Corporate Banking
In 2006, solid results were generated by 1,984 employees working at 93 locations throughout Germany (HVB AG), serving around 70,000 customers and handling loans worth €40 billion and deposits worth €20 billion.
| State | Dec. 31, 2006 | % |
|---|---|---|
| Baden-Wuerttemberg | 7 | 7.5 |
| Bavaria | 43 | 46.2 |
| Berlin | 1 | 1.1 |
| Brandenburg | 1 | 1.1 |
| Hamburg | 6 | 6.5 |
| Hesse | 3 | 3.2 |
| Lower Saxony | 6 | 6.5 |
| Mecklenburg-Western Pomerania | 2 | 2.2 |
| North Rhine-Westphalia | 6 | 6.5 |
| Rhineland-Palatinate | 1 | 1.1 |
| Saarland | 1 | 1.1 |
| Saxony | 3 | 3.2 |
| Saxony-Anhalt | 2 | 2.2 |
| Schleswig-Holstein | 9 | 9.7 |
| Thuringia | 2 | 2.2 |
| Total1 | 93 | 100.0 |
1 The total number of offices of the new HVB Group is 788 (see Note 82).
First value driver: satisfied customers, friendly market environment and good prospects
With a market share of around 5.9% based on the total lending volume in Germany, HVB is the fifth largest corporate bank – but not as far as customers are concerned. We were voted “Corporate bank of the year” in 2007 by 100,000 readers of “Markt und Mittelstand”, a sector magazine; the main reason for this was “the high quality of the range of products and services“ offered to corporate customers by HVB. The feedback we have gained from numerous discussions with customers also shows that our business combination with UniCredit is seen as an advantage. As far as its market presence and significance is concerned, HVB has moved sharply upwards in customer rankings, due in part to customers profiting from the presence of UniCredit banks in 20 countries in Europe – not only in the emerging markets of CEE but also in the most important exporting countries of the EU. But above all, it is the expertise cultivated in increasingly complex corporate banking operations which our customers find convincing.
At the same time, a relatively stable market environment and a favourable economic climate had a positive impact on results. In particular, German enterprises succeeded in exploiting new opportunities to improve their competitiveness in exports. Germany continues to be the world’s biggest exporting country and largely managed to maintain its market shares in 2006. This trend was accompanied by a rise in foreign direct investment and is evidence of the increasing globalisation of production activities and companies. HVB benefited strongly from this development in 2006, thanks largely to the expertise it has in foreign trade and cash management operations as well as in liquidity and financial risk management in its investment, interest and currency products.
Its industry expertise and strong customer relationships in key export sectors, such as engineering, tool manufacturing and automotive supply, also made a decisive contribution to performance in 2006. Greater competitive pressure in fees and lending margins was more than compensated, but will continue to have an impact.
An estimated lending volume of €1.2 trillion in Germany and the rise in demand for capital market expertise among broader customer groups (mid-caps) provide plenty of room for further growth in the coming financial year. We expect the total lending volume for corporate customers to grow by around 5%. We also assume that the market climate for German corporate banking operations will develop similarly well in 2007.
Second value driver: greater advisory expertise and suitable product solutions
Twelve initiatives were launched under the Growth Opportunities (GO) programme in 2006; these will underpin our future growth and improve our value added. In this context, the investments made in our advisory services and efficient relationship management in particular are considered essential requirements for exploiting market opportunities. Alongside greater expertise, relationship managers are benefiting from clear customer segmentation, which is giving them more leeway to serve customers on a long-term basis, provide competent advice and call in product specialists to effectively meet specific customer needs. To optimise this, new relationship models were introduced when the divisions were restructured. Our operations are now divided into four customer segments:
- large caps (6,000 customers)
- mid caps (27,000)
- small caps (32,000) and
- public-sector customers (5,000)
The customer transfers required to implement the resegmentation and the restructuring of divisions were completed mid-2006, with no hindrance to commercial activities; in fact we succeeded in acquiring a number of new customers.
