1 Dual management principle for overall bank management
The main focus of capital market-oriented management in HVB Group is on investment and the value-oriented allocation of our capital resources to business activities with attractive risk-return ratios. Within the framework of our dual management principle, the divisions are allocated both regulatory (or used core) capital and economic capital. Both resources are expected to yield an appropriate return, which is derived from the expectations of the capital markets and is expected to be earned by our business units. In 2007, harmonisation of the dual management principle with the management principles applied by the UniCredit Group will continue.
2 Regulatory capital adequacy
Used core capital
For planning purposes, the divisions are required to have core capital backing for credit and market risks equal to an average of 6.8 percent of equivalent risk assets. Furthermore, the expected return on investment is derived from the average used core capital calculated – for this purpose, excluding hybrid capital.
Management of regulatory capital adequacy requirements
To manage our regulatory capital we apply the following three capital ratios, which are managed on the basis of internally defined minimum levels:
- core capital ratio (ratio of core capital to risk assets, with or without the market risk positions weighted by a factor of 12.5)
- equity capital ratio (ratio of equity capital to risk-weighted assets)
- equity funds ratio (ratio of equity funds to the sum of risk-weighted assets and market risk positions weighted by a factor of 12.5)
More detailed information on these ratios in 2006 is contained in the Financial Review and in the notes to the consolidated financial statements (Note 76) in the present Annual Report.
| (confidence level 99.95%) | ||||
|---|---|---|---|---|
| 2006 | 2005 | |||
| € millions | in % | € millions | in % | |
| Broken down by risk type | ||||
| Market risk | 174 | 2.2 | 278 | 3.4 |
| Credit risk | 1,763 | 22.3 | 3,273 | 39.8 |
| Business risk | 595 | 7.5 | 1,098 | 13.3 |
| Operational risk | 791 | 10.0 | 1,056 | 12.8 |
| Risks arising from the Bank’s own real estate portfolio | 259 | 3.2 | 347 | 4.2 |
| Risks arising from the Bank’s shareholdings/financial investments | 584 | 7.4 | 2,181 | 26.5 |
| HVB Group new | 4,166 | 52.6 | ||
| Discontinued operations and non-current assets or disposal groups held for sale | 3,751 | 47.4 | ||
| Full HVB Group | 7,917 | 100.0 | 8,233 | 100.0 |
| Capital cushion to cover risks | ||||
| Full HVB Group1 | 21,947 | 18,807 | ||
| Utilisation, in % | ||||
| Full HVB Group1 | 36.1 | 43.8 | ||
1 adjustment of previous-year values due to retroactive adjustment of IFRS disclosures
To determine the appropriate capital funding, we have essentially defined the following process:
- Based on our multi-year plan, we prepare a rolling eight-quarter projection for ongoing forecasting of our capital ratios in accordance with the German Banking Act.
- Reports on the actual ratios and significant effects on them are submitted every month to the Asset & Liability Committee, which decides on appropriate action if the actual ratios deviate significantly from plan.
- The Management Board is informed on a monthly basis on the risk asset budget utilisation of the divisions.
| (confidence level 99.95%) | ||||
|---|---|---|---|---|
| 2006 | 20051 | |||
| € millions | in % | € millions | in % | |
| Broken down by division | ||||
| Retail | 571 | 7.2 | 707 | 8.6 |
| Wealth Management | 138 | 1.7 | 116 | 1.4 |
| Corporates & Commercial Real Estate Financing | 688 | 8.7 | 830 | 10.1 |
| Markets & Investment Banking | 1,545 | 19.5 | 1,114 | 13.5 |
| Other/consolidation | 1,224 | 15.5 | 1,695 | 20.6 |
| HVB Group new | 4,166 | 52.6 | 4,462 | 54.2 |
| Discontinued operations and non-current assets or disposal groups held for sale2 | 3,751 | 47.4 | 3,771 | 45.8 |
| Full HVB Group | 7,917 | 100.0 | 8,233 | 100.0 |
1 previous-year figures based on the 2006 divisional structure
2 item for 2005 includes companies disposed of in the 2006 financial year
3 Economic capital adequacy
The future economic capital requirements of the divisions – broken down by risk type – are determined under the annual planning process in close cooperation between Risk Control and the individual operating units. After approval by the Management Board of HVB Group, the economic capital parameters are anchored in the control and reporting instruments. A comparison between the targets and the actual values of the parameters is produced on a quarterly basis and reported to the Chief Risk Officer.
Our economic capital, aggregated for the full HVB Group (including minority interests) amounted to €7.9 billion at December 31, 2006 after taking into account all risk-reducing portfolio effects. This represents an overall decline of 3.8% year-on-year. €4.2 billion of this amount relates to the new HVB Group.
In the year under review, the discontinuation of business activities and the sale of assets were also the focal point of economic capital changes. The related economic capital value at December 31, 2006 amounted to €3.75 billion. The decrease since December 31, 2005 is mainly attributable to the sale of the BPH Group and Activest business units to the UniCredit Group. The most noticeable effect on the economic capital of the new HVB Group is the reduction of our investment portfolio, primarily through the further reduction of our stake in Münchener Rückversicherungs-Gesellschaft AG, to approximately €0.6 billion. Consequently, the economic capital for credit risk, at €1.8 billion, with a stake of 22.3%, remains the most important risk item.
In a quarterly analysis of our ability to support risk, we measure our economic capital against the capital cushion available to us to cover risk. In addition, this sustainability analysis is carried out with a corresponding forecasting horizon as a component of our planning process.
According to our internal definition, the capital cushion is made up of IFRS capital components, participatory certificate and hybrid capital, reserves and the actual result. Minority interests are included and goodwill is deducted. The capital cushion for the full HVB Group amounted to €21.9 billion at the end of 2006 (comparable previous-year figure: €18.8 billion). The year-on-year rise results primarily from higher transfers to reserves together with an increase in the AfS reserve and lower participating certificates outstanding and hybrid capital instruments. With an aggregate economic capital of €7.9 billion, this represents a utilisation of 36.1% of the cushion.
Even taking into account the results of risk type-specific stress results, we had a substantial buffer in the capital cushion at the level of the full HVB Group over the entire financial year.
4 Risk strategy
Taking as the starting point the economic capital and the ability to cover risks, the Management Board approved a risk strategy for 2006 that is consistent with the business strategy. For 2007 this has been done for the new HVB Group which already reflects the new orientation within the planned structure of the UniCredit Group and all relevant risk types.
