The Management's Discussion and Analysis and the rest of the Annual Report include statements, expectations and forecasts concerning the future. These forward-looking statements are based on plans and estimates that are supported by the information that is available to us at the present time. We assume no obligation to update these statements in the light of new information or future events. Known or unknown risks and uncertainties may be entailed in forward-looking statements and the actual results and developments may thus differ significantly from those expected at present. Such discrepancies may result particularly from changes to the general economic climate and the competitive situation, developments on international capital markets, the possible default of borrowers or contracting parties in commercial transactions, the implementation of restructuring measures, amendments to national and international laws, notably to tax regulations, the reliability of our risk management procedures and methods as well as other risks, some of which are described in detail in the Risk Report. The statements made in the Outlook for HVB Group are based on the structure of the new HVB Group at the outset of 2007.
- General economic outlook for 2007
- Sector development 2007
- General economic outlook for 2008
- Key planning data for 2007
- Development of HVB Group
- Opportunities arising from the development of general conditions and future business strategy
- Opportunities in terms of corporate strategy, performance and other factors
General economic outlook for 2007
In 2007, global growth is anticipated to slow down somewhat, although there are no signs of a hard landing for the global economy. At just under 4.5%, GDP growth is expected to lag behind that of last year only slightly. At the same time, worldwide growth will be more evenly balanced. The United States will probably enjoy a soft landing in 2007, expanding by 2.1%, while the euro area and Japan are expected to grow at a similar pace to the U.S. economy. The emerging economies of Asia and China should remain at the top of the growth league (at just under 8% and just under 9.5%, respectively).
In the United States, the problems in the real estate and automotive sectors will initially have a restraining effect. However, lower energy prices will bring relief and boost the purchasing power of private consumers with a favourable financial market environment probably acting as a support in this regard. The slowdown in growth in the United States will probably come to an end in the first half of 2007, while capital spending will revive in the second half. This will give the U.S. economy new momentum, enabling it to return to its long-term growth potential. For the year as a whole, this will mean growth of almost 2.0% year-on-year. With GDP rising a good 2% in 2007, Japan’s economy is anticipated to expand above its long-term trend for the fourth time in a row. Exports and capital spending by companies will remain important pillars of the economy. In addition, a significant recovery is expected in private consumption levels. As the economy continues to perform well, the slight upward trend in consumer prices to date is expected to increase somewhat. Hence, the Bank of Japan will probably carry out two moderate interest rate rises this year, to take the key rates to 0.75%.
Although growth in the euro area is expected to remain steady in 2007, it will lose some of its momentum in the course of a long-term normalisation process. This is suggested in part by leading indicators which, despite declining slightly, are still at a very high level. The sentiment, notably in companies, is set to remain positive. Domestic demand is anticipated to continue its revival, partly as a result of a sustained rise in employment, although there will be a slight deterioration in the outlook for exports because of the slight slowdown worldwide. For 2007 as a whole, GDP growth will thus stand at around 2% in the euro area. With GDP rising at just under 2% in Germany, growth is expected to slow down a little. This is chiefly a result of the slight deterioration in the outlook for exports due to weaker growth in the United States; in addition, a slight decline is expected in the very high growth rate of capital spending by companies in 2006. Furthermore, the increase in value-added tax that came into force at the start of the year may have led to purchases being brought forward and, in return, to private consumption decreasing, particularly at the beginning of 2007. However, the continued increase in jobs for which social security contributions are payable should restrain any decline in private consumption and ensure a moderate recovery in consumption levels as the year wears on.
Sector development 2007
Our assessment indicates a consolidation of economic growth in the economy during the 2007 financial year. The financial services industry should also benefit from these positive growth prospects. We therefore assume that the continued rise in demand for banking services will stimulate revenue growth for banks on both the retail and corporate side. At the same time, we can assume that the positive economic environment will have a further favourable impact on risk provisioning. Operating costs should feature a slightly lower increase than in 2006. In 2008, we expect German banks’ profits to grow only slightly less than in 2007.
