Major events in 2006
The integration of HVB Group into the UniCredit Group has given rise to a new reporting structure and segment structure.
Discontinued operations
The transfers agreed by the Management Board and Supervisory Board on September 12, 2006, which were approved by the Extraordinary Meeting of Shareholders on October 25, 2006, represent a discontinued operation as defined by IFRS 5, resulting in a different presentation in the individual parts of the consolidated financial statements.
The results of the discontinued operations are not shown in the income statement prepared in compliance with IFRS 5 until after the net profit after tax and minorities of “HVB Group new”. The following companies and sub-groups have been defined as discontinued operations: the Bank Austria Creditanstalt Group, IMB, AS UniCredit Bank, Riga (formerly HVB Bank Latvia AS, Riga), HVB Bank Ukraine and the HVB AG branches in Vilnius and Tallinn.
The income statement for HVB Group compliant with IFRS 5 (HVB Group new) down to the item “Net profit of HVB Group new” does not reflect the earnings power of the new HVB Group following the transactions listed, either in the past or in the future. The profit now disclosed for HVB Group new does not contain any adequate revenues offsetting the capital tied up by the holdings in BA-CA, IMB and the other units being transferred (dividends or primary revenues from the holdings). Looking into the future, the proceeds from the transactions will give HVB Group the chance to expand its core competencies and to tap additional sources of revenue.
Modified business structure (new divisions)
In conjunction with the integration of the Bank into the UniCredit Group, the activities of the new HVB Group have been restructured and divided into the following global divisions: Retail, Wealth Management, Corporates & Commercial Real Estate Financing, and Markets & Investment Banking. Also shown is a segment called “Other/consolidation” that covers Global Banking Services and Group Corporate Centre activities. The latter also contain the former RER segment and the newly defined SCP portfolio.
The reorganisation primarily affected the former Germany business segment, from which the Retail, Wealth Management and Corporates & Commercial Real Estate Financing – divided into Corporates and Commercial Real Estate Financing operations – divisions emerged. Within this, the Retail and Wealth Management divisions were created out of the former Private Customers business unit, whereas the Corporate Customers and Professionals and Real Estate business units formed the basis for the new Corporates & Commercial Real Estate Financing division. In addition, customers were transferred from the former Corporate Customers and Professionals business unit (business customer segment) to the new Retail and Wealth Management divisions.
The Markets & Investment Banking division was essentially formed out of the Corporates & Markets segment, but without the activities of the BA-CA Group and IMB.
Compliant with IAS 14.52, we also show the companies defined as discontinued operations in accordance with IFRS 5 additionally and separately from the continuing divisions and segments of the new HVB Group in a separate column headed “Discontinued operations” in our segment report.
New income statement structure
In its Interim Report for the period ended September 30, 2006, HVB Group prepared its income statement for the first time using the structure for many years used by UniCredit in its capital market communications. Furthermore, the presentation of expense items has been modified by the year-end 2006 to match the usual UniCredit practice. This means all absolute amounts in the income statement are shown with their impact on profit.
A reconciliation of the income statement structure used to date to the new income statement structure for the period from January 1 to December 31, 2005 is shown in the notes to the consolidated financial statements (Note 2, “Consistency”) together with the main differences.
Adjustment of comparison periods
Due to the changes listed above, the income statement and the segment report are no longer comparable with the figures reported in the 2005 Annual Report. For this reason, we have adjusted the figures for previous years accordingly.
General comments by management on the operations of the full HVB Group
In its income statement for 2006, the full HVB Group reported a net profit of €4,420 million (2006: €642 million) after taxes and minorities, including a net gain from non-recurring items. This total comprises the net profit of the discontinued operations of €3,457 million (2005: €1,158 million), the minority interests in the discontinued operations of €677 million (2005: €389 million) and the net profit of €1,640 million recorded by the new HVB Group (2005: loss of €127 million). The net profit recorded by the new HVB Group especially reflects the good operating performance that is described in greater detail under “Operating performance of HVB Group new” below using the individual items in the income statement. Comments on the net profit of the discontinued operations are shown in the Note 39 “Income statement and earnings per share of discontinued operations” in the notes to the consolidated financial statements.
Non-recurring effects
The profit before tax of the full HVB Group totalled €5,317 million, including the non-recurring effects of €2,230 million resulting in part from the integration of HVB Group into the UniCredit Group. Of the total non-recurring effects in 2006, €362 million are attributable to the continuing operations of the new HVB Group and €1,868 million to discontinued operations.
