Today, UniCredit Bank AG (also referred to as HypoVereinsbank) presents its figures for 2010. To download the complete Annual Report at 31 December 2010, please visit HVB's Investor Relations website at
Performance in 2010
Results of HVB Group
In what was still a challenging capital market environment at times, HVB Group generated a very good profit before tax of around €1.9 billion in 2010, which was €616 million higher than the equivalent figure for 2009. The consolidated profit of €1,728 million which the Bank generated after tax was almost twice as high as the year-ago total of €884 million. This good performance can be attributed primarily to a reduction of more than half in net write-downs of loans and provisions for guarantees and commitments compared with 2009, to €632 million.
In addition, HVB Group benefited from a year-on-year decline in restructuring costs (serving to increase earnings by €133 million compared with last year) and lower net losses from investments (serving to increase earnings by €148 million compared with last year). HVB Group achieved a very pleasing 10.5% rise in net fees and commissions to €1,312 million. Net other expenses/income have also risen year-on-year, by €98 million to €239 million. At €759 million, net trading income delivered a strong contribution to profits, even if the very high year-ago figure of €1,074 million could not be matched. In an environment characterised by low interest rates, net interest income fell by around 6% to €4,248 million year-on-year.
As in previous years, the success of HVB Group's consistent cost management programme has helped to further reduce the operating costs. The efficiency of the cost management programme has been reflected in a continuous decline in operating costs since 2005. On the back of a year-on-year decline of 0.8% in operating costs, to €3,433 million, HVB achieved a cost-income ratio of 52.3% in 2010 (2009: 50.0%), which is still at an outstanding level by national as well as international standards.
Dr Theodor Weimer, Board Spokesman of HypoVereinsbank:
"2010 was an exceptionally good year for HypoVereinsbank. We succeeded in substantially exceeding our good results in 2009 and generating our second-best pre-tax profit in the history of HypoVereinsbank. Our divisions have again all made a favourable contribution to this good result. On the one hand, this is confirmation of our diversified business model designed for long-term growth. On the other, our success is based on our dual focus on strict risk management and cost-efficiency. With our high capital base, solid funding foundation and a good market position in our core lines of business, we remain a reliable partner for our customers."
The Corporate & Investment Banking division (CIB) made a major contribution to the pleasing rise in the profit before tax reported by HVB Group. It improved its profit before tax by €569 million to €1,500 million, essentially due to the much lower net write-downs of loans and provisions for guarantees and commitments and the year-on-year reduction in charges from both net income from investments and restructuring costs.
The Private Banking and Retail divisions also recorded positive contributions to earnings. The Private Banking division reported profit before tax of €123 million and the Retail division €33 million.
Capital and liquidity
HVB Group continues to have an excellent capital base. The core capital ratio (Tier 1 ratio) in accordance with Basel II was 16.6% at 31 December 2010 after 17.8% at year-end 2009, which is still an excellent level by both national and international standards. With the core capital rising slightly to €20.6 billion, the decline in the core capital ratio results from a €9.4 billion rise in risk-weighted assets that is attributable primarily to the cessation of the relief provided by a number of securitisation transactions and the initial inclusion of CAIB, which was acquired from Bank Austria, Vienna.
The shareholders’ equity shown in the balance sheet totalled €23.7 billion at 31 December 2010. With total assets rising by only 2% year-on-year to €371.9 billion, the leverage ratio (ratio of total assets to shareholders’ equity shown in the balance sheet) increased from 15.4x at the end of December 2009 to the still very good figure of 15.7x at 31 December 2010.
HVB Group enjoyed an adequate liquidity base and a solid financing structure at all times during the 2010 financial year. The funding risk remained low on account of the diversification in products, markets and investor groups, meaning that adequate funding of the lending operations was ensured at all times. The Pfandbriefs issued by HVB Group continued to represent an important source of funding thanks to their very good credit rating and liquidity.
Dr Theodor Weimer:
"After the strong earnings in 2010, the current year is clearly geared for growth. We want to grow and will grow – this applies to all market segments and all sales divisions. To this end, we will proactively exploit our strengths: our productivity, our high standards in customer relationship management, smooth working relationships and our regional proximity to our customers."
Key income statement items in detail
Net interest income
Compared with the previous year, total net interest income decreased by €280 million, or 6.2%, to €4,248 million in the 2010 financial year. Within this total, net interest fell by €376 million to €4,100 million in an environment of low interest rates. This development can be attributed primarily to the significant year-on-year decline in interest income from trading operations and lower income from reclassified holdings compliant with IAS 39.50. Falling interest margins in deposit-taking operations also contributed to the decrease in net interest.
Compared with last year, there was a substantial increase of €96 million, to €148 million, in income generated from dividends and other income from equity investments, which is mainly due to higher dividends paid by private equity funds.
