risk steering of the Capital Bank Group is the risk capac-ity calculation. The risk fi gures from the various risk types are aggregated here into a total loss potential from risk assumptions and are compared in a process to the collateral (earning power, reserves and equity capital) available to cover these potential losses. The aim of this comparison is to determine to what extent the bank is able to cope with potential, unan-ticipated losses (risk capacity calculation). According to the risk capacity calculation, the aim is to guaran-tee the continued existence of the bank. The calcula-

116

tion of the risk capacity therefore acts as a restriction in the group for all risk activities. Based on the results of the risk capacity calcula-tion, a total limit is decided at the group level by the Board of Direc-tors. The risk capacity is calculated quarterly. At the end of the third quarter of 2008, the risk capacity was calculated at the group level of HYPO-BANK BURGENLAND AG for the fi rst time. In addition, there is a separate calculation of the risk capacity for Capital Bank – GRAWE Gruppe AG, including Security KAG and Brüll Kallmus Bank AG.

The main risks are quantifi ed within the framework of the risk capacity calculation and are compared to the risk cover collateral. A distinction is made between following considera-tions when assessing the risk capacity:

– Economic methodThe risk capacity is interpreted as the ability to be able to satisfy all creditor’s demands in the case of liquidation.

117

– Going-concern methodRisk capacity is defi ned here as the seamless contin-ued operation of the banking business. It diff ers from the economic perspective in terms of the risk calculation method and in the off setting of the collateral.

The collateral is calculated based on the equity capital, with hidden reserves and the expected profi t from the current fi nancial year also being applied alongside the statutory equity capital. In order to calculate the risks, the main risks are quantifi ed according to various methods. The following risk categories are taken into account in the risk capacity calculation:

– Credit risk – Risks of the large trading portfolio – Market risks of the banking book (interest rate and

foreign currency risk) – Operational risk – Capital guarantees – Other risks

The Capital Bank Group applies the standard method to calculate the risks in the economic perspective in the credit and market risk of the large trading portfolio and for the banking book, as well as for the capital guarantees. The values from the standard method are adapted for a consideration of these risks in the going-concern perspective by correcting the values statistically to a confi dence

118

interval of 95 %. The operational risk is measured according to the basic indicator approach, in compli-ance with regulations, which is also applied to the economic method. For the consideration of the opera-tional risks for the going-concern method, the average absolute loss of the last three years from the loss database is referenced with a multiplier. In addition, a general buff er is added for other risk types which cannot be explicitly quanti-fi ed. To calculate the total risk, the individual risk types are aggregated irrespective of correlation eff ects. The proportions of the individual risk types in the economic capital of the Capital Bank Group as at 31.12.2008 are contained in the chart.

Credit risk 19 %Capital guarantees 10 %

Market risk, banking book 1 %Market risk, trading book 1 %

Operational risk 6 %Investment risk 0.1 %

Other risks 2 %

RISK CATEGORIES

119

The amount of the total risk capacity used, in % of the risk collateral, in the Capital Bank Group at the end of the year was 39 % using the economic method. By comparison, the use in the economic method as at 31.12.2007 was 33 %.

Risk Capacity 2008

The required reconciliation process between the quantifi ed risk potential on one hand and the bank’s risk collateral potential on the other was therefore constantly taken into account during the 2008 fi nancial year.

0 % 10 % 20 % 30 % 40 %

34.26 %

37.80 %

35.67 %

39.95 %

50 %

169,11557,937

166,84163,062

163,29358,252

128,86651,487

31.3.2008

30.9.2008

30.6.2008

31.12.2008

Values in EUR m

Total banking riskRisk collateral

Capacity used, in % of equity capital

120

Summary

In the Capital Bank Group, mea-sures have been taken to limit and minimise all signifi cant risks. A bank-wide summary of the measur-able risks has been performed within the framework of the of the risk capacity analysis. In addition, measures have been taken to limit risks through an adequate limit system and by calculating various risk factors, above all in the market risk area. The risk capacity calcula-tion shows that the risk capacity of the Capital Bank Group is only partly used by risks and that there is suffi cient buff er to the available risk collateral.

The Capital Bank Group will con-tinue its business this year in accordance with its selected risk strategy. One of the focuses of the work of risk management in 2009 will be the harmonisation of the risk methods, risk systems and risk steering with those of the parent bank HYPO-BANK BURGEN-LAND AG. In addition, new chal-lenges in risk management are arising from the business activities

121

of Brüll Kallmus Bank AG. Another focus will be capital guarantees and the bank’s own issues, where an improvement in the representation of the result-ing risks should be achieved. A continuous improve-ment in the credit risk reporting should also be achieved. Alongside these projects, the current ICAAP process, the modifi cation of the reporting and the constant improvement in existing risk management activities represent other tasks of the risk management for the coming year. The expansion of steering instruments, training for the employees and the continuous improvement in internal risk quantifi cation methods also form the focus for 2009.

Graz, 11 March 2009

The Board of Directors

Dir.Christian Jauk, MBA e.h.

Dir. Mag.Constantin Veyder-Malberg e.h.

122

01. PROFIT FROM ORDINARY ACTIVITIES IN EUR K

2003 : 13,9042004 : 14,8302005 : 15,9612006 : 16,8402007 : 17,6632008 : 175

123

02. BALANCE SHEET TOTAL IN EUR K

2003 : 221,4932004 : 225,9752005 : 389,0542006 : 563,6842007 : 735,8292008 : 731,082

03. OPERATING PROFIT IN EUR K

2003 : 24,5842004 : 26,6662005 : 25,8582006 : 21,9012007 : 22,5582008 : 11,781

124

04. ASSETS UNDER MANAGEMENT (INCL. SECURITY KAG) IN EUR M

2003 : 2,5502004 : 3,2852005 : 4,5722006 : 6,1332007 : 7,3202008 : 5,631

125

05. OPERATING INCOME IN EUR M

2003 : 39,22004 : 42,92005 : 46,12006 : 45,52007 : 47,42008 : 33,2

06. NET INTEREST REVENUE IN EUR K

2003 : 3,4212004 : 4,4622005 : 4,9312006 : 7,4402007 : 10,6412008 : 9,426

126

07. PAYROLL COSTS IN EUR M

2003 : 9,92004 : 11,22005 : 13,22006 : 16,32007 : 15,52008 : 11,1

127

128

Report by the Supervi-sory Board

In four ordinary meetings and one extraordinary meeting of the Super-visory Board, in 2008, the Supervi-sory Board monitored reports and documents submitted by the Board of Directors, as well as through repeated contact with the manage-ment and approved their measures.

The 2008 Annual Accounts and Management Report, insofar as it refers to the Annual Accounts, have been audited by KPMG Wirt-schaftsprüfungs- und Steuerbera-tungs GmbH, 1090 Vienna. This audit did not give rise to any objec-tions, and consequently an unquali-fi ed audit certifi cate was issued.

The Supervisory Board has acknowledged the report and the proposed profi t distribution submit-ted by the Board of Directors and has audited and approved the Annual Accounts as at 31 December 2008, which is approved according to Section 125 para. 2 Austrian Stock Corporation Act.

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The Supervisory Board thanks all the customers for their confi dence in Capital Bank – GRAWE Gruppe AG and the Board of Directors and all employees for their work in 2008.