The non-recurring effects in the new HVB Group relate to the following:
- Gains on the disposal of the Activest companies to Pioneer Global Asset Management S.p.A. totalling €543 million and the partial disposal of our holding in Münchener Rückversicherungs-Gesellschaft AG (€217 million) disclosed in net income from investments
- Valuation expenses of €130 million arising from the disposal of a portfolio of non-strategic real estate announced by the Management Board of HVB AG on December 13, 2006 included in net income from investments
- Restructuring costs of €60 million
- General provisions for losses on specific loans and advances of €55 million disclosed under net write-downs of loans and provisions for guarantees and commitments that were made possible for the first time by the preparations for Basel II causing improvements to the data records in terms of defaults by customers who are 90 days in arrears and other non-performance
- Expenses of €153 million arising from a change in the parameters used to calculate the fair value mainly of financial instruments under the categories held for trading and at fair value through profit and loss (fair-value discount) shown in a separate line called “Other non-operating expenses”
In the discontinued operations, the non-recurring effects comprise the following individual items:
- Gains of €669 million on the disposal of Splitska banka, which belongs to the BA-CA Group, and of €1,756 million on the disposal of the Bank BPH Group disclosed in net income from investments
- Restructuring costs of the discontinued operations totalling €248 million. €225 million of this total relates to the creation of provisions for reorganisation and restructuring in the Retail, Corporates, Markets & Investment Banking and Global Banking Services divisions as well as Support Services and Risk Management at BA-CA
- Non-recurring expense of €278 million in net write-downs of loans and provisions and for guarantees and commitments relating to a change of methods used by BA-CA
- Expenses of €31 million arising from a change in the parameters used to calculate the fair value mainly of financial instruments under the categories held for trading and at fair value through profit and loss (fair-value discount) shown in the income statement item called “Other non-operating expenses”
The profit before taxes totalling €1,299 million was also depressed by non-recurring effects in 2005. In addition to restructuring costs of €546 million (€108 million of which is for discontinued operations), this includes further extraordinary expenses arising from loan-loss provisions due to additional general provisions for losses on specific loans and advances totalling €147 million (€70 million of which was for discontinued operations).
Adjusted for non-recurring effects in both years, the full HVB Group performed extremely well, with profit before taxes rising by 55.0% to reach €3,087 million after €1,992 million in the previous year and net profit after taxes and minorities totalling €2,160 million, up 85.7% on the previous year.
Appropriation of profit
In the full HVB Group, €3,798 million of the unappropriated profit of €4,420 million has been transferred to reserves. The consolidated profit (which is the profit available for distribution of HVB AG) amounts to €622 million. We will propose to the Annual General Meeting of Shareholders that a dividend of €301 million be paid to the shareholders and that a further €321 million be transferred to retained earnings. The total dividend payout of €301 million is equivalent to a dividend of €0.40 per share of common stock and per share of preferred stock and an advance dividend of €0.064 per share of preferred stock.
Key capital ratios
The return on equity after taxes (based on average IFRS equity capital without change in valuation of financial instruments) of the full HVB Group amounted to 37.8% (including non-recurring effects). Even adjusted for the non-recurring effects listed, our expectations with regard to return on equity after taxes have been more than met, with a figure of 18.5% at December 31, 2006 after 10.2% in the previous year.
Besides increasing our return on equity, we also more than matched the targets stated in the Outlook section of Management’s Discussion and Analysis (on page 74 of the 2005 Annual Report) in terms of a significant boost in total revenues and a substantial improvement in the cost-income ratio (ratio of operating costs to total revenues). The cost-income ratio improved by 9.4 percentage points during the year under review to 59.1%.
We were able to beat these targets for return on equity and the cost-income ratio in the new HVB Group as well.
Operating performance of the new HVB Group
As already mentioned in the section headed “Major events in 2006”, we are presenting a separate income statement for the new HVB Group in compliance with IFRS 5 rules. This statement no longer contains the income and expense items of discontinued operations and shows their contribution to earnings only after net profit after tax and minorities of the new HVB Group.
Total revenues
With further year-on-year growth in net trading, hedging and fair value income as well as in net fees and commissions coupled with a favourable economic climate, further improvements to our earnings structure are becoming apparent on the operating side. Overall, total revenues increased 14.2% over the previous-year figure.