Net fees and commissions
Net fees and commissions developed healthily, increasing a substantial €125 million, to €1,312 million, in the year under review (2009: €1,187 million). Most notably the Corporate & Investment Banking division contributed to this rise with a growth of 17.8% in net fees and commissions. Fee and commission income also increased year-on-year by 3.5% in the Retail division while it remained stable at last year’s level in the Private Banking division. The sharp rise in HVB Group’s net fees and commissions chiefly results from the significant increase of €85 million, to €732 million, in fee and commission income from management, brokerage and consultancy services (up 13%).
In addition, fee and commission income from lending operations improved by 14%, to €403 million, which is partly attributable to higher advisory fees and lower expenses in connection with HVB’s own securitisation transactions. Income from collection and payment services remained unchanged at €180 million while income from other service operations declined by €12 million on account of the cessation of income from BodeHewitt which was sold in 2009.
Net trading income
In 2010, HVB Group generated a solid net trading income of €759 million but was unable to reach last year’s high level of €1,074 million. The main reason for this is that the unusually high contribution to profits from held-for-trading financial instruments in the previous year benefited from a strong recovery in the market as a whole, an effect that did not continue to the same extent in the year under review.
HVB Group nevertheless succeeded in achieving a considerable net gain of €654 million on financial assets held for trading in 2010. This result was generated primarily by the Rates (interest-related products), Equities (equity and index products) and the Capital Markets units. Compared with last year, there was an increase in the effects on net trading income from hedge accounting (up €24 million), the gains on fair-value-option holdings including the derivatives concluded for the purpose of hedging them (up €11 million) and other net trading income (up €61 million). The rise in other net trading income can be attributed notably to the higher profit from the buy-back of hybrid capital in the year under review compared with the positive effect from buy-backs in the previous year.
The operating costs decreased for the fifth year in a row and thus continue to reflect the success the HVB Group has achieved with its consistent cost management. The decline of 0.8%, to €3,433 million, in total operating costs includes a reduction in payroll costs by a total of €66 million, notably as a result of lower expenses for the pension guarantee association while the expenses for wages and salaries remained largely unchanged. In contrast, other administrative expenses including depreciation and impairment losses on property, plant and equipment rose slightly by 2.3% to €1,677 million. This rise is partly due to outsourcing measures (such as the transfer of IT activities to UniCredit’s IT service provider, UGIS, in May 2009) and the related shift in payroll costs to other administrative expenses.
At €3,125 million, operating profit in 2010 was €343 million lower than the comparable figure for last year. This is due to the declines in net interest income and net trading income, which were partially offset by higher income from net fees and commissions, higher net other expenses/income and the reduction in costs. The cost-income ratio, at 52.3%, was at a very good level also in the year under review (2009: 50.0%).
Net write-downs of loans and provisions for guarantees and commitments
In 2010, net write-downs of loans and provisions for guarantees and commitments fell a substantial €969 million, or 60.5%, to €632 million, in a significantly improved credit environment compared with the previous year. This strong decline occurred in the Corporate & Investment Banking division in particular (down 63.8%). In addition, the Retail division also reports a considerable improvement in net write-downs of loans and provisions for guarantees and commitments (down 71.4%).
Net income from investments
The net loss from investments amounted to €132 million in 2010 after a loss of €280 million in the previous year. At the same time, write-downs and value adjustments on financial assets totalling €218 million were recognised in the year under review. This figure includes valuation expenses of €169 million for investment properties and other valuation expenses of €49 million for available-for-sale financial assets. These expenses were partially offset by gains of €86 million realised on the disposal of financial assets, which include the profit generated from the sale of shareholdings, and gains on the disposal of parts of the private banking activities of the UniCredit Luxembourg S.A. subsidiary. Last year’s net loss from investments was primarily attributable to impairments of €328 million on private equity funds, direct investments and co-investments.
Profit before tax, income tax for the period and consolidated profit
In the 2010 financial year, HVB Group generated a very good profit before tax of €1,882 million, which is an increase of almost 49%, or €616 million, compared with last year’s figure. Income tax decreased by €228 million, to €154 million, despite the good performance. Of the total income tax expense, €469 million relates to current taxes, which were partially offset by deferred taxes of €315 million. In this context, it must be taken into account that the valuation adjustments of deferred tax assets has a favourable effect on tax loss carryforwards of another €467 million.
After deducting taxes, HVB Group generated a consolidated profit of €1,728 million in 2010 and thus succeeded in almost doubling last year’s figure (€884 million).
Segment results by division
The divisions contributed the following amounts to the very pleasing profit before tax of HVB Group totalling €1,882 million.
|Corporate & Investment Banking
Division results in detail
Corporate & Investment Banking division
In the year under review, the Corporate & Investment Banking division recorded a very good profit before tax of €1,500 million, which is a significant increase of €569 million compared with last year (€931 million).
Net interest income decreased by €237 million, to €3,000 million (down 7.3%) compared with the previous year. With lending business remaining largely stable, this development can be attributed primarily to lower trading-related interest income together with a decline in income from reclassified assets compliant with IAS 39.50. Furthermore, net interest income fell in deposit-taking activities, despite an increase in volumes, on account of lower margins caused by the development in interest rates. However, the dividends included in net interest income increased mainly on account of higher dividends paid by private equity funds.