Graz, March 2009

Chairman of the Supervisory Board:

Mag. Dr. Othmar Ederer

Chairman of the Supervisory Board

130

08. BALANCE SHEET OF CAPITAL BANK – GRAWE GRUPPE AG

AS AT 31.12.2008

ASSETS 01. Cash and balances

at central banks02. Public authority debt instruments, authori-

sed for refi nancing at the central bank Public authority debt instruments and

similar securities03. Receivables from banks a) Due daily b) Other receivables04. Receivables from non-bank customers05. Loan stock and other

fi xed interest securities06. Shares and other non-fi xed

interest securities 07. Investments

incl. in banks 08. Shares in affi liated companies

incl. in banks 09. Intangible fi xed assets10. Material assets11. Other assets12. Accruals

TOTAL ASSETS

01. Foreign assets

114,065,328.49122,194,176.62

8,575.38

22,900,925.13

31.12.2008EUR

7,083,859.47

4,776,947.23236,259,505.11

143,447,266.13

25,735,899.06

119,010,046.179,318.42

23,972,255.30

249,626.112,603,216.85

167,157,962.12776,258.12

731,082,160.09

312,966,668,27

31.12.2007EUR K

8,019

5,958115,21559,46155,754

173,657

24,745

246,49299

12,00810,901

2611,564

147,307594

735,829

370,451

131

LIABILITIES

01. Liabilities to banks a) Due daily b) With agreed term or notice period02. Liabilities to non-bank customers

a) Savings deposits aa) Due daily bb) With agreed term or notice periodb) Other liabilities aa) Due daily bb) With agreed term or notice period

03. Securitised liabilitiesOther securitised liabilities

04. Other liabilities05. Deferrals06. Provisions

a) Provisions for severance paymentsb) Provisions for pensionsc) Tax provisionsd) Other

07. Subscribed capital Nominal amount

08. Capital reservesa) Tiedb) Non-tied

09. Retained profi ta) Stautory reservesb) Other reserves

10. Liability reserves according toSection 23 para. 6 BWG

11. Net profi ta) Profi t brought forwardb) Annual profi t

TOTAL LIABILITIES

01. Contingent liabilitiesLiabilities from bank sureties andliability from providing security

02. Credit risksincl. liabilities from pension transactions

03. Liabilities from trusts04. Eligible equity according to

Section 23 para. 14 BWG05. Required equity capital according to

Section 22 para. 1 BWGincl. required equity capital according toSection 22 para. 1 nos. 1 and 4 BWG

06. Foreign liabilities

39,813,093.5941,137,908.39

3,213,854.742,704,950.05

508,904.69233,338,679.98183,287,993.86

50,050,686.12

263,365,814.01

2,226,509.47444,027.00212,751.56

11,507,237.98

10,000,000.00

35,082,987.2220,832,674.43

1,504,504.4540,391,714.32

273,941.23210,118.27

9,200,000.00

46,488,483.84

31.12.2008EUR

80,951,001.98

236,552,534.72

263,365,814.01

18,699,343.450.00

14,390,526.01

10,000,000.00

55,915,661.65

41,896,218.77

8,827,000.00484,059.50

731,082,160.09

281,740,046.1121,060,120.00

21,556,369.91

122,918,012.5447,932,483.84

53,193,796.05

31.12.2007EUR K

78,42837,45640,971

234,6913,2761,6111,665

231,415221,743

9,672258,860258,86034,674

10136,224

1,316678213

34,01710,00010,00039,91635,083

4,83330,760

1,50529,256

8,4003,7742,874

900

735,829

242,5327,482

0

113,32139,577

36,93036,298

132

09. PROFIT AND LOSS ACOUNT OF CAPITAL BANK - GRAWE GRUPPE AG

FOR THE 2008 FINANCIAL YEAR

01. Interest and similar incomeincl. from fi xed interest securities

02. Interest and similar costs I. NET INTEREST REVENUE 03. Revenue from securities and investments

a) Income from shares, other equity interests and non-fi xed interest securitiesb) Income from investmentsc) Income from shareholdings in affi liated companies

04. Commission income05. Commission costs06. Revenue/expenses from fi nancial transactions07. Other operating income

II. OPERATING INCOME 8. General administrative expenses

a) Payroll costsaa) Wages and salariesbb) Expenses for statutory social charges and for income-based charges and compulsory contributionscc) Other social security expensesdd) Expenses for retirement benefi ts and supportee) Allocation to the pensions reserveff) Expenses for severance payments and payments to operational company pension funds

b) Other administrative expenses (operating expenses)

9. Value adjustments on the assets listed underasset items 9 and 10

10. Other operating expenses

III. OPERATING COSTS

31.12.2008EUR

21,097,341.91

-11,671,133.60

9,426,208.31

6,976,461.50

47,680,031.76-28,343,995.95

-4,284,787.801,784,196.28

33,238,114.10

-20,509,616.33

-936,568.78-11,192.02

-21,457,377.13

31.12.2007EUR K

20,1841,834

-9,543

10,641

3,754

2,7531

1,00083,179

-58,2287,327

694

47,368

-24,061-15,507-13,154

-1,636-199

-23512

-294

-8,554

-703-47

-24,811

2,291,840.62

4,963,199.571,670.93

2,011,591.00

-11,092,038.40-7,734,085.61

-1,983,026.58-163,808.54

-265,209.59234,469.00

-1,180,377.08

-9,417,577.93

133

IV. OPERATING PROFIT

11. Value adjustments on receivablesand allocation to reserves forcontingent liabilities and credit risks

12. Revenue from the reversal ofvalue adjustments on receivablesand from reserves for contingentliabilities and credit risks

13. Value adjustments on securities evaluatedas financial assets and on shareholdingsin affiliated companies

14.Revenue from the sale of securities evalu-ated as financial assets and on sharehol-dings in affiliated companies

V. PROFIT FROM ORDINARYACTIVITIES

15. Tax on income16. Other tax, if not to be entered

under item 15

VI. ANNUAL NET PROFIT / LOSS

17. Minority interests’ share of the annual profit

VII. ANNUAL PROFIT

18. Profit brought forward

VIII. NET PROFIT

31.12.2008EUR

11,780,736.97

-31,785,501.27

14,783,966.75

-469,356.05

5,865,297.61

175,144.01

430,169.00

-68,194.74

537,118.27

-327,000.00

210,118.27

273,941.23

484,059.50

31.12.2007EUR K

22,558

-7,862

1,883

-343

1,427

17,663

-6,449

-72

11,142

-10,242-442

900

2,874

3,774

-327,000.00

134

10. EQUITY AND EQUITY REQUIREMENTS IN EUR K

Core capital (Tier 1)Paid-up capitalCapital reserveRetained incomeLiability reserveConsolidation according to Section 24 para. 2 BWGIntangible fi xed assets

Non-core elements (Tier 2)Reserve as specifi ed in Section 57 para. 1 BWG and revaluation reserve

Deductions

Eligible equity capital

Assessment basis (non-trading portfolio)Core capital ratio (non-trading portfolio)Aggregated capital ratio (non-trading portfolio)

Equity requirements (non-trading portfolio)Equity requirements (trading portfolio)

Equity requirement operational risk

Equity surplus

2008

116,38910,00055,91641,896

8,8270

-250

6,5296,058

471

0

122,918

494,28823.55 %24.87 %

39,5431,444

6,946

74,985

Capital Bank – GRAWE Gruppe AG

2007

88,81510,00039,91630,760

8,4000

-261

24,50624,000

506

0

113,321

461,62019.24 %24.55 %

36,9302,647

-

73,744

135

136

11. SCHEDULE OF ASSETS OF CAPITAL BANK - GRAWE GRUPPE AG AS AT 31.12.2008

Public authority bondsReceivbles from banks(securities)Receivables from customers(securities)Bonds and other fi xedincome securitiesShares and other non-fi xedincome securitiesInvestmentsShares in affi liated companiesIntangible assetsMaterial assetsLow-value assets

