Primary Credit Analyst: Stefan Best Frankfurt (49) 69-33-999-154 stefan_best@ standardandpoors.com Secondary Credit Analyst: Volker von Kruechten Frankfurt (49) 69-33-999-164 volker_vonkruechten@ standardandpoors.com Additional Contact: Financial Institutions Ratings Europe FIG_Europe@ standardandpoors.com
RatingsDirect Publication Date Nov. 1, 2006
BANK CREDIT REPORT
Bayerische Hypo- und Vereinsbank AG
CREDIT RATING A/Stable/A-1 Outstanding Rating(s) Counterparty Credit A/Stable/A-1 Certificate of deposit A/A-1 Senior unsecured A Commercial paper A-1 Subordinated A- Junior subordinated Foreign currency BBB Short-Term debt A-1 Senior secured Local currency AAA Senior secured Foreign currency NR Credit Rating History Oct. 28, 2005 A/A-1
Dec. 9, 2002 A-/A-2
Feb. 21, 2002 A/A-1
Sovereign Rating Germany (Federal Republic of) AAA/Stable/A-1+
Related Entities
UniCredito Italiano SpA Counterparty Credit A+/Stable/A-1 Certificate of deposit A+/A-1 Senior unsecured A+ Commercial paper Foreign currency A-1 Subordinated A Junior subordinated Local currency A- Preferred stock A- Short-Term debt Local currency A-1 HVB Banque Luxembourg S.A. Counterparty Credit A/Stable/A-1 Certificate of deposit A/A-1
Major Rating Factors
Strengths:
Strategic importance to UniCredito Italiano SpA (UniCredito; A+/Stable/A-1)
Domestic franchise, mainly in Bavaria
Improved earnings trend due to restructuring even considering tailwind from an unusually
favorable environment
Bayerische Hypo- und Vereinsbank AG
Weaknesses:
Weak domestic mortgage loan book
High earnings reliance on capital markets
Modest business and earnings diversification after the sale of Bank Austria Creditanstalt AG
Rationale
The ratings on Germany-based Bayerische Hypo- und Vereinsbank AG (HVB) are based on its
strategically important status within the UniCredito group. The ‘AAA’ ratings on HVB’s
Öffentliche Pfandbriefe primarily reflect the quality of Pfandbriefe collateral, coupled with
protections afforded by German insolvency and banking laws. HVB’s Hypothekenpfandbriefe are
not rated by Standard & Poor’s Ratings Services.
HVB’s profile will change substantially through the planned group-internal transactions over the
next few quarters. According to the plan, HVB will sell its 77.53% stake in Bank Austria
Creditanstalt AG (BA; A/Positive/A-1), its subsidiary in the Ukraine, and its asset-management
business to UniCredito, and its subsidiaries in Russia and the Baltic region to BA in the course of
2006. HVB is expected to use part of the proceeds to buy UniCredito and BA’s investment-banking
business most likely in 2007. In addition, both operations are to be combined with large parts of
HVB’s corporates and markets business, with one option to spin this business off into a separate
subsidiary of HVB. It was announced that HVB will direct all of UniCredito group’s investment-
banking operations for the next seven years, partly to benefit from HVB’s tax losses carried
forward. However, UniCredito plans to gain full ownership of this business in the longer run.
While the transfers will be conducted at arm’s length, which means that HVB will realize capital
gains of more than �EUR6.5 billion, details about the eventual use of these gains are as yet
unknown. It is therefore crucial for HVB to continue its restructuring process to further improve
the profitability of its domestic business, and to ensure that its ability to absorb losses will be
strengthened.
Adjusting for positive and negative extraordinary factors, HVB’s 2005 earnings were about in
line with its �EUR1 billion net income target, mainly through stronger trading and brokerage results
in the second half of the year. Including extraordinary items, HVB’s net income before minorities
was solely derived from BA. HVB had an excellent start in the first half 2006, mainly due to
further increased trading and brokerage revenues, the ongoing growth of BA, and, to a lesser
extent, through HVB’s restructuring measures in 2005. Furthermore, large extraordinary gains will
also boost consolidated 2006 results. In its analysis, Standard & Poor’s also considers potential
risks, however. First, trading and brokerage revenues in the first six months were 46% higher than
the average of the past 10 quarters, a level unlikely to be sustainable. Second, the ongoing
deterioration of HVB’s domestic mortgage loan book could lead to higher-than-expected credit
losses. Third, through the sale of BA and other operations, HVB will lose key pillars of profitability
and diversification that are difficult to replace.
Adjusted common equity (ACE)-to-risk assets continue to be weak, but the expected strong
improvements in net income in 2006 and the expected disposal gains will strengthen capital
depending on the capital allocation within the UniCredito group. Flexibility to make acquisitions
besides investment banking appears limited considering the UniCredito group’s capital target,
however.
Standard & Poor’s | FULL ANALYSIS 2
Bayerische Hypo- und Vereinsbank AG
Outlook
The stable outlook on HVB and related subsidiaries reflects that on UniCredito. The one-notch
distinction remains, however. Uncertainties about the implications of the planned disposals on
HVB’s business and financial profile remain. Future rating actions will therefore depend on the
level of HVB’s integration into UniCredito and HVB’s stand-alone profile following the
transactions, as well as on the success and sustainability of HVB’s turnaround, particularly in
Germany.
Close integration of HVB into UniCredito combined with both improved prospects to raise the
profitability levels of HVB’s German business much closer to the overall group performance, and
prudent capitalization and loss coverage for HVB’s higher business risk could have positive rating
implications. This might even lead to a convergence of ratings with those on UniCredito over time
if HVB becomes an intrinsic part and important contributor of earnings for the group.
Conversely, a sluggish performance at HVB and failure to restructure the German business,
including HVB’s legacy problems, could have negative rating implications. Standard & Poor’s
expects more information to emerge over the next few quarters.
Profile: Germany To Become Sole Core Market On Completion Of BA Sale To UniCredito
HVB, created by a merger in 1998, ranks among the largest banking groups in Germany, and at
June 30, 2006, had total consolidated assets of �EUR487 billion. As a result of the 2000 acquisition,
HVB fully consolidates BA, Austria’s largest bank, with total consolidated assets of �EUR161
billion accounting for one-third of group assets and 45% of operating profit at mid-year 2006 after
about 60% in 2005. Following the planned sale of BA to UniCredito, HVB’s sole core market will
be Germany. The importance of its international investment-banking business, which HVB is
expected to conduct for the UniCredito group for some years to come, will grow further, however.
