Strategy, Business Model and Results

Tailor-made range of products and services for all customer groups

Private customers
Demand-driven range of products and services

Private banking customers
Demand-driven range of products and services, focusing on investment business

Small business customers
Demand-driven range of products and services for the private and business needs of entrepreneurs

Divisionalisation boosts growth opportunities

When the Bank was split into divisions in the middle of the year, the wealth management, corporates and retail customer segments were aligned with the uniform UniCredit structure. This created a stable foundation for growth.

Offices by state

State	Dec. 31. 2006	%
Baden-Wuerttemberg	24	3.7
Bavaria	371	57.9
Berlin	7	1.1
Brandenburg	8	1.2
Hamburg	30	4.7
Hesse	14	2.2
Lower Saxony	26	4.1
Mecklenburg-Western Pomerania	8	1.2
North Rhine-Westphalia	19	3.0
Rhineland-Palatinate	22	3.4
Saarland	9	1.4
Saxony	10	1.6
Saxony-Anhalt	12	1.9
Schleswig-Holstein	72	11.2
Thuringia	9	1.4
Total1	641	100.0

¹ The total number of offices of the new HVB Group is 788 (see Note 82)

Range of products and services tailored to demand

Now that they are homogenous, the customer segments are in a better position to provide a bespoke range of products and services, securing long-term customer satisfaction, and to significantly enhance efficiency in production and handling.

The small business customer segment, which includes all customers with annual revenues of up to €3 million, has been included in the Retail division. This goes hand in hand with a strengthening of our retail bank, which has achieved even greater proximity to our business and professional customers, and providing comprehensive customer care from a single source for commercial and personal banking during the life cycle of our business customers. At the same time, we have succeeded in retaining the customer relationship models that have proved successful with small business customers, in the form of standardised offerings made via telesales and individual solutions provided on site, through to our specialised approach for the target group of health care professionals.

As part of a systematic, customer-oriented transfer process, we succeeded in moving over some 320,000 customers within a few weeks, whilst managing to keep the same relationship manager in most cases. A customer survey carried out specially for this purpose showed that the transfer did not have a detrimental effect on the satisfaction and loyalty of our customers.

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Earnings performance in the Retail division

In 2006, the Retail division made an operating profit of €306 million before loan-loss provisions, thus providing a significant contribution towards HypoVereinsbank’s total profit. With a 8.7% reduction in operating costs, total revenues increased by 2%. (Please refer to Note 22 in the notes to the consolidated financial statements for a detailed discussion of the results.)

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Improved advisory processes support rise in cross-selling rate

Systematic, long-term advisory processes play a crucial role particularly in the more sophisticated customer segments. HVB is consistently pursuing the policy it has adopted in this connection. By refining this policy, we have succeeded in sustainably increasing the cross-selling rate by using competent advisory methods tailored to customers’ needs, objectives and affinity to risk. This has involved applying the advisory processes of the recently integrated small business customer segment for the first time.

In 2006, the BasisDialog and PremiumDialog advisory processes were revised with this in mind. Apart from streamlining processing steps and simplifying functions, system adjustments focused on networking with existing product-closing tools. As intended by the comprehensive, holistic advisory strategy, the sales force now has a wealth of possibilities for gathering, consolidating and evaluating customer data using CRM tools.

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Further expansion of alternative sales channels

Moreover, we succeeded in increasing our lead in online services. It is now possible to buy all basic products over the Internet conveniently and inexpensively. This helps reinforce our customer acquisition and cross-selling activities in our branches. We also added more online services (making it possible to create and amend tax exemption requests, for instance) with a view to boosting customer satisfaction and improving customer retention.

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Systematic pursuit of customer acquisition

Offering a unique account package (the HVB Willkommenskonto) helped us to win almost 60,000 new customers in the second half of 2006. Consistent advisory reviews and the ensuing product sales with these customers have already led to a high cross-selling rate and above-average earnings. We are looking to repeat this success in 2007, this time also with special offers for our existing customers.

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Securities operations record solid growth rates

Despite the separation of the Wealth Management division in the middle of the year, the securities business saw its 2005 growth rates beaten again in 2006. With revenues up more than 16%, this line of business was once more the engine of growth for the division in 2006.