TOTAL ASSETS

As at01.01.2008

2,882,195.00

0.00

0.00

14,000,000.00

19,407,642.799,334.89

12,007,815.30512,936.58

5,781,796.240.00

54,601,720,80

Additions through

reorganisation

39,365.80

71,072.00

70,000.0012,000,000.00

5,577.899,797.00

12,195,812.69

Additions

66,847.74

2,083,845.22

35,000.00169,531.98

1,733,603.6758,147.57

4,146,976.18

Disposals

1,339,365.80

7,000,000.00

4,784,564.8270,000.0070,560.00

0.00223,491.30

58,147.57

13,546,129.49

Procurement and manufacturing costsin EUR

137

cumulative

41,825.00

0.00

0.00

2,288.00

1,665,386.8016.47

0.00438,420.34

4,698,488.760.00

6,846,425.37

As at31.12.2008

1,649,042.74

0.00

0.00

7,071,072.00

16,706,923.199,334.89

23,972,255.30688,046.45

7,301,705.610.00

57,398,380.18

31.12.2008

1,607,217.74

0.00

0.00

7,068,784.00

15,041,536.399,318.42

23,972,255.30249,626.11

2,603,216.850.00

50,551,954.81

31.12.2008

2,839,850.00

0.00

0.00

14,000,000.00

18,089,564.829,318.42

12,007,815.30261,497.99

1,564,015.150.00

48,772,061.68

01.01.2008

2,839,850.00

0.00

0.00

14,000,000.00

18,089,564.829,318.42

23,972,255.30264,025.99

1,568,406.310.00

60,743,420.84

2008

0.00

0.00

0.00

988.00

347,308.830.000.00

183,931.86694,489.35

58,147.57

1,284,865.61

Depreciation Book valueBook value Book value Depreciation

138

Extract from the Notes on Capital Bank – GRAWE Gruppe AG AnnualAccounts asat 31.12.2008

A. GENERAL INFORMATION

The Capital Bank Group, which belongs to the banking group of Grazer Wechselseitige Versicherung AG (hereinafter referred to as GRAWE), underwent signifi cant changes as a result of a reorganisa-tion of the group undertaken by the owner. Extensive reorganisations were necessary under company law with the aim of optimising the banking activities and to integrate HYPO-BANK BURGENLAND Aktiengesellschaft (hereinafter referred to as Bank Burgenland), which is also part of the GRAWE Group.

With resolutions passed by the General Meeting of Capital Bank International – GRAWE Group AG (hereinafter referred to as CBI) on 23 June 2008, CBI (assuming bank) merged with CBH – Holding Österreich GmbH (transferring company) and there was also a merger with CBH – Holding Inter-national GmbH (also as transferring company).

139

In the General Meeting of 26 August 2008, the demerger for inclusion of CAPITAL BANK – GRAWE Gruppe AG (hereinafter referred to as Capital Bank) was approved with the demerger contract of the same date by transferring CBI’s assets.

The General Meeting resolution of 15 September 2008 ultimately led to the demerger of the sub-division “Private Banking Italy” with the demerger and takeover contract of the same date from CBI and inclusion in Capital Bank. At the same time, the company changed its name from Capital Bank International – GRAWE Group AG to Brüll Kallmus Bank AG.

In the newly formed banking group, Capital Bank – GRAWE Gruppe AG is a subsidiary of Bank Burgenland, which acts as the superordinate bank. The main subsidiaries of Capital Bank are the hold-ings in Brüll Kallmus Bank AG, which was formed from Capital Bank International AG, and Security Kapitalanlage Aktiengesellschaft.

The parent company, which prepares the con-solidated Annual Accounts for the largest group of companies, is Grazer Wechselseitige Versicherung AG, Graz. The consolidated Annual Accounts are published at the parent company’s place of domicile. The parent company, which prepares the consolidated Annual Accounts for the banking group of companies, is HYPO-BANK BURGENLAND

140140

Extract from theNotes on Capital Bank – GRAWE Gruppe AG Annual Accounts as at 31.12.2008

Aktiengesellschaft, Eisenstadt. The consolidated Annual Accounts of HYPO-BANK BURGENLAND Aktiengesellschaft are lodged with the Eisenstadt Provincial Court.

The comparison fi gures stated come from the 2007 Annual Accounts and are in brackets. The Annual Accounts of Capital Bank has been prepared in accordance with the provisions of the Austrian Banking Act in the current version and also – insofar as is applicable – the provisions of company law. The balance sheet and profi t and loss account are laid out corresponding to the forms contained in Annex 2 to Section 43 BWG.

B. Accounting and Valuation Methods

The Annual Accounts of Capital Bank and the subsidiaries have been prepared according to the principles of proper accounting in compli-ance with the general standard in order to provide as true an image of the asset, fi nancial and income situation as possible. The principle of completeness was observed

141

when preparing the Annual Accounts. The principle of individual valuation is applied to the assets and debts. All identifi able risks and anticipated losses, which occurred in the 2008 fi nancial year or earlier, have been taken into account. The valuation method previous applied has been adhered to.

The precautionary principle has been duly observed through displaying only the profi ts realised on the balance sheet date and taking into account all recog-nisable risks and anticipated losses.

For foreign currency receivables and liabilities, the ECB’s reference exchange rates (average exchange rates) published on 31 December 2008 are applied.

Securities are assessed at procurement costs or lower market costs or, for fi xed interest securities, at the lower redemption sum (strict lower-of-cost-or-market principle), irrespective of whether they are classifi ed as fi xed assets or current assets. The securities of the trading portfolio are assessed at market values. The criterion for belonging to the fi xed assets is the sustained attainment of income or the existence of restrictions of disposal. Short stocks of securities are reported under Other liabilities.

Receivables to banks and non-bank customers have generally been assessed at nominal values. All risks identifi able in the credit business are taken into account through the application of appropriate individual write-downs. In addition, customer

142142

Extract from theNotes on Capital Bank – GRAWE Gruppe AG Annual Accounts as at 31.12.2008

receivables are hedged with deriva-tives and thus form a valuation unit with them. Counter transactions have been concluded by the bank with partner banks for these hedg-ing transactions, which together for a valuation unit.

Investments and shareholdings in affi liated companies are assessed at procurement costs or, where there was sustained value reduction, at the reduced value as at the balance sheet date.

Buildings and equipment are assessed at procurement costs, less the scheduled depreciation. The scheduled depreciation was applied on a straight-line basis. Low-value items were fully written off in the year of purchase.

The depreciation rates were 2.5 % to 10 % p. a. for immovables and 10 % to 33.3 % p.a. for movables. The full annual depreciation was off set against the receipts in the fi rst half of the fi nancial year, whilst half the annual depreciation was off set against the receipts in the second half of the fi nancial year.

143

Intangible assets of the fi xed assets exclusively include purchased software. Straight-line deprecia-tion is applied with rates of 25 % and 33.3 % p.a.

Securitised liabilities contain items for which the redemption sum is dependent on the market value of set basic investments and which are consequently assessed at the current market value of these items. These securitised liabilities constitute a valuation unit with the assets entered under various items. The securitised liabilities are furnished in part with a capital guarantee.

The remaining liabilities have been reported at the repayment amount.

When assessing the provisions, all identifi able risks and anticipated losses, as well as the amount of the liabilities not yet determined, have been taken into account corresponding to the statutory requirements.

Provisions for severance payments are calculated according to recognised actuarial principles (in the previous year according to fi nancial principles based on an interest rate of 4 %) using AVÖ 2008 – Pagler- Pagler P-Basis for calculating pension insurance. Claims are valued according to the Projected Unit Credit Method. Moreover, for the calculations a pension age of 65 has been assumed for men and 60 for women. A long-term capital market interest rate of 5.5 % has been assumed.