HVB itself employs about 20,000 staff and has more than 600 domestic branches. HVB’s overall
domestic market shares are low, reflecting the high fragmentation of the domestic market, but it
has a strong presence in Bavaria and, to a lesser extent, in Northern Germany.
At mid-year 2006, HVB had three operating business segments and a workout division:
Germany, with the subsegments: private customers, corporate customers, and real estate.
Austria and CEE (BA and its subsidiaries), with the subsegments: Private Customers, small and
midsize corporate customers (SMEs), Large Customers and Real Estate, and CEE.
Corporates and Markets (C&M), including large corporate customers, structured finance, and
investment banking.
Real Estate Restructuring (RER), an exit portfolio of domestic property loans created in early
2005.
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Bayerische Hypo- und Vereinsbank AG
Table 1
Bayerische Hypo- und Vereinsbank AG—Segment Results
(Mil. �EUR) June 2006 June 2005 Change (Mil.
EUR�) As % of total June 2006
Germany 492 356 136 26.0
Austria/CEE (Does not equal BA’s own accounts) 680 444 236 36.0
Corporates and Markets 872 361 511 47.0
Work-out -12 -48 36 (1.0)
Other -159 -247 88 (8.0)
Total 1,873 866 1,007 100.0
HVB, excluding BA’s own accounts 1,021 295 726 55.0
This segmentation will change as a result of reorganization within the UniCredito group.
Ownership And Legal Status
HVB is a joint-stock company and 93.9% owned by UniCredito. As a credit institution, HVB is
subject to the provisions of the German Banking Act (Kreditwesengesetz, or KWG) and the
supervision of the German Federal Financial Supervisory Agency (Bundesanstalt für
Finanzdienstleistungsaufsicht, or BaFin).
Strategy: Framework For Ambitious Three-Year Plan Tabled
In July 2006, UniCredito and HVB presented the framework of the group’s ambitious three-year
plan, which projects an almost 70% increase in consolidated profit after risk compared with 2005,
based on revenue growth outpacing costs, and stable costs of risk in relation to risk assets. For
HVB including BA, the targeted increase is even greater, at about 240% over the same period, but
the proposal is not sufficiently specific to draw conclusions on the future financial profiles of HVB
and BA once the separation of the two banks occurs.
Under a new segmentation that does not allow comparisons with earlier years, the plan foresees
investment-banking business (MIB) including those of UniCredito and BA as remaining by far the
largest contributor to HVB’s earnings in 2008. In addition, UniCredito expects that retail and
corporate banking will demonstrate a strong turnaround, while nonstrategic commercial real estate
business is expected to break even in 2008. The plan also involves the remaining RER portfolio
being managed down over this period, but no information on required workout charges or HVB’s
overhead costs, which are not allocated to the segments, have been provided to date.
Standard & Poor’s | FULL ANALYSIS 4
Bayerische Hypo- und Vereinsbank AG
Table 2
Bayerische Hypo- und Vereinsbank AG—New Segmentation (cont.'d)
MIB HVB incl. The business of Unicredito and BA Corporates Germany new segmentation
(Mil. �EUR) 2005 2008 Change Growth (%) 2005 2008 Change Growth (%)
Revenues 2,768 4,000 1,232 44.5 Revenues 1,000 1,222 222 22.2
Costs 1,444 1,800 356 24.7 Costs 462 483 21 4.4
Before 1,324 2,200 876 66.2 Before 538 739 201 37.4
Risk/other 5 163 158 3,150.0 Risk 239 208 -31 (13.0)
After 1,319 2,038 719 54.5 After 299 532 232 77.5
RWAs 57,396 65,000 7,604 13.2 RWAs 35,615 46,122 10,507 29.5
Cost-to-Income ratio (%) 52 45 (13.7) Cost-to-Income ratio (%) 46 40 (14.5)
Profit/RWAs (%) 2.30 3.13 36.4 Profit/RWAs (%) 0.84 1.15 37.1
Risk/RWAs (%) 0.01 0.25 Risk/RWAs (%) 0.67 0.45
Retail HVB new segmentation CRE Germany
(Mil. �EUR) 2005 2008 Change Growth (%) 2005 2008 Change Growth (%)
Revenues 1,753 2,148 395 22.5 Revenues 249 213 -36 (14.3)
Costs 1,638 1,589 -49 (3.0) Costs 101 69 -32 (31.9)
Before 115 558 443 385.3 Before 148 145 -3 (2.3)
Risk 243 234 -8 (3.5) Risk 226 149 -77 (34.1)
After -128 324 452 N.M. After -78 -4 74 N.M.
RWAs 31,100 29,271 -1,829 (5.9) RWAs 16,065 11,860 -4,204 (26.2)
Cost-to-Income ratio (%) 93 74 (20.8) Cost-to-Income ratio (%) 41 32 (20.5)
Profit/RWAs (%) (0.41) 1.11 (369.8) Profit/RWAs (%) (0.49) (0.04) (92.8)
Risk/RWAs (%) 0.78 0.80 Risk/RWAs (%) 1.41 1.25
RWAs—Risk-weighted assets. N.M.—Not meaningful.
The strategic measures underlying the plan are not materially different from what HVB and its
large domestic peers have focused on following their restructurings, but UniCredito believes that it
can draw on its successes in Italy to manage the implementation of such measures more effectively.
Key initiatives are improving the sales process and product penetration; winning market shares in
the affluent and corporate segment, particularly outside Bavaria; and leveraging on its presence in
UniCredito’s core markets to boost regional cross-border and investment-banking business. In
contrast to peers, however, Standard & Poor’s expects that HVB will benefit from synergies
through rationalization within the UniCredito group.
Standard & Poor’s believes that the takeover by UniCredito is likely to have positive
implications on HVB’s turnaround, but achieving these ambitious targets will strongly depend on
successful integration and a favorable economic and capital-market environment. This is because
competition is mounting given that peers follow similar strategies, and owing to the still existing
overcapacities in the German industry combined with sluggish volume growth.