Net interest income
At €3,148 million, we almost matched the previous year’s total for net interest income (down 0.6% or €18 million) despite the scheduled strategic portfolio disposals, chiefly in the Real Estate Restructuring unit. Average risk assets (compliant with the German Banking Act) declined by 7.1% year-on-year. The effects of portfolio disposals were also reflected in our segment report through the decline in net interest income in the Other/consolidation segment, whilst all other operating divisions increased or maintained net interest income compared to the previous year. At €251 million, interest and similar income from dividends and other income from equity investments almost matched the previous year’s level of €259 million.
Net fees and commissions
At €1,753 million, there was a significant 1.7% year-on-year rise in net fees and commissions. However, the profit contributions made by the sold Activest companies are only included in net fees and commissions for 2006 up to the middle of the year, which has a negative effect when compared to 2005. Adjusted for consolidation and currency effects, the rate of increase in net fees and commissions totalled 7.0%. In the process, net fees and commissions from the securities and depositary business rose by around 9% in adjusted terms. In particular, sales of innovative financial products like the “HVB Best of Fonds”, “HVB Flex Bonus Zertifikat”, “HVB 2 x 5% Profianleihe” and the “HVB Höchststand-Zertifikat” helped to boost earnings. There was also an increase in the contributions made to profits by other service units (including commissions) and from the lending business.
Net trading, hedging and fair value income
Net trading, hedging and fair value income of the new HVB Group developed especially well. At €768 million, it is more than double the figure of €376 million reported for 2005. The net income from financial instruments classified as held for trading increased by €209 million to €673 million thanks essentially to higher dividend income arising from trading operations (up €184 million to €320 million) together with a rise of around a quarter in equity contracts to €112 million. In 2006, we report the gains realised from private equity transactions of €38 million under net trading, hedging and fair value income for the first time; these were previously shown under net income from investments.
Net other expenses/income
Net other expenses/income amounted to €32 million. A net expense of €311 million was reported for this item in 2005 on account of losses absorbed. Of the total losses absorbed in 2005, €256 million relates to HVB Immobilien AG due to the existing profit-and-loss transfer agreement with HVB AG. These include the losses of real estate subsidiaries of the HVB Immobilien AG sub-group, which was not consolidated in 2005. The major companies of the HVB Immobilien AG sub-group were fully consolidated in the consolidated financial statements of HVB Group with effect from January 1, 2006.
Operating costs
At €3,695 million, the operating costs of the new HVB Group were reduced by 4.9% compared to the previous year. In the process, the payroll costs remained stable at 0.2%, despite higher expenses for profit-related bonus payments in the Markets & Investment Banking segment, while there was a 7.5% reduction in other administrative expenses and a significant 24.2% decline in amortisation, depreciation and impairment losses on intangible and tangible assets.
In net terms, consolidation and currency effects served to reduce expenses reported under the aggregate operating costs by €11 million in 2006. In particular, the increase in expenses caused by the initial consolidation of the HVB Immobilien AG sub-group was offset by the lower expenses arising from the deconsolidation of the Activest companies, resulting in a year-on-year decrease adjusted for consolidation and currency effects of 4.6%.
Operating profit
The massive 70.0% rise in the operating profit of the new HVB Group to €2,257 million is evidence of the further progress we made in the year under review in the constant improvement of our operating profit we had already initiated in previous years, helping us to more than meet our financial targets. The rise in operating profit compared to the same period last year is a result of both the rise in total revenues and successful cost reduction measures. This efficiency gain led to a significant enhancement of the cost-income ratio (percentage of total revenues made up by operating costs), which improved by 12.4 percentage points to 62.1%.
Provisions for risks and charges
Net provisions for risks and charges increased to €164 million after €87 million in the previous year. The largest individual item in this regard is the provision for rental guarantees related to premises no longer required for banking operations that were vacated in the course of space-optimisation programmes. As a result of discontinuing the use of space, existing tenancy/leasing contracts became onerous contracts for which provisions of €60 million must be set aside to meet contractual obligations arising under what are defined by IAS 37.66 as onerous contracts. This will no longer affect our income statements in future years. In addition, this income statement item includes further provisions for rental guarantees, other provisions and accruals for risks and charges as well as provisions for litigation risks in the lending business.
Write-down on goodwill
In compliance with IFRS 3, scheduled write-downs have no longer been taken on goodwill since January 1, 2005. No non-scheduled write-downs of goodwill were taken in 2006.
Restructuring costs
The restructuring costs incurred in part as a result of the integration of HVB Group into the UniCredit Group amounted to €60 million in 2006. This figure includes payroll costs of €27 million and other administrative expenses (including depreciation) of €28 million. The restructuring costs of €438 million reported for 2005 essentially included additions to restructuring provisions mainly for severance pay settlements, depreciation charges on non-current assets and fees.