144144

Extract from theNotes on Capital Bank – GRAWE Gruppe AG Annual Accounts as at 31.12.2008

Provisions for pensions are also calculated according to recognised actuarial principles using the AVÖ 2008 – Pagler- Pagler P-calculation basis for pension insurance. Claims are valued according to the Projected Unit Credit Method. The group of benefi ciaries exclusively includes pension recipients. A long-term capital market interest rate of 5.5 % has been assumed. The calculation in the previous year was performed according to recognised actuarial principles based on an interest rate of 4 %.

The option in Section 57 para. 1 BWG has been exercised in the 2008 Annual Accounts, as in the previous year.

C. Notes on the Annual Accounts

Fixed Assets

The break down of the fi xed assets and their development are shown in the Schedule of Assets (cf. Annex 1 to the Notes). As in the previous year, the Bank did not have any

145

developed or undeveloped properties as at the reporting date.

Securities

The total level of the securities portfolio (incl. rateable interest) as at the end of the year totalled EUR 308.8 million (EUR 421.7 m). Of this, a volume of EUR 244.1 million acts as the basic investment for securitised liabilities and total return swaps, with which valuation units have been formed. Of the bonds and other fi xed income securities, nominals of EUR 10.5 million (EUR 4.2 million) become due on the reporting date in the following year.

The diff erence from the procurement costs and the higher market value on the reporting date of securities authorised for trade on the stock exchange, which are not fi nancial assets, totals EUR 271 K (EUR 89 K).

The bank’s fi xed assets as at 31 December 2008 includes securities with a book value of EUR 23.7 million (EUR 34.9 million). The diff erence between procurement costs and higher market value totals EUR 0.6 million (EUR 6.8 million).

Securities of the fi xed assets include the following positions:

146146

Extract from theNotes on Capital Bank – GRAWE Gruppe AG Annual Accounts as at 31.12.2008

– A2 public authority bonds EUR 1.6 million (EUR 2.8 million); – A5 bonds and other fi xed income

securities EUR 7.1 million (EUR 14.0 million) – A6 shares and other non-fi xed

income securities EUR 15.0 million (EUR 18.1 million).

We also refer to the enclosed Sched-ule of Assets, Annex 1.The company maintains a trading book according to Section 2 No. 35 BWG. Positions of the trading book are valued at market prices. As at 31 December 2008, this totalled EUR 27.1 million (EUR 55.0 million).The securities devoted to the trad-ing stock are listed in the following positions:

– in A3 receivables due to banks EUR 0.0 million (EUR 1.1 million); – in A4 receivables due to non-

banking customer EUR 1.3 million (EUR 2.7 million); – in A5 bonds and other fi xed

income securities EUR 6.7 million (EUR 4.9 million) – in A6 share and other non-fi xed

income securities EUR 19.1 million (EUR 46.3 million).

147

The securities authorised for trading comprise the following:

Bonds include lower-ranking assets totalling EUR 7.1 million (previous year: EUR 14.0 million).

Investments

Investments and shareholdings in affi liated compa-nies are not authorised for stock exchange trading.

in current assets

13,113

189,211

17,097

84,821

Listed

31,054

74,017

30,514

18,915

Not listed

7,589

179,604

3,242

100,095

in fi xedassets

16,840

18,090

8,676

15,042

in EUR K

2007Bonds and other fi xedincome securitiesShares and other non-fi xedincome securities

2008Bonds and other fi xedincome securitiesShares and other non-fi xedincome securities

148148

Extract from theNotes on Capital Bank – GRAWE Gruppe AG Annual Accounts as at 31.12.2008

As at 31 December 2008, the bank held at least a 20 % stake in the following companies 1)

d=direct stake;1) Section 241 para. 2 UGB applied;2) The equity capital is calculated according to Section 229 UGB and includes the taxed reserves; incl. balance sheet profi t.3) The annual profi t / loss has been applied before transactions involving reserves according to Section 231 para. 2 no. 22 UGB.

*) Newly founded in November 2008, no Annual Accounts.

direct / indirect

dd

ddd

Equity capital k in

EUR K 2)

12,42417,867

10,89961

Annual results in EUR K 3)

2151,997

9418

Accounts

20082008

20072007

Company, cap. in EUR K

6,0004,362

1,0003535

Own share

100 %100 %

100 %67 %

100 %

Holding

Brüll Kallmus Bank AGSecurity KAGCorporate Finance –GRAWE Gruppe GmbHCENTECCB Family Offi ce Service GmbH*)

149

Receivables Due from Banksand Non-Bank Customers

Receivables due from banks include EUR 0.6 million (EUR 1.1 million) securitised receivables not author-ised for stock exchange trading.Receivables from non-bank customers include EUR 2.7 million (EUR 6.5 million) securitised receivables not authorised for stock exchange trading.

Representation of the Maturities

There is sales tax affi liation between CORPORATE FINANCE – GRAWE GRUPPE GmbH and CEN-TEC.AT SOFTWAREENTWICKLUNGS UND DIENSTLEISTUNGS GmbH.

Capital Bank is part of a group of companies according to Section 9 KStG, group leader is Bank Burgenland.

31.12.2007

60,660 63,293 42,977 20,340

187,270

Receivables

31.12.2007

10,98738,728

5032,089

52,307

31.12.2008

114,128 89,761 44,038 20,945

268,872

31.12.2008

39,948 59,885 491 2,328

102,652

Receivables / liabilitiesnot due dailyTotal banks and non-bank customers (in EUR K)

Up to 3 monthsBetween 3 months and 1 yearBetween 1 and 5 yearsMore than 5 years

Total

Liabilities

150150

Extract from theNotes on Capital Bank – GRAWE Gruppe AG Annual Accounts as at 31.12.2008

Publication according to Section 26 BWG is through the superordinate bank HYPO-BANK BURGEN-LAND AG. Receivables and liabilities among affi liated companies and companies linked by virtue of participating interests

in EUR K

Receivables from banksIncl. from affi liated companiesIncl. from companies linked by virtue of participating interests

Receivables from customersIncl. from affi liated companies

Liabilities to banksIncl. to affi liated companiesIncl. to companies linked by virtue of participating interests

Liabilities to customersIncl. to affi liated companies

31.12.2008

219,139

8

13,168

61,501

794

22,521

31.12.2007

11,921

8

5,303

33,140

68

7,379

151

Other Assets

Positions above EUR 1 Million(all fi gures in EUR K):

Other Liabilities

This item contains Tax Offi ce liabilities of EUR 2,058 K (previous year: EUR 1,921 K) and liabilities from securities clearing of EUR 1,692 K (previous year: EUR 11,971 K). Expenditure only recorded against results after the reporting date mainly refer to personnel costs of EUR 1,074 K (previous year: EUR 1,138 K) and various material costs.

As at 31 December 2008, there were insignifi cant guilt-edged savings deposits.

Securities Liabilities

Securities liabilities of EUR 17.2 million (previous year: EUR 4.8 million) will become due in the next fi nancial year.

in EUR K

Other shares in companiesTax Offi ce clearing accountReceivables due from affi liated companiesLife insurance policies underwrittenClearing balances on settlement accounts

31.12.2008

155,5031,6251,9965,4235,622

31.12.2007

123,813604

1,8615,0437,331

152152

Extract from theNotes on Capital Bank – GRAWE Gruppe AG Annual Accounts as at 31.12.2008

Other Provisions

The other provisions mainly include provisions for loss cases totalling EUR 3,449 K (EUR 15,026 K), for holidays not taken totalling EUR 435 K (EUR 800 K), for other personnel costs totalling EUR 2,732 K (EUR 8,570 K), and for com-mission payments totalling EUR 1,704 K (EUR 4,504 K). In the last fi nancial year, provisions of around EUR 13.2 million were redeemed from pending legal proceedings.

Share Capital

The company’s share capital remains at EUR 10.0 million and is divided into 1,376,030 ordinary shares. Of these, 729,030 are bearer shares and 647,000 are registered shares with restricted transferability.