More specific training for employees is a further positive side-effect of the resegmentation. In 2006, all relationship managers working in the mid-cap and large-cap sector underwent training in conducting strategic dialogues with customers. Moreover, relationship managers have been able to use the methods launched in 2006 – “HVB industry and benchmark analysis”, “HVB corporate customer credit-standing analysis” and the “HVB structural analysis for the Mittelstand” – to show their customers where they are located in an industry-wide comparison and what opportunities and openings there are for their company.
The ratio of net interest income to net fees and commissions stood at 70:30, clearly indicating that lending operations were our core business again in 2006. But all our efforts were aimed at providing Mittelstand customers with innovative alternative solutions to supplement traditional loans, such as mezzanine products involving the capital market (PREPS™). This highly innovative profit-participation platform, which was launched jointly with our partner CEG, enables mid-sized companies to raise finance directly from the capital market. With its sixth transaction (2007-1) in the first quarter of 2007, Corporates placed over €2.0 billion of subordinated capital for Mittelstand customers via the PREPS™ platform.
HVB is the market leader in Germany for mezzanine finance. Besides providing sophisticated, tool-aided advisory services, coupled with the analysis and funding of current (working capital) and non-current assets, we offer structured loans to a broader array of small and medium-sized enterprises. We are also continuing to expand operations involving subordinated finance, small and medium-sized finance for corporate transactions and project finance. In addition, we can open up the complete range of products of the Markets & Investment Banking division (MIB) to mid-sized customers, thus enabling them to access the capital market.
We rolled out a new product in the autumn of 2006 in the form of M-ABS, an asset-backed securities programme for Mittelstand companies. This product leverages the UniCredit Group’s high level of expertise in the field of securitisation.
As the leading player in central and eastern Europe, accompanying our customers into these markets is one of the focal points of our business activities. In 2006, almost 4,000 HVB customers made use of these capabilities to invest in one or more CEE countries. Our services extended from facilitated account opening to complex cash management solutions, cross-border credit offerings and leasing products. Our business combination with the UniCredit Group has put these cross-border business activities on an even wider base.
Earnings performance of Corporates
Our corporate banking operations continue to make a significant contribution to the consolidated profit of HVB Group. Operating profit before net write-downs of loans and provisions for guarantees and commitments developed especially well, rising 12.8% to €659 million compared to 2005. Despite higher revenues, we succeeded in cutting operating costs by 3.3% year-on-year. There was a slight increase in net write-downs of loans and provisions for guarantees and commitments, up 5.8% to €201 million. As a result of higher revenues and cost reductions, the cost-income ratio improved by 3.7 percentage points to 40.3% (see also the Segment Reporting section in the notes to the consolidated financial statements). The solid 5.8% year-on-year improvement in total revenues was down to a 6.4% rise in net interest income and a pleasing 4.9% increase in net fees and commissions, which benefited from higher income from advisory fees under structured finance.
Outlook: growth initiatives in several lines of business
Corporates will again seek to act as a value driver for customers and to remain the market player with the highest customer satisfaction in 2007. We intend to support our customers’ growth in the course of the increasing cross-border expansion of medium-sized corporate customers and be seen as the driver of process and product innovation in corporate banking. To this end, Corporates will launch further growth initiatives in the following areas in 2007:
- Organic growth (recruitment and training of new corporate customer relationship managers) and opening of five branches in regions with low market penetration (south-western Germany, North Rhine- Westphalia, Lower Saxony)
- Greater concentration on sectors and industries in which HVB can tap further potential with its core expertise: public-sector finance, renewable energy, global shipping and maritime industry
- Further expansion in innovative product areas (derivatives, structured finance, foreign trade, cash management and corporate finance)
- Leasing products and services: the UniCredit Group’s Corporate division plays an outstanding role in leasing operations in Europe. We will seek to transfer this expertise to Germany through HVB Leasing
Hence, the strategic economic goals set for 2007 are to increase our market share, apply strict cost management and manage risks at increased volumes.