Standard & Poor’s considers HVB’s progress in the following areas as crucial to improve its
credit profile:
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Bayerische Hypo- und Vereinsbank AG
Successful integration into UniCredito
The integration model that will be adopted is based on a full divisionalization of Western
European markets and mirrors the one previously adopted by UniCredito in Italy. Considering the
complexity of this cross-border acquisition, its full implementation represents a significant
managerial challenge. This situation might also be compounded by the fact that a number of top
and second-level management staff at HVB has left the bank and that a large number of customers
will have to be shifted from one segment to another. Furthermore, maintaining staff motivation
after a series of restructurings at HVB over the past few years will be crucial, as the bank is likely to
be more vulnerable to competitive pressure during the integration process.
Successful reduction and workout of domestic real estate loans
In February 2005, HVB announced its new strategy to accelerate the workout of nonperforming
property loans (NPLs) and further tighten lending criteria for commercial real estate loans.
Property loans have been a regular and enormous drain on earnings since the merger in 1998,
reflecting an ill-advised strategy and lending policy following the unification boom, and the
prolonged weakness of property markets since the mid-1990s. Since its creation in early 2005, the
workout portfolio has reduced, and coverage ratios are likely to have increased, but during the
same period HVB’s domestic core portfolio deteriorated further and coverage ratios on these NPLs
might have declined to comparatively low levels. Combined with the plan to withdraw from
commercial real estate lending, further restructuring charges might be required.
Improving the efficiency of the domestic retail and wholesale-banking business
In light of the loss of profitable subsidiaries with growth prospects such as BA and that UniCredito
plans to assume full control of the investment-banking business in the longer run, HVB is under
pressure to increase its market shares in the competitive and less dynamic domestic market.
Although HVB is expected to realize a substantial gain from the sale of its businesses, it remains
uncertain whether it will be able to use the proceeds to make acquisitions to offset the loss of these
revenue streams.
Corporates and Markets (C&M)
C&M has been a significant contributor to HVB’s earnings due to the very favorable credit and
capital-market environment. As HVB’s operations are less diversified than those of larger
investment banks, earnings appear more vulnerable to cyclical swings. Although investment
banking will play an even more important role, a successful merger with UniCredito’s investment-
banking business could mitigate this business concentration at least to some extent.
Risk Management: Domestic Real Estate Loans Remain Key Weakness
Over the past few years, HVB has steadily improved its risk-management systems on a groupwide
basis to satisfactory levels, although domestic legacy problems continue to be a concern. The
bank’s risk tolerance has been reduced as a consequence of large loan losses incurred in earlier
years, most notably through the downsizing of concentration risk to single names or industries and
equity stakes, and the implementation of more restrictive lending guidelines.
HVB has established a comprehensive risk-measurement system to include credit risk,
operational risk, and business risk in its Value-at-Risk (VaR) system and Economic Capital
Concept, and aims to comply with the advanced approach under Basel II guidelines, which HVB
expects could have a modestly positive impact on capital requirements.
Standard & Poor’s | FULL ANALYSIS 6
Bayerische Hypo- und Vereinsbank AG
Credit risk
Following the planned group-internal transactions, HVB’s loan book will shrink substantially, and
the diversity and average quality of HVB’s assets will, in Standard & Poor’s view, deteriorate.
According to HVB’s segment reporting, the German portfolio amounted to EUR�154.9 billion
including �EUR8.7 billion in the RER portfolio at mid-year 2006. Real estate loans, whose asset
quality compares very unfavorably with those of domestic peers, amounted to �EUR97.2 billion,
representing a significant concentration risk to persistently difficult domestic property markets. The
portfolio also includes presumably less risky mortgage loans of about �EUR49 billion, which qualify
as collateral for mortgage Pfandbriefe, however. Furthermore, the quality of other loans,
particularly corporate loans to large and midsize customers has improved and is about in line with
peers. Consequently, the following analysis will focus on domestic real estate loans, also given that
BA—whose asset quality and coverage ratios are satisfactory—is expected to be sold in the near
future.
While transparency and disclosure is limited, some estimates and conclusions can be drawn from
publicly available information:
Total problem loans of HVB and BA (exposures with a HVB internal rating 8-10, which
according to HVB is equivalent to Standard & Poor’s CCC-D) including the RER portfolio
amounted to �EUR25.1 billion at mid-year 2006. This is only slightly above what UniCredito
reports on HVB’s impaired loans of EUR�23.9 billion, which means that the numbers are
converging.
Impaired loans declined by �EUR0.7 billion during the first half of 2006. However, write-offs
amounted to �EUR1.8 billion and BA’s NPLs declined by EUR�0.5 billion, indicating further
deterioration at HVB, which contrasts sharply with a more favorable development at peers.
Germany, including RER, accounted for �EUR17.3 billion or about 70% of HVB’s problem
loans at mid-year 2006.
In 2005, problem loans in the Germany portfolio excluding RER rose to EUR�9.5 billion from
�EUR7.5 billion, despite �EUR0.6 billion in write-offs in this segment. This increase was caused by
a steady inflow of distressed real estate loans (up EUR�2.9 billion), whereas non-real-estate-
related problem loans decreased.
While the coverage ratio of the RER portfolio has probably improved above the original level of
46% in early 2005, the coverage ratio of German problem loans might have since decreased to
comparatively low levels.
Based on publicly available information, Standard & Poor’s has stress-tested the RER and core
portfolio using its own assumptions. Such a stress test does not describe Standard & Poor’s most
probable scenario, but only serves to identify potential sources of vulnerability.
Regarding the RER, Standard & Poor’s draws conclusions from HVB’s losses on its former
workout portfolio called WIM, which amounted to about 70% between 2001 and 2004 (write-
offs and ongoing losses). About �EUR2.6 billion of this portfolio was included in the RER portfolio.
On completion of the second large portfolio disposal in 2006, the RER will have been reduced to
�EUR6.9 billion, but might have a similar or even weaker quality, as the least attractive exposures
are most difficult to manage. Under stressed assumptions with loss given defaults (LGDs) ranging
from 70%-80%, potential losses could range between EUR�0.8 million and �EUR1.5 billion.