153

D. Notes on the Profi t and Loss Account

A breakdown of revenue by geographic market according to Section 64 (1) Z9 BWG is omitted, as the geographic markets, considered from the perspective of the organisation, do not diff er signifi cantly.

Income from securities and investments includes payouts from affi liated companies of EUR 2,012 K (previous year: EUR 1,000 K).

Income / costs from fi nancial transactions includes sales profi ts from securities transactions of EUR 43,089 K (previous year: EUR 26,427 K) which are off set by losses from this area of EUR 48,312 K (previous year: EUR 20,030 K).

Other operating income mainly includes the dissolu-tion of provisions of EUR 1,106 K and income from the Service Level Agreements of EUR 310 K.

The balance from write-downs on receivables and allocations to provisions for contingent liabilities and credit risks, as well as income from the reversal of write-downs on receivables and allocations to provisions for contingent liabilities totals EUR -17.0 million (EUR -6.0 million).

The balance from write-downs on investments and income from adjustments on receivables, which are

154154

Extract from theNotes on Capital Bank – GRAWE Gruppe AG Annual Accounts as at 31.12.2008

valued like fi nancial assets, totals EUR 5.4 million (EUR 1.1 million).

The possible capitalised deferred tax according to Section 198 para. 10 UGB (Austrian Business Code) as at the reporting date totals EUR 2.0 million (previous year: EUR 6.9 million). The capitalisation option has not been applied.

Obligations from the use of material assets (without indexing) not reported in the balance sheet:

The write-downs on receivables and allocations to reserves for contin-gent liabilities and credit risks were adjusted within the framework of the conditions of Section 57 para. 2 BWG.

Obligations 2009 (2008)Obligations 2009–2013 (2008–2012)

EUR K

9405,160

EUR K

(820)(4,320)

OBLIGATIONS FROM THE USE OF MATERIAL ASSETS (WITHOUT INDEXING)

NOT REPORTED IN THE BALANCE SHEET

155

E. Additional Information

The assets on the balance sheet, which are in foreign currencies, total EUR 140.1 million as at the report-ing date (previous year: EUR 131.9 million EUR), the liabilities on the balance sheet, which are in foreign currencies, total EUR 40.3 million (previous year: EUR 19.6 million).

The following forward contracts not yet settled are open as at the reporting date:

As at the reporting date, forward currency purchases with a nominal value of EUR 41.3 million (previous year: EUR 11.5 million) were off set against forward currency sales of EUR 40.9 million (previous year: EUR 11.5 million).

Furthermore, as at 31 December 2008 there were sales contracts from currency swaps and forward currency contracts for EUR 100.0 million (previous year: EUR 124.5 million) to hedge currency risks and interest swaps of EUR 36.2 million (previous year: EUR 34.0 million). As at the reporting date, there were no hedging transactions for credit derivatives (previous year: none). The valuation result from currency swaps and forward currency contracts was recorded against the results.

156156

Extract from theNotes on Capital Bank – GRAWE Gruppe AG Annual Accounts as at 31.12.2008

The derivative transaction volume is represented as follows, using fair values as at 31 December 2008:

Nominal valueIn EUR K Market value positive

1. Interest rate agreementsOTC products:

Forward rate agreementsInterest swapsInterest optionsOther similar agreements

Traded products

2. Exchange rate agreementsOTC products:

Forward exchange agreementsCurrency optionsCurrency swapsOther similar agreements

Traded products

3. Securities-related agreementsOTC products:

Share options boughtShare options soldSecurity swapsOther similar agreements

Traded productsPurchased share optionsSold share options

Total

-36,247

--

-

182,149--

15,377

-

18,84011,90030,000

-

4,8529,582

308,946

31.12.2008 31.12.2007 31.12.2008 31.12.2007

-(34,047)

--

-

129,682-

(19,545)-

-

(61,141)(20,682)(30,000)

-

(18,655)(1,017)

(314,768)

----

-

9,027--

751

-

1,477-

2,625-

2,412-

16,293

-(5)

--

-

(1,962)-

(179)-

-

(6,941)---

(1,413)-

(10,500)

157

-(17)

--

-

(313)---

-

-(894)

(6,482)-

--

(7,706)

-147

--

-

987--

751

-

-527

--

-31

2,443

----

-

8,313---

-

1,477---

2,412-

12,202

-87

--

-

335---

-

-527

--

-31

980

Market value negative Book value31.12.2008 31.12.2007 Active Passive

158158

Extract from theNotes on Capital Bank – GRAWE Gruppe AG Annual Accounts as at 31.12.2008

The options are valued on the basis of theoretical option prices. The theoretical option prices are calculated according to the Black and Scholes method. The implicit volatility is assumed as the basis for calculating the theoretical option prices.

Currency forwards and currency swaps are valued at the ECB’s valuation rate on the respective reporting date taking into account the interest rates of the currency involved and the residual terms. External valuations are applied to other derivatives.

Positive market values are only applied if derivatives are allocating to the trading stock or are in a valuation unit with own issues.

Negative market values from interest swaps totalling EUR 60 K are not accrued, as they are in a valuation unit with securities swaps.

159

Contingent Liabilities

The contingent liabilities as at 31 December 2008 include capital guarantees for state-aided pension provision of EUR 115.2 million (EUR 76.5 million) and other capital guarantees of EUR 154.7 million (EUR 164.9 million). As at the reporting date, there were two genuine pension transactions with a volume of EUR 18.4 million.

The credit risks reported below the balance sheet are credits not yet claims of EUR 21.1 million (EUR 7.5 million).

There is also an obligation from the membership, mandatory according to Section 93 BWG, of the Banken & Bankiers Gesellschaft mbH deposits guarantee scheme. If this deposit guarantee scheme is used, according to Section 93a para. 1 BWG this totals a maximum of 0.93% of the assessment basis for the individual bank plus 12.5 times the equity capital requirement for positions of the trading book as at the last reporting date. Thus the upper limit is calculated to be EUR 4.8 million (EUR 3.8 million).

Securities with a book value of EUR 4.9 million (EUR 7.7 million) have been lodged as an arrange-ment deposit. There are also cash deposits of EUR 50 K (EUR 50 K). There is also collateral of EUR 269 K (EUR 269 K) for pension provisions.

160160

Extract from theNotes on Capital Bank – GRAWE Gruppe AG Annual Accounts as at 31.12.2008

F. Other Information

During the 2008 fi nancial year, the average number of employees totalled 159 (138) plus an unaltered 6 blue-collar workers.

Receivables due from non-bank customers as at 31 December 2008 include loans to members of the Board of Directors totalling EUR 3 K (EUR 6 K) and to members of the Supervisory Board totalling EUR 3 K (previous year: EUR 102 K). Interest rates and other conditions (term and security) are customary for this line of business.

Costs for severance payments and pensions, including allocations to provisions, total EUR 105 K (EUR 140 K) for senior employees and EUR 1,141 K (EUR 377 K) for other employees.

Costs for pensions to former mem-bers of the Board of Directors total EUR 115 K (EUR 110 K).

Directors’ emoluments:The provisions laid down under Article 241 (4) UGB were applied.

161

The Members of the Supervisory Board were not remunerated for their work over the course of the fi nancial year.

162

We have performed an audit, incor-porating the company accounts, for the Annual Accounts for Capital Bank – GRAWE Gruppe AG, Graz, for the fi nancial year from 1 January to 31 December 2007. The accounts, the preparation and the contents of these Annual Accounts and the Management Report, issued in accordance with the commercial regulations applicable in Austria, come under the responsibility of the company’s statutory representa-tives. It is our responsibility to issue an audit fi nding for these Annual Accounts on the basis of our audit and a statement as to whether the Management Report complies with the Annual Accounts.