Net write-downs of loans and provisions for guarantees and commitments
At €933 million, net write-downs of loans and provisions for guarantees and commitments were €46 million or 4.7% below the figure of €979 million recorded for 2005. Net write-downs of loans and provisions for guarantees and commitments were affected by the non-recurring effects described in both years. Even adjusted for the non-recurring effects, there was a 2.7% decline in net write-downs of loans and provisions for guarantees and commitments to €878 million.
Net income from investments
Net income from investments recorded by the new HVB Group amounted to €671 million in 2006 and benefited from net nonrecurring effects of €630 million.
These effects include gains on the disposal of the Activest companies (€543 million) and the sale of part of our holding in Münchener Rückversicherungs-Gesellschaft AG (€217 million) and valuation expenses of €130 million arising from the sale of a portfolio of non-strategic real estate announced by the Management Board of HVB AG on December 13, 2006.
In addition, gains were realised from the reduction of our shareholdings in Babcock & Brown Limited (€55 million) in the first quarter of 2006 and Lufthansa AG (€40 million) in the second quarter of 2006; these were partially offset by deconsolidation losses and write-downs on investment properties.
In 2005, the largest income items were the gains from the partial disposal of our shareholdings in Münchener Rückversicherungs- Gesellschaft AG (€208 million) and the gains realised on the sale of our holdings in Rhön-Klinikum AG (€36 million) and Premiere AG (€63 million). These were partially offset by non-recurrent expenditure of €225 million in connection with the acquisition of real estate from the fund assets of a property fund managed by the Bank’s Internationales Immobilien-Institut GmbH (iii-investments) subsidiary.
Other non-operating expenses
Expenses of €153 million arising from a change in the parameters used to calculate the fair values of financial instruments classified as held for trading and at fair value through profit and loss are shown in a separate line in the income statement called “Other non-operating expenses” (changes in accounting estimates, compliant with IAS 8.32 et seq.). This involves an effect, which is non-recurrent in this magnitude, arising from the initial application of the fair-value discount which takes account of other factors influencing the calculation of the fair value and thus increases the quality of our conservative fair value calculation.
Profit before tax
The profit before tax of the new HVB Group amounted to €1,618 million including the non-recurring effects mentioned after a loss of €107 million in the previous year. Adjusted for non-recurring effects, profit before tax, at €1,256 million in 2006, would still have been more than three times as high as the adjusted figure of €408 million for 2005.
Income tax for the period
For the year under review, we are disclosing income tax income of €125 million (2005: income tax expenses of €14 million), which consists of expenses arising from current income taxes of €199 million and income from deferred taxes of €324 million.
The apparently low current income taxes of €199 million in relation to the profit before tax of €1,618 million is mainly attributable to tax-free earnings. In addition, the capitalisation of the discounted corporate income tax credit from previous years in accordance with new tax regulations had a beneficial effect.
The deferred tax income stems largely from an increase in the deferred tax assets recognised on the domestic loss carry-forward of HVB AG which were not previously disclosed.
Minorities and net profit
Minorities account for €103 million of net profit. After deducting the minorities, we generated a profit of €1,640 million after a loss of €127 million incurred as a result of non-recurring effects in the previous year. Adjusted for the listed non-recurring effects in both years, we managed to increase the profit of €290 million reported for 2005 by a factor of almost four to €1,128 million in 2006.
The return on equity of the new HVB Group (based on the average IFRS equity capital of the full HVB Group, distributed to the continuing and discontinued operations in accordance with average risk-weighted assets) totals 19.3% before taxes and 22.1% after taxes. Adjusted for non-recurring effects, the amounts are 15.0% before taxes and 15.2% after taxes. Starting in the 2007 financial year, we will adjust the method used to calculate return on equity to match the controlling logic of the UniCredit Group.
Segment results by new division
The contributions of the divisions to the profit before tax of the new HVB Group of €1,618 million were as follows:
| Retail | €117 million | |
| Wealth Management | €746 million | |
| Corporates & Commercial Real Estate Financing | €531 million | |
| Markets & Investment Banking | €969 million | |
| Other/consolidation | loss of €745 million |
The income statements of each division, the components and targets of the divisions and comments on the performance of the divisions are described in Note 21 “Notes to segment reporting by division” and Note 22 “Income statement broken down by division” in the notes to the consolidated financial statements.