For distressed mortgage loans outside the RER portfolio, Standard & Poor’s expects
significantly lower losses. Assuming that LGDs could range between 40% and 50%—which is
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Bayerische Hypo- und Vereinsbank AG
about in line with portfolio transactions seen in the market—potential losses could range between
�EUR0.8 million and EUR�1.75 billion.
Table 3
Bayerische Hypo- und Vereinsbank AG—Scenario Analysis Domestic Real Estate Loans
HVB RER portfolio
LGD (%) 58.0 65.0 70.0 75.0 77.5 80.0 90.0
Potential underprovisioning (Bil. �EUR) 0.00 0.48 0.83 1.18 1.35 1.53 2.22
HVB Germany portfolio
LDG (%) 31.6 35.0 40.0 45.0 47.5 50.0 60.0
Potential underprovisioning (Bil. �EUR) 0.00 0.33 0.80 1.28 1.51 1.75 2.70
LGD—Loss given defaults.
Finally, Standard & Poor’s assessed the potential amount of new problem loans in 2006 and
believes that HVB’s budgeted new loan loss provisions (NLLPs) for the Germany portfolio of
EUR�860 million should provide sufficient coverage, but is unlikely to materially strengthen the
loan loss reserves (LLRs) on already existing problem loans in 2006. While the inflow of new
problematic real estate loans is likely to continue in 2007 and 2008, volumes should decline as new
business between 2000 and 2002 was substantially below the levels seen between 1993 and 1999.
Therefore, Standard & Poor’s still believes that real estate lending will continue to contribute
disproportionately to NLLPs in future years to strengthen overall coverage ratios over time.
However, the goal to keep the cost of risk stable might be challenged as NLLPs in the corporates
and markets segment, which were almost nonexistent between 2004 and mid-year 2006, might
increase to normalized levels as the release of LLRs is likely to decline.
Funding and liquidity risk
HVB’s asset-liability management is sound as it continues to maintain a significant amount of
highly liquid assets, and prudently manages its liquidity position, for example, through the
matching of long-term assets and long-term liabilities, the reduction of less liquid risk assets, and
reduced reliance on short-term funding. HVB has a stable and well-diversified funding base, but
the bank is largely wholesale market funded, which is a relative weakness compared with
predominantly retail-funded institutions. HVB is a large issuer of less market-sensitive Pfandbriefe,
with about �EUR53 billion outstanding at mid-year 2006, and, through its nationwide branch
networks in Germany, has access to a large customer base.
The ‘AAA’ ratings on HVB’s Öffentliche Pfandbriefe, which are used to refinance HVB’s public
finance business, are based on the legal protection that grants its holders a preferential claim over
all other creditors if the bank were to become insolvent. The ratings reflect Standard & Poor’s
ongoing analysis of the collateral quality, and the cash inflows and outflows of the pool
corresponding to the Pfandbriefe issued, irrespective of the counterparty credit ratings on HVB.
With respect to liquidity risk, HVB must comply with the regulatory guidelines, which aim to
ensure that available funds exceed payment obligations for the following month, but also applies
more sophisticated tools for liquidity management including groupwide daily liquidity limits and
regular stress testing.
Standard & Poor’s | FULL ANALYSIS 8
Bayerische Hypo- und Vereinsbank AG
Market risk
HVB’s market risk is closely monitored and conducted within strict and prudent parameters. Back
testing and stress scenarios are carried out regularly. In the past, HVB’s VaR numbers were
overstated compared with those of peers as the bank had implemented only a partial use of its
internal model. With the integration of equity risk in the third quarter of 2005, VaR of the trading
book (99% confidence interval and one-day holding period) dropped to �EUR25 million. Trading
results have shown pronounced quarterly swings, reflecting the lower level of diversification
compared with those of larger investment banks. The VaR of the banking book excluding equity
investments was �EUR36 million at year-end 2005. While VaR is not a reliable indicator, more
stressful assumptions indicate higher, but manageable market risk at HVB, however. HVB’s listed
equity investments have been reduced to �EUR2.2 billion, including an unrealized gain of about
�EUR0.4 billion at mid-year 2006.
Accounting
HVB has reported consolidated figures according to IAS/IFRS since 1999. In its calculation of
operating profit, Standard & Poor’s adjusts significant onetime items, such as gains from the sale
of subsidiaries or large equity stakes, and restructuring charges. In its calculation of ACE, Standard
& Poor’s deducts goodwill and intangibles, HVB’s stakes are accounted for under the equity
method, which amounted to �EUR1 billion at mid-year 2006, and a minority stake of about
�EUR700 million from an investor in a joint venture with HVB for project finance, which is not
fungible within the group. HVB deducted actuarial losses on pension liabilities of about �EUR1
billion (net of deferred tax assets) from its capital in the first quarter of 2006. This deficit was
mainly caused by the use of a reduced discount factor of 4.25% (from 5%). Furthermore, Standard
& Poor’s closely monitors the accounting treatment of HVB’s deferred tax assets and liabilities
(excess of �EUR1.3 billion). They include �EUR556 million from losses carried forward (evenly split
between HVB and BA), the size of which, in Standard & Poor’s view, is not a material concern.
Profitability: Earnings Level And Diversification Set To Change After Planned Group-Internal Transactions
HVB’s earnings developments in the first half of 2006 indicate improvements after a series of
restructurings, which due to the integration into UniCredito and the ongoing need to workout
problem loans have not yet been completed. As a result of the planned group-internal transactions,
the level and diversification of HVB’s earnings will substantially change as HVB is expected to
focus on its German business and investment-banking operations for the group. Plans foresee the
possibility of the latter being spun-off into a subsidiary of HVB and in the longer run transferred to
UniCredito.
The implications on HVB’s profitability are difficult to assess due to the lack of information on
the planned transactions, but earnings will increasingly rely on the new investment-banking
segment (�EUR1.3 billion after risk in 2005 on a pro forma basis), as the German business was only
marginally profitable (�EUR94 million on a pro forma basis) in 2005 (see table 1). Furthermore,
HVB’s earnings will also include the negative implications from the RER portfolio, which will
depend on the success of the workout, as well as overhead charges, which are not allocated to the
segments. Whether and to what extent the planned transactions (besides the investment-banking
business) will have further offsetting effects to the loss of BA and other businesses is unclear. While
the proceeds will reduce funding costs, the flexibility to make acquisitions without jeopardizing the
UniCredito group’s capital targets is limited.