We have performed our audit taking into account the statutory regulations and standard commercial principles applica-ble in Austria. These principles require the audit to be planned and performed in such a way that a suffi ciently secure fi nding can be drawn from the audit, declaring whether the Annual Accounts are free of major inconsistencies, and a statement can be made as to whether the Management Report complies with the Annual Accounts. When laying down the audit procedures, knowledge of the business operations and the com-

Auditcertifi cation

The una-bridged Financial Accounts for Capital Bank – GRAWE Gruppe AG as at 31.12.2008 were issued with thefollowingunqualifi edauditcertifi cate by the chosen auditor:

163

mercial and legal environment of the company and the ex-pectations with regard to possible inconsistencies are taken into account. The audit includes a random inspection of the documentary records for fi gures and other information in the Annual Accounts. It also includes evaluation of the accounting principles and of signifi cant estimates per-formed by the statutory representatives and an appraisal of the Annual Accounts as a whole. We are of the view that our audit constitutes a suffi ciently secure basis for our audit fi nding.

Our audit did not lead to any objections. On the basis of the fi ndings drawn from the audit we have performed, we feel that the Annual Accounts comply with the statutory regulations and provide the truest possible refl ection of the assets, fi nances and earnings of the company in compliance with the Austrian principles of sound accounting practice. The Management Report complies with the Annual Ac-counts.

Vienna, 11 March 2009

KPMGWirtschaftsprüfungs- und Steuerberatungs GmbH

Mag. Bernhard Gruber Mag. Rainer HasslerAuditor AuditorPublication or circulation of the Annual Accounts bearing our audit certifi cate may only be performed using the version we have audited. Compliance with the regulations of Article 281 Paragraph 2 UGB is required for any alternative versions (e.g. abbreviated versions or translated versions). The Annual Accounts are lodged with the Commercial Register of the Graz Provincial Court for Matters under Civil Law under FN 112471z and is published in the Offi cial Gazette of the ‘Wiener Zeitung’ newspaper.

164

RETROSPECTIVE

165

166

2008 was the most diffi cult year for the global banking industry for dec-ades. Capital Bank – GRAWE Gruppe AG (“Capital Bank”) and its subsidiar-ies were not able to escape this devel-opment in the last fi nancial year. The business model is too oriented on the performance of national and interna-tional fi nancial markets. However, the operative business mostly achieved the budget targets. The individual business divisions experienced greatly varying performances, however. The overall results suff ered from the – in part very surprising – risk components.

In Investment Banking, the bank had to adjust its capacities to the changes, caused by the enormous increase in volatility on the stock market with simultaneously large falls in liquidity and lower trading volumes. In Shares, Capital Bank is concentrating on traditional equity sales with institu-tional customers. Leveraged Finance and Corporate Finance divisions were positioned defensively as much as possible in the last fi nancial year because of the deteriorating market environment in the credit market.

2008Retro-spective and prospects of the Capital Bank – GRAWE Gruppe AG sub-group

167

The most signifi cant division, Private Banking, was restructured in 2008 as a result of effi ciency and costs considerations in order to allow for the altered general conditions. As a result, Corporate Investments, which specialises in looking after corporate customers, Private Banking International and Private Banking Salzburg were merged and placed under a uniform management. The integration should put the bank in a stronger position, which is underlined in 2009 with a new location in Salzburg. The Profi t Centers in Graz and Vienna were able to defend their market position, even if income was down. The Family Offi ce remained true to its core business of looking after family businesses and private foundations but, like Private Banking, was also unable to avoid the crisis on the fi nancial markets and recorded a fall in customer securities volumes.

The third division, the so-called “platform business”, where Capital Bank’s role is reduced to the custodian of customers of independent licensed fi nancial service providers, recorded a considerable reduction in transac-tion volumes because of the negative performance of the fi nancial markets, on one hand, and due to the structural change of the market for independent fi nancial services providers on the other. In the last few weeks, an increase in this business was detected. In the 2008 fi nancial year, the platform recorded total revenue of EUR 682 million and 18,000 new custodian accounts were opened, bring-ing the total to around 110,000 custodian accounts as at 31.12.08. Altered customer behaviour, and lower transac-tion volumes, resulted in the need to make adjustments to staff and services. These structural measures, which

168

should guarantee the success of Capi-tal Bank over the long-term, derive from a medium-term crisis situation.

In the last fi nancial year, Capital Bank and HYPO-BANK BURGENLAND (“Bank Burgenland”), together with their owner Grazer Wechselseitige Versicherung AG (“GRAWE”), reor-ganised their banking investments. The aim of this cooperation was to create a uniform banking group in order to optimise the banking activi-ties of the GRAWE Group. In general, the main focus was on strategic consid-erations, such as the expansion of business and quality synergies, equity optimisation, reinforcing the competi-tive and success factors, and aspects of a joint tax group. Costs synergies did not represent a primary strategic goal of this cooperation. The realignment of the GRAWE Group’s banking activities was successfully completed and Capital Bank, including its subsidi-aries and participations, were brought into Bank Burgenland.

In autumn 2008, the wholly-owned subsidiary of Capital Bank, Capital Bank International – GRAWE Group AG was renamed Brüll Kallmus Bank

169

AG (“Brüll Kallmus Bank”) and a team of experienced and highly specialised experts were hired to expand the business with institutional and semi-institutional inves-tors. The focus of Brüll Kallmus Bank lies in looking after institutional customers in the areas of bonds, investment banking consultancy and alternative invest-ments. Brüll Kallmus Bank has its headquarters in Graz, and last year a branch was opened in Linz. Since chang-ing its name, in the last three months of the previous fi nancial year Brüll Kallmus Bank has fi nalised its market appearance in legal, strategic and marketing terms. From a strategic perspective, Brüll Kallmus Bank will revitalise a customer segment which has been very successful in the past.

The investment company of Capital Bank, Security KAG, also felt the eff ects of the patchy economic environment. Security KAG’s volume of securities accounts fell by almost 27 % to EUR 1.23 billion.

170

The General Economic Environment

The economic outlook for 2008 was already gloomy at the start of the year due to weak economic indica-tors. The fi nancial crisis led to a collapse in the global economy. Forecasts by international organisa-tions signal a large economic deterio-ration in 2009 as well. The available economic data confi rm the forecasts, as the following representations show.

European Union

The eff ects of the fi nancial crisis on the real economy, in the form of higher fi nancing costs, falling busi-ness and consumer confi dence, and weaker foreign demand, have resulted in the fi rst recession in the EU area since the launch of the single currency. Economic growth in the EU area for 2008 totalled 0.9 %, according to fi rst extrapolations, with GDP growth in the Euro zone at 0.8 %. In the previous year, growth rates of 2.9 % and 2.6 % respectively were achieved. This was according to Eurostat, the Statistical

Sources:OeNB, Kon-junktur aktuell, December 2008,Eurostat, Euro-pean Economic Indicators 2009 OECDOECD, World EconomicOutlook

171

Offi ce of the European Union, using current calculations.

For 2009, a decrease in the size of the economy of the EU area of minus 3.0 % points is predicted. According to the OECD, a sustained recession is expected until at least the third quarter of 2009. The forecasts for 2010, according to current calculations, assume a slight recovery and economic growth of at least zero percent. However, the report points out that coun-tries such as Ireland and Spain have to overcome a marked recession in the next few years because of falling property prices.

The annual infl ation rate in the entire EU area was 3.7 % in the 2008 fi nancial year, compared to 2.3 % in the previous year. The Euro zone reported slightly less infl ation of 3.3 % (2.3 %). At the same time, the seasonally-adjusted, harmonised unemployment rate in the EU area in December 2008 was 7.6 %, com-pared to 7.4 % in November, according to Eurostat calculations.

