bayerische hypo- und vereinsbank...

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


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


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.

www.standardandpoors.com 3


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.



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:



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.



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



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.



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.



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.



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



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



Table 5



(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



Table 5



(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



Table 6



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



Table 6



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.



Published by Standard & Poor's, a Division of The McGraw-Hill Companies, Inc. Executive offices: 1221 Avenue of the Americas, New York, NY 10020. Editorial offices: 55 Water Street, New York, NY 10041. Subscriber services: (1) 212-438-7280. Copyright 2005 by The McGraw-Hill Companies, Inc. Reproduction in whole or in part prohibited except by permission. All rights reserved. Information has been obtained by Standard & Poor's from sources believed to be reliable. However, because of the possibility of human or mechanical error by our sources, Standard & Poor's or others, Standard & Poor's does not guarantee the accuracy, adequacy, or completeness of any information and is not responsible for any errors or omissions or the result obtained from the use of such information. Ratings are statements of opinion, not statements of fact or recommendations to buy, hold, or sell any securities. Standard & Poor's uses billing and contact data collected from subscribers for billing and order fulfillment purposes, and occasionally to inform subscribers about products or services from Standard & Poor's, our parent, The McGraw-Hill Companies, and reputable third parties that may be of interest to them. All subscriber billing and contact data collected is stored in a secure database in the U.S. and access is limited to authorized persons. If you would prefer not to have your information used as outlined in this notice, if you wish to review your information for accuracy, or for more information on our privacy practices, please call us at (1) 212-438-7280 or write us at: [email protected]. For more information about The McGraw-Hill Companies Privacy Policy please visit www.mcgraw-hill.com/privacy.html. Analytic services provided by Standard & Poor's Ratings Services ("Ratings Services") are the result of separate activities designed to preserve the independence and objectivity of ratings opinions. Ratings are statements of opinion, not statements of fact or recommendations to buy, hold, or sell any securities. Ratings are based on information received by Ratings Services. Other divisions of Standard & Poor's may have information that is not available to Ratings Services. Standard & Poor's has established policies and procedures to maintain the confidentiality of non-public information received during the ratings process. Ratings Services receives compensation for its ratings. Such compensation is normally paid either by the issuers of such securities or by the underwriters participating in the distribution thereof. The fees generally vary from US$2,000 to over US$1,500,000. While Standard & Poor's reserves the right to disseminate the rating, it receives no payment for doing so, except for subscriptions to its publications.


bayerische hypo- und vereinsbank...

Documents