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Bayerische Hypo- und Vereinsbank AG
In the first half of 2006, HVB’s operating profit before risk excluding BA rose by �EUR0.7 billion
to EUR�1 billion or about 120 basis points (bps) on risk-weighted assets (RWAs). The increase was
mainly buoyed by record trading profits (up �EUR326 million compared with mid-year 2005) and,
to a lesser extent, by higher brokerage fees, both accounting for almost 60% of the improvement
and about one-third of revenues. Net interest income only rose due to consolidation and onetime
effects, while costs and risk provisions slightly declined excluding consolidation and currency
effects. A very favorable market environment boosted earnings of HVB’s Corporates and Market
segment to record highs, but also increased fee income of the Germany segment, which benefited
further from cost cutting as a result of 2005’s restructuring program.
Standard & Poor’s believes that these earnings levels are unlikely to be sustained due to their
increased reliance on favorable capital-market trends and the volatility of HVB’s trading profits
compared with market trends. Furthermore, NLLPs of the Corporates and Market segment were
almost nonexistent in the first half of 2006, which helped to mitigate ongoing high provisioning
needs of the Germany segment of about 90 bps on RWAs. Synergies from the integration into
UniCredito should have a positive impact, however. Net income is expected to benefit strongly
from the planned transactions, which could raise profit by several billion euros in 2006 even
considering further restructuring charges.
Capital: Expected To Be Prudently Capitalized For Its Higher Business Risk
At mid-year 2006, HVB’s capital ratios were still weak taking into consideration its real-estate-
related legacy problems, the high proportion of corporate exposures, and its equity stake in
Munich Reinsurance Co. (A+/Stable/—), which, due to their size, are subject to high volatility.
While HVB’s capital ratios are well above the regulatory requirements, Standard & Poor’s
calculation of HVB’s ACE-to-risk-assets and adjusted total equity-to-risk-assets ratios including
market risk was only 3.7% and 4.4%, respectively, at mid-year. Including HVB’s interim net
income of �EUR2.2 billion consolidated capital ratios are about 90 bps higher, however.
Although HVB’s regulatory Tier 1 ratio could temporarily soar to about 14% upon the sale of
BA in 2006, the medium-term impact on HVB’s capitalization once the planned group-internal
transactions take place is as yet unclear. Standard & Poor’s expects that HVB, as an important
group member, will be prudently capitalized for its higher business risk and within its more
difficult market environment.
HVB Banque Luxembourg S.A.
The ratings on HVB Banque Luxembourg S.A. (HVB Luxembourg) are based on its very close
integration within and dependence on its parent company, HVB. HVB Luxembourg’s main lines of
business are: short-term lending to HVB’s preferred corporate customers; structured finance, in
close cooperation with HVB; private banking, predominantly for HVB’s affluent customers;
custody business for HVB’s asset-management company Activest; and treasury, with a focus on
money market business. HVB Luxembourg also receives substantial funding from its parent and
other group members.
HVB Luxembourg had total assets of �EUR42 billion and a net profit of �EUR185 million at year-
end 2005. The bank’s financial profile is sound, reflecting its special role as service provider mainly
for HVB’s core customers.
Standard & Poor’s | FULL ANALYSIS 10
Bayerische Hypo- und Vereinsbank AG
Table 4
Bayerische Hypo- und Vereinsbank AG—Balance Sheet Statistics (cont.'d)
—Year ended Dec. 31— Breakdown as a % of assets (adj.)
(Mil. �EUR) 2006* 2005 2004 2003 2002 2001 - 2006* 2005 2004 2003 2002 2001
Assets
Cash and money market instruments
22,942 8,355 17,833 18,190 20,418 36,510 4.74 1.70 3.84 3.82 2.97 5.04
Securities 101,029 100,913 85,732 84,239 135,561 153,869 20.87 20.57 18.45 17.67 19.72 21.24
Trading securities (marked to market)
60,841 59,374 46,753 36,315 40,841 45,763 12.57 12.10 10.06 7.62 5.94 6.32
Nontrading securities 40,188 41,539 38,979 47,924 94,720 108,106 8.30 8.47 8.39 10.05 13.78 14.92
Loans to banks (net) 49,213 55,769 36,075 38,942 35,724 45,899 10.17 11.37 7.76 8.17 5.20 6.33
Customer loans (gross) 268,639 278,016 275,994 284,747 432,758 445,913 55.50 56.67 59.40 59.73 62.96 61.54
Public sector/government
N.A. 20,440 22,231 26,211 81,684 87,872 N.A. 4.17 4.78 5.50 11.88 12.13
Total real estate loans
N.A. 111,538 118,906 126,796 200,187 N.A. N.A. 22.74 25.59 26.60 29.12 N.A.
All other loans 268,639 146,038 134,857 131,740 150,887 183,434 55.50 29.77 29.03 27.63 21.95 25.32
Loan loss reserves 10,443 12,401 13,138 11,165 13,438 12,579 2.16 2.53 2.83 2.34 1.96 1.74
Customer loans (net) 258,196 265,615 262,856 273,582 419,320 433,334 53.35 54.14 56.58 57.39 61.01 59.81
Earning assets 436,694 434,867 408,330 420,606 619,366 674,428 90.22 88.64 87.89 88.23 90.11 93.08
Equity interests/participations (nonfinancial)
2,795 2,842 3,252 3,878 5,925 4,810 0.58 0.58 0.70 0.81 0.86 0.66
Inv. in unconsolidated subsidiaries (financial co.)