Eurostat also estimates that in December 2008, a total of 17,911 million men and women were unem-ployed across the EU. Austria, with an unemployment rate of 3.8 % (according to the international ILO/Eurostat defi nition), had one of the lowest rates, while the Netherlands had the lowest unemployment rate of 2.8 %.

172

The recently published spring fore-cast by the EU Commission assumes an average budget defi cit in the Euro zone in 2009 of 5.3 % and also predicts an increase to 6.5 % for 2010. According to the autumn forecast, the budget defi cit in the current fi nancial year was to be 1.8 % and 2 % in 2010.

In view of this, the EU Commission expects employment in the Euro area to fall by 2.6 % in 2009 and 1.5 % in 2010 and the unemployment rate to increase to 9.9 % and 11.5 % respectively. According to the spring forecast, infl ation, measured using the Harmonised Index of Consumer Prices (HICP), will be less than 1 % in 2009 and will increase to 1.25 % in 2010.

173

Interest rate development

At the end of the third quarter 2008, the ECB’s cycle of rising minimum bid interest rates came to an end and a cycle of falling rates followed, which with four reductions brought interest rates to 2 % on 15.01.2009, with further downward corrections being announced for the fi rst quarter of 2009. The eff ect of a rapid capital fl ow stimulus at the interbank level has largely remained unattained, indeed confi dence in the capital market could not be restored and deposits with the ECB reached ever higher record levels by the end of 2008.

CYCLE OF FALLING INTEREST RATES

CYCLE OF RISING INTEREST RATES

08.10.2008: 3.75 percent (- 0.50 percentage points)06.11.2008: 3.25 percent (- 0.50 percentage points)04.12.2008: 2.50 percent (- 0.75 percentage points)15.01.2009: 2.00 percent (- 0.50 percentage points) 05.03.2009: 1.50 percent (- 0.50 percentage points) 02.04.2009: 1.25 percent (- 0.25 percentage points) 07.05.2009: 1.00 percent (- 0.25 percentage points)

06.06.2007: 4.00 percent (+ 0.25 percentage points)03.07.2008: 4.25 percent (+ 0.25 percentage points)

174

Austrian economy

As a result of the fi nancial crisis and the predicted global economic decline for all of 2009, the Austrian economy did not escape from a recession either. With negative growth of -0.2 % in the fourth quarter of 2008 compared to the third quarter, the Austrian economy shrunk for the fi rst time since 2001. For the 2008 fi nancial year, GDP still grew, according to calculations by the WIFO (Austrian Institute of Economic Research), by 1.8 % points in real terms. Austria’s gross domestic product (GDP) was therefore above the EU average of 0.9 % for the EU area.

This development was above all due to the recession in export-oriented manufacturing. In 2008, this recorded growth of around 3.0 % (real added value), and in 2009, according to the forecasts, will fall by up to 2.8 %. In the past fi nancial year, goods exports increased by 0.9 % (2007, plus 8.7 %), and according to WIFO will fall by up to 7.0 % in 2009. Since 2002, actual consumer demand among private

Sources:OeNB, Konjunkturaktuell, December 2008,Eurostat, European Economic Indicators 2009 OECDOECD, WorldEconomic Outlookhttp://ec.europa.eu/economy_fi nance/thematic_articles/arti-cle14927_en.htmSpring forecasts 2009-2010

175

households has remained considerably behind the performance of actually available household income. This development slowed in 2007. Consumer spend-ing in 2008 was around 1 % less than the comparable fi gure for the previous year. According to forecasts, 2009 will also develop negatively and consumer spending will fall by up to -3.8 %. For 2010, economic experts expect a slight recovery and a change com-pared to 2009 of -0.3 %. A continuing, increasing savings ratio is also assumed for the coming fi nancial year.

For 2009, the WIFO expects a further fall in eco-nomic output across the EU by up to 3.0 % and zero growth for 2010. This is why a fall in GDP in real terms is also expected in Austria in 2009 of 2.2 %, despite the massive counter measures of fi scal policy.

Infl ation accelerated to almost 4 % in mid-2008. By the end of the year, the infl ation rate had fallen back considerably to 3.2 % as a result of falling energy, raw material and food prices. According to the forecasts, price pressure is expected to decrease in 2009 and 2010 as well, and infl ation should fall to 0.6 % and 1.2 % respectively.

176

The decline in economic output has already had a massive impact on the national labour market. While it was still possible in 2008 for the unemployment rate to fall to 5.8 % or 212,253, for 2009 the WIFO is predicting an increase in the number of unemployed of 52,000, and the number should increase by a slightly smaller amount in 2010.

In order to counter the fi nancial crisis and the accompanying reces-sion, fi scal measures have been taken worldwide. In many cases, the plans envisage an increase in gov-ernment debt. For example, in Austria the total state budget defi cit, according to Maastricht 2008, will deteriorate to -0.7 of GDP. Accord-ing to the spring forecast from the EU Commission for 2009 and 2010, a budget defi cit of 4.2 % and 5.3 % respectively is assumed for Austria. In autumn 2008, the Commission was expecting new debt for Austria of “only” 1.2 % and 1.4 % for 2010.

1) Sources:WIFO, Statistik Austria, December 2008OeNB, Konjunkturaktuell, December 2008http://ec.europa.eu/economy_fi nance/thematic_articles/arti-cle14927_en.htmSpring forecasts2009-2010

177

Balance Sheet

Because of the reorganisation of the Capital Bank Group in the last fi nancial year, and because of the fact that the fi gures are now included in the consoli-dated annual report of HYPO-BANK BURGEN-LAND AG, it is not sensible to compare the group fi gures from the previous year. This is no longer a group, but a subgroup of the Capital Bank banking group. The fi gures explained below are therefore audited but not certifi ed by auditors and serve as orientation for the reader over the economic devel-opment of Capital Bank and its subsidiaries.

The balance sheet total of the Capital Bank subgroup as at 31.12.2008 was around EUR 730 million. Receiv-ables due from customers in the 2008 fi nancial year totalled around EUR 143.59 million, the receivables due from banks totalled around EUR 237.68 million in the reporting period. Liabilities due to customers totalled around EUR 236.88 million in 2008 and the volume of own emissions was around EUR 263.37 million in 2008. The level of liabilities due to banks (customers) as at the end of 2008 totalled EUR 68.19 million (EUR 236.88 million). The eligible equity capital according to Section 23 BWG (Austrian Banking Act) totalled EUR 127.80 million in 2008 and thus was far more than the statutorily required equity capital of EUR 47.83 million. The surplus equity capital therefore totals EUR 79.97 million. The equity ratio, which is important for a bank’s stability, of 26.34 % is at a high level. As a result, the

178

subgroup has an equity ratio signifi -cantly higher than the statutorily required 8 %. The reported equity capital does not include any sup-plementary capital, participation capital or other lower-ranking capital components. Both the Return on Equity (0.92 %) and the Return on Capital Employed (2.24 %) of the subgroup of the Capital Bank Group are refl ected in the altered general economic condi-tions on the global fi nancial markets in 2008.

Volume of Securities Accounts

The bank’s volume of securities accounts as at 31.12.2008 totals EUR 5.13 billion. Assets Under Manage-ment, including Security KAG and own emissions in 2008 total EUR 5.63 billion.