Strong gains were made in all product areas. With gross revenues in excess of €2.5 billion, the business involving structured products enjoyed especially lively growth. Above all, the certificates on funds issued for the first time in 2006 were particularly popular, making a significant contribution to growth.

The merger of Activest and Pioneer Investments has also provided our retail customers with a broader spectrum of high-quality fund products from our own Bank, which also reported significant increases in volumes in retail customer operations in 2006. At over €6.6 billion, the Activest TotalReturn fund group is now the largest fund of its kind in Germany.

In addition to earnings growth, the optimisation of earnings structures was by far the most important factor in 2006. The goal is to significantly stabilise earnings and thus reduce the dependency on capital market fluctuations. A huge step was taken in this direction with the relaunch of the HVB KombiAnlage, a standardised fund asset management offering.

The HVB KombiAnlage recorded volume growth of over €1 billion in the fourth quarter alone and, at over €5.25 billion, now ranks among the largest fund asset management products in Germany. The annual asset management fee it generates guarantees a significant earnings base for the coming years. The exceptionally high quality of the HVB KombiAnlage product was confirmed by winning first place in the study carried out by FondsConsult (03/2006) and through the renewed certification by the Institut für Vermögensaufbau (Q4/2006).

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HVB wins market share in instalment loan business

In 2006, HVB was able to increase its share of the instalment loan business to 1.8% despite stagnation in the market. Innovative offerings, such as the option of increasing the regular repayments, make it easier to draw up concepts for customised solutions whilst using standardised procedures. The ongoing development of advisory and rating systems in the instalment loan business ensures that we provide customised finance solutions and accurately predict the credit risks entailed in these loans at the same time.

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Excellent performance in insurance business

Our insurance business performed strongly, posting growth of almost 20% in endowment policies and over 30% in non-life policies. One of the main drivers was the state-subsidised Riester pension, a private retirement savings plan, which posted over 60% growth in terms of volumes sold.

We successfully re-aligned our portfolio of insurance products catering for the needs of our small business customers. Overall, we succeeded in selling insurance products to a broad section of each customer group, hence sustainably boosting fee and commission income.

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Further increase in deposit-taking operations

Deposit-taking operations were one of the primary sources of income for the division once more in 2006. Consistent pricing policies helped us to again substantially raise the interest contribution on the deposits side by almost 15%. In the process, the quality of deposits has improved, thus guaranteeing future income. HVB KomfortSparen, a new savings plan introduced in November 2005, attracted 100,000 new customers in its first year. Over 85% of these customers make monthly deposits under the scheme and are thus safeguarding growth in the coming years.

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Real estate finance as a basic product for cross-selling

Real estate finance continues to be a core product for retail and small business customers. The strategy of focusing on profitable, low-risk business was continued. Particularly in this area, the market was characterised by fierce competition and hence strong pressure on margins. Despite this difficult market environment, we managed to book new business at a satisfactory rate in 2006. In the course of these new contracts, we also succeeded in boosting the cross-selling rate so as to increase both the proceeds gained from each customer relationship and customer loyalty.

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Significant expansion of e-business and cash management

HVB significantly expanded the electronic banking and cash management services it provides for its customers in 2006. Thus, customer payments in Germany rose to 550 million items (up 10% on last year) and 2.5 million items abroad (up 20% on last year). The gross contributions from payments increased by around 7.5%. Thus we improved the earnings situation in this line of business, bucking the market trend, despite the persistent decline in margins.

In cash management, we won 49 new clients (cross-border cash pools) and continued to consolidate our position in central and eastern Europe.

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Outlook: focus on optimised advisory services

In 2006, we devised a systematic concept for continuing to expand and optimise the sales interface, which will reduce costs and increase earnings in our retail operations in 2007. This forms the springboard for us to achieve our ambitious 3-year plan. The key points involve offering optimised advisory services through the consistent allocation of customers, deploying more employees in sales functions and reaching passive customers by applying a new relationship management concept. To this end, we will also invest in the continuing professional development of our workforce.

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