993 953 985 780 792 763 0.21 0.19 0.21 0.16 0.12 0.11
Intangibles (nonservicing)
2,792 2,926 2,799 2,721 3,816 3,634 0.58 0.60 0.60 0.57 0.56 0.50
Fixed assets 4,052 3,288 3,287 3,419 4,034 5,550 0.84 0.67 0.71 0.72 0.59 0.77
Derivatives credit amount
34,535 47,489 48,222 47,114 53,953 33,617 7.14 9.68 10.38 9.88 7.85 4.64
Accrued receivables N.A. 338 408 421 640 1,001 N.A. 0.07 0.09 0.09 0.09 0.14
All other assets 10,251 5,035 5,959 6,169 10,974 9,183 2.12 1.03 1.28 1.29 1.60 1.27
Total reported assets 486,798 493,523 467,408 479,455 691,157 728,170 100.58 100.60 100.60 100.57 100.56 100.50
Less nonservicing intangibles
(2,792) (2,926) (2,799) (2,721) (3,816) (3,634)
Adjusted assets 484,006 490,597 464,609 476,734 687,341 724,536 100.00 100.00 100.00 100.00 100.00 100.00
Breakdown as a % of liabilities + equity
2006* 2005 2004 2003 2002 2001 2006* 2005 2004 2003 2002 2001
Liabilities
Total deposits 270,554 273,964 248,057 253,276 298,283 306,286 55.58 55.51 53.07 52.83 43.16 42.06
Noncore deposits 106,572 114,183 103,606 112,964 143,361 134,624 21.89 23.14 22.17 23.56 20.74 18.49
Core/customer deposits 163,982 159,781 144,451 140,312 154,922 171,662 33.69 32.38 30.90 29.26 22.41 23.57
Mortgage pfandbriefe N.A. 47,248 49,418 55,381 91,046 87,318 N.A. 9.57 10.57 11.55 13.17 11.99
Public sector or total pfandbriefe
N.A. 10,254 15,530 16,778 96,654 102,998 N.A. 2.08 3.32 3.50 13.98 14.14
Other borrowings 121,197 64,789 61,892 68,182 103,723 141,286 24.90 13.13 13.24 14.22 15.01 19.40
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Bayerische Hypo- und Vereinsbank AG
Table 4
Bayerische Hypo- und Vereinsbank AG—Balance Sheet Statistics (cont.'d)
—Year ended Dec. 31— Breakdown as a % of assets (adj.)
(Mil. �EUR) 2006* 2005 2004 2003 2002 2001 - 2006* 2005 2004 2003 2002 2001
Other liabilities 79,057 79,773 77,335 71,480 83,959 59,985 16.24 16.16 16.55 14.91 12.15 8.24
Total liabilities 470,808 476,028 452,232 465,097 673,665 697,873 96.72 96.46 96.75 97.01 97.47 95.84
Total shareholders’ equity
15,990 17,495 15,176 14,358 17,493 30,297 3.28 3.54 3.25 2.99 2.53 4.16
Preferred stock and other capital
1,799 2,030 1,903 2,317 2,450 2,594 0.37 0.41 0.41 0.48 0.35 0.36
Minority interest-equity 2,602 2,492 1,788 1,729 813 1,863 0.53 0.50 0.38 0.36 0.12 0.26
Common shareholders’ equity (reported)
11,589 12,973 11,485 10,312 14,230 25,840 2.38 2.63 2.46 2.15 2.06 3.55
Share capital and surplus
11,378 11,380 11,583 10,904 14,721 14,742 2.34 2.31 2.48 2.27 2.13 2.02
Revaluation reserve 264 729 (325) (552) (3,373) 6,772 0.05 0.15 (0.07) (0.12) (0.49) 0.93
Reserves (incl. inflation revaluations)
(53) 864 227 (40) 2,882 4,326 (0.01) 0.18 0.05 (0.01) 0.42 0.59
Total liabilities and equity
486,798 493,523 467,408 479,455 691,158 728,170 100.00 100.00 100.00 100.00 100.00 100.00
Less revaluation reserve, intangibles
(3,056) (3,655) (2,474) (2,169) (443) (10,406)
Tangible total equity 12,146 13,840 12,702 12,189 17,050 19,891
Tangible common equity 10,347 11,810 10,799 9,872 14,600 17,297
Less equity in unconsolidated subsidiaries
(993) (953) (985) (780) (792) (763)
Adjusted common equity 9,354 10,857 9,814 9,092 13,808 16,534
Plus preferred stock and other capital
1,799 2,030 1,903 2,317 2,450 2,594
Adjusted total equity 11,153 12,887 11,717 11,409 16,258 19,128
*Data as of June 30, 2006. Ratios annualized where appropriate. N.A.—Not available.
Table 5
Bayerische Hypo- und Vereinsbank AG—Profit And Loss Statement Statistics (cont.'d)
—Year ended Dec. 31— Adj. avg. assets (%)
(Mil. �EUR) 2006* 2005 2004 2003 2002 2001 - 2006* 2005 2004 2003 2002 2001
Profitability
Interest income 8,944 16,515 16,717 19,234 33,597 38,354 3.67 3.46 3.55 3.30 4.76 5.34
Interest expense 6,040 10,985 11,398 13,599 27,162 31,363 2.48 2.30 2.42 2.34 3.85 4.36
Net interest income 2,904 5,530 5,319 5,635 6,435 6,991 1.19 1.16 1.13 0.97 0.91 0.97
Operating noninterest income 3,089 4,598 4,046 4,145 4,039 4,370 1.27 0.96 0.86 0.71 0.57 0.61
Fees and commissions 1,891 3,240 2,845 2,795 2,684 2,877 0.78 0.68 0.60 0.48 0.38 0.40
Equity in earnings of unconsolidated subsidiaries
142 83 117 82 81 260 0.06 0.02 0.02 0.01 0.01 0.04
Trading gains 870 926 718 820 787 592 0.36 0.19 0.15 0.14 0.11 0.08
Other market-sensitive income
N.A. 0 0 56 N.A. (25) N.A. 0.00 0.00 0.01 N.A. 0.00
Other noninterest income 186 349 366 392 487 666 0.08 0.07 0.08 0.07 0.07 0.09
Operating revenues 5,993 10,128 9,365 9,780 10,474 11,361 2.46 2.12 1.99 1.68 1.48 1.58
Standard & Poor’s | FULL ANALYSIS 12
Bayerische Hypo- und Vereinsbank AG
Table 5