Net fees and commissions improved, increasing by €92 million, or 17.8%, which can be mainly attributed to the pleasing development in the area of project and structured finance coupled with lower expenses for securitisation transactions. In the year under review the division reported net trading income of €660 million. This figure does not match the contribution to profits of €927 million generated in 2009, which was supported by the strong recovery of the overall market at that time. In particular, the Rates (interest-related products), Equities (share and index products) and Capital Markets units contributed to this performance in the year under review. In addition, this result was improved by holdings assigned to the fair value option, which were still under considerable pressure last year due to widening spreads caused by the market conditions.
Operating costs rose year-on-year by a total of €54 million, or 3.1%. At 41.0%, the cost-income ratio is still at a very good level (2009: 36.6%) despite lower earnings. The year under review was concluded with much lower net write-downs of loans and provisions for guarantees and commitments compared with 2009. The positive development of risks (€980 million less in impairments) made a significant contribution to the overall increase in net income. At the same time, the provisions for risks and charges and net income from investments increased. The 2009 total included high valuation expenses for private equity funds and direct and co-investments. Overall the division was able to record a very good profit before tax of €1,500 million and thus exceed last year’s figure (€931 million) by more than 60%.
In the first phase of implementing the UniCredit-wide "One for Clients" (One4C) initiative, customers were transferred between the Retail and Private Banking divisions in the 2010 financial year. Customers with free assets of at least €500,000 were moved from the Retail division to the Private Banking division, and customers with assets of less than €500,000 were moved from the Private Banking division to the Retail division. This reorganisation resulted in an overall shift in customers from the Retail division to the Private Banking division and, with it, a disproportionate transfer of total revenues. Figures from the previous year and previous quarters have been adjusted accordingly.
In the 2010 financial year the total revenues of the Retail division fell by around 5% compared with the previous year. This decline is primarily attributable to the decrease in net interest income by around 10%, to €841 million. This is essentially due to lower interest margins in deposit-taking activities which, despite an increase in volumes, resulted in a decline in net interest income in the deposit-taking business. In addition, there was a decrease in net interest income on the lending side as a result of falling volumes, whereby a significant rise in new real estate financing business (up 21%) partially offset the decrease in volumes. Furthermore, net interest income declined due to the deconsolidation of Vereinsbank Victoria Bausparkasse in the second half of 2009.
In contrast, net fees and commissions developed pleasingly, increasing by 3.5%, to €509 million. This rise was mainly a result of better year-on-year securities operations, which improved particularly in the area of assets under management. In addition, the division has benefited from the successful sales of pension products and the increased distribution of savings-and-loan products. The cooperations with ERGO and Wüstenrot Bausparkasse contributed to this success.
The decline in total revenues was partially offset by applying consistent cost management to achieve savings in operating costs (down 4.4%). In the process, payroll costs fell by 5.6% in particular due to a reduction in headcount. In addition, other administrative expenses decreased by 4.0%. The sharp decline in net write-downs of loans and provisions for guarantees and commitments of around 71.4%, to €18 million, coupled with the non-recurring restructuring costs included last year led to an improvement in the now positive profit before tax of €33 million (2009: a loss of €71 million).
As the second phase of One4C, the transfer of medium-sized corporate customers (with revenues up to €50 million) from the Corporate & Investment Banking division was carried out as planned at the start of 2011 and not in the 2010 financial year, the net income for 2010 does not yet fully reflect the profitability of the division.
Private Banking division
The Private Banking division generated a profit before tax of €123 million in the 2010 financial year and thus almost equalled last year’s figure (€125 million). There was a 5.6% decline in total revenues, primarily on account of lower net interest income. Net interest income fell by €10 million to €109 million largely as a result of falling interest margins but also because of a decline in the average volume in the deposit-taking business.
The cost-income ratio rose by 1.6 percentage points to 58.1% in 2010 due to the reduction in total revenues. This was partly offset by the development in operating costs, where a 2.9% reduction was achieved by implementing cost-cutting measures. In non-operating profit, restructuring costs incurred in connection with the sale of parts of the private banking business of UniCredit Luxembourg S.A. were more than compensated by the resulting gain on disposal reported under net income from investments.
In the year under review, the total revenues of this segment increased by €86 million, to €602 million, compared with the €516 million in the previous year. Within this total, there was a significant increase particularly in net interest income and net other expenses/income whereas net trading income decreased. With operating costs declining by €18 million, the operating profit significantly improved by €104 million, to €410 million (2009: €306 million) on account of higher earnings.
It was necessary to add €56 million (2009: €6 million) to net write-downs of loans and provisions for guarantees and commitments in the year under review. The loss of €110 million in net income from investments and other items (2009: a loss of €2 million) arose in the year under review primarily as a result of higher impairments taken on investment properties. The profit before tax declined by €55 million, to €226 million (2009: €281 million), in the 2010 financial year.