Our corporate banking operations are geared to four customer segments, which we serve with tailor-made products and services.
| Customer segment | Product range | |
|---|---|---|
| Large caps Revenues >€250m |
|
|
| Mid caps Revenues €15m – €250m |
|
|
| Small caps Revenues €3m – €15m |
|
|
| Public-sector customers |
|
Commercial Real Estate Financing
In 2006, Commercial Real Estate Financing continued its firm commitment to implementing the Group business model in commercial real estate finance in Germany.
Implementing the business model
The implementation of the business model involved balancing activities between the restructuring of the current portfolio and the continued focus on value-added business (e.g. services and products with higher advisory content). The new structure adopted in 2005, based on regional teams at six locations in Germany (Berlin, Düsseldorf, Frankfurt, Hamburg, Munich and Nuremberg) with the structured finance specialists concentrated in Munich, proved to be effective and was consequently retained without amendment in 2006.
During 2006, with the implementation of the new Group divisionalisation, our commercial real estate finance operations were integrated into the Corporates & Commercial Real Estate Financing division. This makes it easier to exploit synergies in fee-generating products and services and also leverage the strong structuring expertise deployed by Corporates.
The major activities in 2006 included an analysis of the customer portfolio from a strategic perspective, leading to the transfer of positions identified as non-strategic to the Special Credit Portfolio (please see page 7 of the HVB Interim Report at September 30, 2006). This move made it possible for us to concentrate our sales efforts on the target customer base.
Development of the real estate market
Buoyed by a surprisingly strong economy overall together with some sector-specific factors, the German property markets improved in 2006. Investment activities, rents and prices have all picked up; property and portfolio transactions, which had already increased sharply in the last few years, have reached record levels.
The improvement in residential and commercial property markets is also reflected in the gradual reduction of vacancy rates that had depressed the markets in the past and in a slight decline in the number of forceclosures. Some selected German office markets, in particular, have seen very little new construction and high absorption rates combined with a noticeable reduction in oversupply; this has already led to initial rises in rents for offices in good locations.
New business approach and development in 2006
Despite improving market conditions, our approach to new lending in the real estate business remained extremely cautious in 2006. We continued to be selective in terms of the quality of the properties financed and maintain high credit requirements for investors and buyers, and pricing has been systematically linked to the risk profile of the transaction.
Our strict lending and pricing policy helped to stabilise profitability in the new lending business of Commercial Real Estate Financing in 2006, despite some pressure on margins at sector level. During 2006, we kept our lending policy focused on risk and geared to marketing and transfer options in order to provide greater room for risk management possibilities in the portfolio.
Earnings development
The period of transition experienced by Commercial Real Estate Financing in 2006 and the major focus on restructuring were reflected by the 14.6% decrease in total revenues year-on-year, mainly due to the significant reduction of interest-bearing assets, resulting in lower net interest income. At the same time, the successful downsizing effort also translated into a significant decrease in operating costs, down by an impressive 37.8% year-on-year as the resources allocated to Commercial Real Estate Financing were effectively reduced. Furthermore, the lower volume of lending and the adjustment measures carried out led to a massive reduction in loan-loss provisions.
Outlook: continued focus on premium segments
The probability of an ongoing improvement in property markets is enhanced by the good start to 2007 made by the economy as a whole. However, developments are likely to differ by sector and region. The residential market should lose some momentum this year, because it benefited from various segment- specific factors (including government subsidies) in the past two years that no longer apply. In contrast, commercial construction should increase considerably. Regional differences that are still evident between the individual markets will hardly diminish in the course of this year.
In this setting, Commercial Real Estate Financing intends to keep its focus on serving its target customer base, which primarily includes investors, property developers and housing development companies. In accordance with its strategic guidelines, Commercial Real Estate Financing will maintain its commitment to cutting back non-profitable business and increasing the service component of its revenues, as well as a applying cautious approach to new business.