The European Central Bank is expected to raise its key rate twice, by 25 basis points each time, in the course of year. This is suggested by the stable economic performance entailing the risk of second-tier effects in inflation as well as the continued very ample supply of liquidity. In contrast, the Fed is expected to lower the key rate by a mere 25 basis points in the current year. In the United States, long-term interest rates will probably remain largely around 4.7%, the level reached at the end of 2006, as a result of slightly weaker economic growth. German yields should also rise very slowly, to 4.1%. Because the relative advantage in terms of interest rates enjoyed in the United States will decline further, the dollar is expected to move towards the 1.34 mark by the end of the year.
General economic outlook for 2008
In 2008, the global economy will show the same solid growth as in 2007. This is especially true for the United States, which should see growth accelerate slightly. In contrast, the European and German economies should keep the same growth rates as in 2007.
Key planning data for 2007
Our plans are based on the following conservative assumptions:
- the global upturn will lose some of its momentum,
- growth in gross domestic product will be close to 2% in Germany,
- the inflation rate will rise to approximately 2% as a result of the increase in the rate of value-added tax,
- long-term interest rates will remain close to 4%,
- the number of company bankruptcies will continue to decline slightly.
Development of HVB Group
A rise in earnings per share, to €0.56, has been targeted for 2007 for the UniCredit Group as a whole.
As an integral part of this corporate group, the new HVB Group will provide important financial contributions to achieving this goal.
Based on our good operating performance in the year under review, we are planning a further tangible increase in total revenues for the new HVB Group and only a slight rise in operating costs, which will lead to an improvement in the cost-income ratio. This is based on the existing group of consolidated companies following the disposal of our activities in Austria and central and eastern Europe.
Net trading, hedging and fair value income, coupled with higher net commission income from innovative products for private and corporate customers, is set to drive the increase in total revenues.
Net write-downs of loans and provisions for guarantees and commitments will remain at around the same level as the previous year.
The new HVB Group is the centre of competence for the investment banking activities of the UniCredit Group. The possibility of pooling the activities grouped together in a virtual structure at the new HVB Group is currently being considered. The first step would involve integrating the main business activities of UniCredit Banca Mobiliare (UBM), UniCredit’s investment bank, in the new HVB Group. The definitive timing and nature of the integration are to be determined in the near future.
With the disposal of BA-CA, AS UniCredit Bank and IMB at the start of January 2007, the core capital ratio improved to 15.6% on a pro forma basis.
Opportunities arising from the development of general conditions and future business strategy
In the course of the combination with the UniCredit Group and as a result of the sale of the commercial activities in Austria, central and eastern Europe, Russia, the Ukraine and the Baltic states, interesting new opportunities have arisen for HVB Group to continue to grow again organically and by means of acquisitions after a period of transformation and integration:
- Exploiting opportunities arising from change and consolidation processes in Germany within the framework of a specialised business model with a clear emphasis on Germany.
- Tapping the success potential arising from the concentrated expansion of investment banking activities.
- HVB Group’s prospects of realising high value-added potential and sustained earnings growth as part of a European banking group with a unique competitive profile in central and eastern European markets.
- Using more favourable funding options through a sustainably improved and secured capital base, which can also influence rating assessments.
- Leveraging the advantage from HVB Group’s now high capital base and liquidity to swiftly and flexibly respond to opportunities arising on the market.
- Reduction of regional risk potential and the entailed future investment risks.
- Exploiting cost and earning synergies by optimising all production capacities, rationalising overlapping functions and enhancing processing flows.
Opportunities in terms of corporate strategy, performance and other factors
Besides the opportunities arising from our combination with the UniCredit Group, the disposals in Austria and central and eastern Europe and the strategic realignment of HVB Group, further opportunities have arisen as a result of:
- a further improvement in total revenues by creating and using new products for all customer segments through product factories with tailored solutions,
- projects to support customers demanding cross-border financial services in central and eastern European markets,
- a further reduction in operating costs achieved by strict cost management in Germany,
- an improvement in cross-selling potential in all customer groups,
- reducing risk by disposing of individual non-strategic assets, an
- a bolstering of the capital base also from sustainable earnings growth.
The economic development in the core market of Germany will also have a major impact on all of the opportunities described. An economic recovery, accompanied by improvement in the unemployment rate and a favourable trend on the real estate markets, provides positive leverage for further strong performance.