Bayerische Hypo- und Vereinsbank AG—Profit And Loss Statement Statistics (cont.'d)
—Year ended Dec. 31— Adj. avg. assets (%)
(Mil. �EUR) 2006* 2005 2004 2003 2002 2001 - 2006* 2005 2004 2003 2002 2001
Noninterest expenses 3,492 7,074 6,604 6,922 7,658 8,526 1.43 1.48 1.40 1.19 1.08 1.19
Personnel expenses 1,959 3,734 3,514 3,631 3,912 4,187 0.80 0.78 0.75 0.62 0.55 0.58
Other general and administrative expense
1,261 2,677 2,350 2,427 2,823 3,388 0.52 0.56 0.50 0.42 0.40 0.47
Amortization of intangibles N.A. 264 165 232 409 366 N.A. 0.06 0.04 0.04 0.06 0.05
Depreciation and amortization-other
272 399 575 632 514 585 0.11 0.08 0.12 0.11 0.07 0.08
Net operating income before loss provisions
2,501 3,054 2,761 2,858 2,816 2,835 1.03 0.64 0.59 0.49 0.40 0.39
Credit loss provisions (net new) 625 1,513 1,813 2,313 3,797 2,074 0.26 0.32 0.39 0.40 0.54 0.29
Net operating income after loss provisions
1,876 1,541 948 545 (981) 761 0.77 0.32 0.20 0.09 (0.14) 0.11
Nonrecurring/special income 807 321 158 547 649 925 0.33 0.07 0.03 0.09 0.09 0.13
Nonrecurring/special expense 3 546 2,880 3,224 471 100 0.00 0.11 0.61 0.55 0.07 0.01
Pretax profit 2,680 1,316 (1,774) (2,132) (803) 1,586 1.10 0.28 (0.38) (0.37) (0.11) 0.22
Tax expense/credit 510 279 218 310 55 619 0.21 0.06 0.05 0.05 0.01 0.09
Net income before minority interest
2,170 1,037 (1,992) (2,442) (858) 967 0.89 0.22 (0.42) (0.42) (0.12) 0.13
Minority interest in consolidated subsidiaries
464 395 286 197 (29) 29 0.19 0.08 0.06 0.03 0.00 0.00
Net income before extraordinaries
1,706 642 (2,278) (2,639) (829) 938 0.70 0.13 (0.48) (0.45) (0.12) 0.13
Net income after extraordinaries 1,706 642 (2,278) (2,639) (829) 938 0.70 0.13 (0.48) (0.45) (0.12) 0.13
Core earnings 1,055 819 N.A. N.A. N.A. 435 0.43 0.17 N.A. N.A. N.A. 0.06
2006* 2005 2004 2003 2002 2001
Asset Quality
Nonperforming assets 22,555 22,400 24,100 25,600 N.A. N.A.
Nonaccrual loans 22,555 22,400 13,383 13,886 14,700 12,900
Loans in arrears but accruing N.A. N.A. 10,717 11,714 N.A. N.A.
Net charge-offs 1,829 2,634 2,683 2,828 2,352 2,492
Average balance sheet
Average customer loans 261,906 264,236 268,219 346,451 426,327 431,974
Average earning assets 435,781 421,599 414,468 519,986 646,897 669,037
Average assets 490,161 480,466 473,432 585,306 709,664 722,342
Average total deposits 272,259 261,011 250,667 275,780 302,285 302,753
Average interest-bearing liabilities
394,003 385,576 384,257 491,662 613,797 637,100
Average common equity 12,281 12,229 10,899 12,271 20,035 22,490
Average adjusted assets 487,302 477,603 470,672 582,038 705,939 718,594
Other data
Number of employees (end of period, actual)
62,716 61,251 57,806 60,214 65,926 69,520
Number of branches 2,489 2,316 2,036 2,062 2,104 2,238
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Bayerische Hypo- und Vereinsbank AG
Table 5
Bayerische Hypo- und Vereinsbank AG—Profit And Loss Statement Statistics (cont.'d)
—Year ended Dec. 31— Adj. avg. assets (%)
(Mil. �EUR) 2006* 2005 2004 2003 2002 2001 - 2006* 2005 2004 2003 2002 2001
Total assets under management N.A. N.A. N.A. N.A. 93,800 97,500
Off-balance-sheet credit equivalents
89,721 100,592 87,076 91,482 105,352 115,566
*Data as of June 30, 2006. Ratios annualized where appropriate. N.A.—Not available.
Table 6
Bayerische Hypo- und Vereinsbank AG—Ratio Analysis (cont.'d)
—Year ended Dec. 31—
2006* 2005 2004 2003 2002 2001
ANNUAL GROWTH (%)
Customer loans (gross) (6.75) 0.73 (3.07) (34.20) (2.95) 0.63
Loss reserves (31.58) (5.61) 17.67 (16.91) 6.83 0.52
Adjusted assets (2.69) 5.59 (2.54) (30.64) (5.13) 1.67
Customer deposits 5.26 10.61 2.95 (9.43) (9.75) 10.00
Tangible common equity (24.78) 9.36 9.39 (32.38) (15.59) (0.93)
Total equity (17.20) 15.28 5.70 (17.92) (42.26) 36.34
Operating revenues 18.35 8.15 (4.24) (6.63) (7.81) 36.34
Noninterest expense (1.27) 7.12 (4.59) (9.61) (10.18) 55.95
Net operating income before provisions 63.79 10.61 (3.39) 1.49 (0.67) (1.08)
Loan loss provisions (17.38) (16.55) (21.62) (39.08) 83.08 74.87
Net operating income after provisions 143.48 62.55 73.94 N.M. (228.91) (54.70)
Pretax profit 307.29 N.M. N.M. N.M. (150.63) (15.59)
Net income 318.51 N.M. N.M. N.M. (188.73) (18.33)
2006* 2005 2004 2003 2002 2001
PROFITABILITY (%)
Interest Margin Analysis
Net interest income (taxable equiv.)/avg. earning assets 1.33 1.31 1.28 1.08 0.99 1.04
Net interest spread 1.04 1.07 1.07 0.93 0.77 0.81
Interest income (taxable equiv.)/avg. earning assets 4.10 3.92 4.03 3.70 5.19 5.73
Interest income on loans/avg. total loans 5.07 4.80 4.89 4.52 6.04 6.59