179

Profi t and Loss Account

In 2008, the subgroup of the Capital Bank Group was seriously aff ected by the fi nancial crisis. The net interest income of the Capital Bank’s subgroup totalled around EUR 10.05 million in the 2008 reporting year. The commission and fi nancial results of the subgroup of the Capital Bank Group totalled around EUR 19.98 million in 2008 and reveals the dependency of the business model on the developments on international fi nancial markets. Operating expenditure by the subgroup totalled EUR 24.84 million in 2008, while operating income of EUR 37.72 million was earned. The operating result reported in the profi t and loss account for the 2008 fi nancial year was therefore EUR 12.89 million. The subgroup of the Capital Bank Group applied write-downs on receivables and made allocations to provisions for contingent liabilities and for credit risks of EUR 31.78 million. This is off set by income from the reversal of write-downs on receivables and from the dissolution of provisions for contingent liabilities and for credit risks of EUR 14.83 million. After write-downs on and income from securities, which are valued like fi nancial assets, and shares in affi liated companies, the operating profi t for the subgroup totalled around EUR 1.07 million.

The Cost Income Ratio, which highlights the relation-ship of operating costs to operating income, totalled 65.84 % in 2008. The subgroup’s annual profi t after taxes totals EUR 748 K for 2008.

180

Outlook

There is no end in sight in 2009 to the fi nancial crisis. As the fi rst few weeks of the New Year showed, a recovery in the fi nancial markets cannot be assumed yet. Because of this, Capital Bank will reduce its investment banking activities to a level appropriate for the market conditions. 2009 will be extremely challenging for Capital Bank’s most important division, Private Banking. The continuing and intensifying fi nan-cial crisis has aff ected customer confi -dence in respect of the stability of the fi nancial system. The consequences are lower transaction volumes for shares and larger cash holdings. The invest-ment behaviour of Private Banking customers has therefore altered funda-mentally. Customers will give complex products less consideration and the demand for traditional and simpler investments will increase vehemently in 2009. In the Platform division, custom-ers are acquired and advised exclusively through licensed fi nancial service providers. As a result, Capital Bank is not exposed to any advice risk in this business. In autumn 2008, Brüll Kall-mus Bank began to expand the institu-tional and semi-institutional business

181

and should contribute to the success of the group over the long-term. In the Fixed Income Sales business, which is a focus of operations, institutional customers such as insurance companies, banks, funds, etc. are being addressed. Brüll Kallmus Bank sees itself as an effi cient and fast-reacting niche player in the European fi nancial market.

A relaxation in the crisis on the fi nancial markets is not expected for 2009. The integrated business model of Capital Bank, in conjunction with the risk-aware actions of Brüll Kallmus Bank, should guarantee the stability of the income over the long term and make a signifi cant contribution to the success of the subgroup. Security KAG as an internal capital investment company should also provide further income diversifi cation. However, it must be noted that the fi nancial year will be diffi cult and very challenging because of the negative market environ-ment and the predominant economic developments.

Graz, 29 May 2009The Board of Directors

Dir.Christian Jauk, MBA e.h.

Dir. Mag.Constantin Veyder-Malberg e.h.

182

SUB-GROUP OF CAPITAL BANK – GRAWE GRUPPE AG

183

184

12. SUB-GROUP OF CAPITAL BANK – GRAWE GRUPPE

CONSOLIDATED BALANCE SHEET TO 31 DECEMBER 2008

ASSETS

01. Cash and balances at central banks 02. Public authority debt instruments,

authorised for refi nancing at thecentral bank

Public authority debt instruments andsimilar securities

03. Receivables from banks 04. Receivables from non-bank customers 05. Loan stock and other

fi xed interest securities 06. Shares and other non-fi xed interest

securities 07. Investments

incl. in banks 08. Shares in affi liated companies09. Intangible fi xed assets10. Material assets11. Other assets12. Accruals

TOTAL ASSETS

01. Foreign assets02. Managed capital investment

fund plan

8,575.38

31.12.2008EUR

7,143,758.67

4,776,947.23237,675,806.17143,594,487.20

25,735,899.06

133,142,905.069,318.42

1,156,330.17260,575.11

6,047,500.29169,413,045.17

856,636.85

729,813,209.40

313,149,564.94

1,230,383,459.00

185

LIABILITIES

01. Liabilities to banks02. Liabilities to non-bank customers

a) Savings depositsb) Other liabilities

03. Securitised liabilitiesOther securitised liabilities

04. Other liabilities05. Deferrals06. Provisions

a) Provisions for severance paymentsb) Provisions for pensionsc) Tax provisionsd) Other

07. Subscribed capital08. Generated capital09. Minority interests

TOTAL LIABILITIES

01. Contingent liabilitiesLiabilities from bank sureties andliability from providing security

02. Credit risksincl. liabilites from pension transactions

03. Liabilities from trusts04. Eligible capital according to

Section 23 para. 14 BWG (Austrian Banking Act)05. Required equity capital according to

Section 22 para. 1 BWGincl. required equity capital according toSection 22 para. 1 nos. 1 and 4 BWG

06. Foreign liabilities

3,797,468.51233,086,469.95

263,365,814.01

2,496,203.31444,027.00

1,012,751.5613,510,831.54

9,200,000.00

46,387,107.25

31.12.2008EUR

68,194,848.99236,883,938.46

263,365,814.01

21,391,336.200.00

17,463,813.41

65,915,661.6556,597,796.68

0.00

729,813,209.40

281,740,046.1121,778,665.67

21,556,369.91

127,804,022.25

47,831,107.25

36,684,203.76

186

13. SUB-GROUP OF CAPITAL BANK – GRAWE GRUPPE

CONSOLIDATED PROFIT AND LOSS ACCOUNT FOR THE 2008 FINANCIAL YEAR

01. Interest and similar incomeincl. from fi xed interest securities

02. Interest and similar costs I. NET INTEREST INCOME 03. Revenue from securities and investments

a) Income from shares, other equity interests and non-fi xed interest securitiesb) Income from investmentsc) Income from shareholdings in affi liated companies

04. Commission income05. Commission costs06. Revenue/expenses from fi nancial transactions07. Other operating income

II. OPERATING INCOME 8. General administrative expenses

a) Payroll costsaa) Wages and salariesbb) Expenses for statutory social charges and for income-based charges and compulsory contributionscc) Other social security expensesdd) Expenses for retirement benefi ts and supportee) Allocation to the pensions reserveff) Expenses for severance payments and payments to operational company pension funds

b) Other administrative expenses (operating expenses)

9. Value adjustments on the assets listedunder asset items 9 and 10

10. Other operating expenses

III. OPERATING COSTS

31.12.2008EUR

21,204,401.45

-11,157,698.55

10,046,702.90

5,817,005.58

59,076,877.64-34,816,543.09

-4,284,680.261,883,993.50

37,723,356.27

-23,714,746.68

-1,112,147.15-11,192.02

-24,838,085.85

2,317,535.24

5,558,743.651,670.93

256,591.00

-13,688,708.16-9,733,587.71

-2,350,369.94-203,761.80

-309,052.89234,469.00

-1,326,404.82

-10,026,038.52

187

IV. OPERATING PROFIT

11. Value adjustments on receivablesand allocation to reserves forcontingent liabilities and credit risks

12. Revenue from the reversal ofvalue adjustments on receivablesand from reserves forcontingent liabilities and credit risks

13. Value adjustments on securities evaluated as financial assets and on shareholdingsin affiliated companies

14. Revenue from the sale of securitiesevaluated as financial assets andon shareholdings in affiliated companies

V. PROFIT FROM ORDINARYACTIVITIES

15. Tax on income16. Other tax, if not to be entered under

item 15

VI. CONSOLIDATED ANNUAL NETPROFIT/LOSS(before minority interests)

17. Minority interests‘ share of theannual profit

VII. CONSOLIDATED NET PROFIT

31.12.2008EUR

12,885,270.42

-31,785,501.27

14,827,879.59

-728,494.03

5,871,497.61

1,070,652.32

-238,143.30

-84,981.41

747,527.61

0.00

747,527.61