Interest expense/avg. interest-bearing liabilities 3.07 2.85 2.97 2.77 4.43 4.92
Revenue Analysis
Net interest income/revenues 48.46 54.60 56.80 57.62 61.44 61.54
Fee income/revenues 31.55 31.99 30.38 28.58 25.63 25.32
Market-sensitive income/revenues 14.52 9.14 7.67 8.96 7.51 4.99
Noninterest income/revenues 51.54 45.40 43.20 42.38 38.56 38.46
Personnel expense/revenues 32.69 36.87 37.52 37.13 37.35 36.85
Noninterest expense/revenues 58.27 69.85 70.52 70.78 73.11 75.05
Noninterest expense/revenues less investment gains 58.27 69.85 70.52 71.18 73.11 74.88
Expense less amortization of intangibles/revenues 58.27 67.24 68.76 68.40 69.21 71.82
Standard & Poor’s | FULL ANALYSIS 14
Bayerische Hypo- und Vereinsbank AG
Table 6
Bayerische Hypo- und Vereinsbank AG—Ratio Analysis (cont.'d)
—Year ended Dec. 31—
2006* 2005 2004 2003 2002 2001
Expense less all amortizations/revenues 53.73 63.30 62.62 61.94 64.30 66.68
Net operating income before provision/revenues 41.73 30.15 29.48 29.22 26.89 24.95
Net operating income after provisions/revenues 31.30 15.22 10.12 5.57 (9.37) 6.70
New loan loss provisions/revenues 10.43 14.94 19.36 23.65 36.25 18.26
Net nonrecurring/abnormal income/revenues 13.42 (2.22) (29.07) (27.37) 1.70 7.26
Pretax profit/revenues 44.72 12.99 (18.94) (21.80) (7.67) 13.96
Net income/revenues 36.21 10.24 (21.27) (24.97) (8.19) 8.51
Tax/pretax profit 19.03 21.20 (12.29) (14.54) (6.85) 39.03
2006* 2005 2004 2003 2002 2001
Other Returns
Pretax profit/avg. risk assets (%) 2.12 0.51 (0.68) (0.67) (0.21) 0.40
Net income/avg. risk assets (%) 1.71 0.41 (0.76) (0.77) (0.22) 0.24
Revenues/avg. risk assets (%) 4.73 3.96 3.58 3.09 2.71 2.84
Net operating income before loss provisions/avg. risk assets (%) 1.98 1.19 1.05 0.90 0.73 0.71
Net operating income after loss provisions/avg. risk assets (%) 1.48 0.60 0.36 0.17 (0.25) 0.19
Net income before minority interest/avg. adjusted assets 0.89 0.22 (0.42) (0.42) (0.12) 0.13
Net income/employee (�EUR) 70,019 17,420 (33,757) (38,719) (12,669) 13,677
Personnel expense/employee (�EUR) 63,210 62,726 59,549 57,571 57,765 59,221
Personnel expense/branch (mil. �EUR) 1.63 1.72 1.72 1.74 1.80 1.80
Noninterest expense/branch (mil. �EUR) 2.91 3.25 3.22 3.32 3.53 3.66
Cash earnings/avg. tang. common equity (ROE) (%) 44.09 15.04 (12.11) (12.90) 0.41 11.04
Core earnings/avg. tang. common equity (ROE) (%) 19.05 7.25 N.A. N.A. N.A. 2.50
2006* 2005 2004 2003 2002 2001
FUNDING AND LIQUIDITY (%)
Customer deposits/funding base 41.86 40.32 38.53 35.65 26.27 26.91
Total loans/customer deposits 193.83 209.01 216.16 230.83 302.58 286.66
Total loans/customer deposits + long-term funds 116.64 111.86 109.59 111.14 102.74 94.07
Customer loans (net)/assets (adj.) 53.35 54.14 56.58 57.39 61.01 59.81
2006* 2005 2004 2003 2002 2001
CAPITALIZATION (%)
Adjusted common equity/adjusted assets 1.93 2.21 2.11 1.91 2.01 2.28
Adjusted common equity/risk assets 3.67 4.32 3.77 3.45 3.73 4.10
Adjusted common equity/customer loans (net) 3.62 4.09 3.73 3.32 3.29 3.82
Internal capital generation/prior year’s equity 26.30 5.59 (22.09) (18.55) (3.21) 2.51
Tier 1 capital ratio 6.20 6.38 6.03 5.41 5.16 5.39
Regulatory total capital ratio N.A. 10.90 10.40 9.64 9.10 10.30
Adjusted total equity/adjusted assets 2.30 2.63 2.52 2.39 2.37 2.64
Adjusted total equity/risk assets 4.37 5.13 4.50 4.33 4.40 4.75
Adjusted total equity plus LLRs (specific)/customer loans (gross) 8.04 9.10 9.01 7.93 6.86 7.11
Common dividend payout ratio 0.00 0.00 0.00 0.00 0.00 48.72
2006* 2005 2004 2003 2002 2001
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Bayerische Hypo- und Vereinsbank AG
Table 6
Bayerische Hypo- und Vereinsbank AG—Ratio Analysis (cont.'d)
—Year ended Dec. 31—
2006* 2005 2004 2003 2002 2001
ASSET QUALITY (%)
New loan loss provisions/avg. customer loans (net) 0.48 0.57 0.68 0.67 0.89 0.48
Net charge-offs/avg. customer loans (net) 1.40 1.00 1.00 0.82 0.55 0.58
Loan loss reserves/customer loans (gross) 3.89 4.46 4.76 3.92 3.11 2.82
Credit-loss reserves/risk assets 4.10 5.00 5.11 4.31 3.71 3.19
Nonperforming assets (NPA)/customer loans 8.40 8.06 8.73 8.99 N.A. N.A.
NPA (excl. delinquencies)/customer loans 8.40 8.06 4.85 4.88 N.A. N.A.
Net NPA/customer loans (net) 4.69 3.76 4.17 5.28 N.A. N.A.
Loan loss reserves/NPA (gross) 46.30 55.36 54.51 43.61 N.A. N.A.
*Data as of June 30, 2006. Ratios annualized where appropriate. N.A.—Not available. N.M.—Not meaningful.
Standard & Poor’s | FULL ANALYSIS 16
Bayerische Hypo- und Vereinsbank AG
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