Corporates Division

The Corporates Division comprises the previous Large Corporates and Real Estate Division and those customers from the former SMEs Austria business segment whose annual turnover is over € 3 m or which meet certain criteria regarding international activity and/or use corporate finance and risk management products. The business segment is geared to meet the needs of large and medium-sized companies, many of them operating internationally, with differentiated service approaches being used for companies of different sizes.

The newly defined Corporates Division achieved a good operating performance in 2006. The economic environment was characterised by dynamic exports and stronger investment activity in the business sector both with regard to strategic investments and to increasing capacity expansion. Companies benefited from ample liquidity, and the risk environment was more favourable when compared with previous years. In this scenario the Corporates Division brought out its strengths to its best advantage in international business, medium to long-term financing activities using capital market instruments and structuring expertise, new issue business, M&A, advisory services and derivatives for commercial risk management.

Total revenues increased by 5 % to € 1,059 m. All areas and subsidiaries of the Corporates Division contributed to this performance: current business with corporate customers, leasing activities and real estate financing, and the M&A business of CA IB Corporate Finance, a company consolidated for the first time in 2006.

The decline in net interest income was due to lower dividend income and income from companies accounted for under the equity method, reflecting the reduction of investments in associated companies over the past years: net interest in a narrower sense (excluding the above income components) rose by 5 % in 2006. Given the structural changes which have occurred in the corporate finance sector, the favourable economic environment no longer stimulates credit demand to any significant degree. As the business sector enjoyed a strong liquidity position, working capital finance declined and in some cases early repayments were made. While this trend was more than offset by rising volumes of capital investment finance, margins fell to new lows, weighed down by the strong competition prevailing in Austria and by the fact that the yield curve flattened in the second half of the year. A favourable effect counterbalancing this development in lending business in 2006 was the larger volume of new corporate deposits (especially time deposits) at better margins.

Revenue growth in 2006 was mainly driven by net fee and commission income, which rose by 23 % to € 374 m. CA IB Corporate Finance, which was included in the scope of consolidation for the first time and generated particularly high net fee and commission income from numerous large-volume deals in 2006, made an important contribution to the increase. Net fees and commissions rose strongly also in other sectors, including trade finance services, leasing activities and derivatives used by companies for interest rate / exchange rate / liquidity risk management, an area in which BA-CA is the undisputed market leader.

Costs remained under control in 2006: operating expenses were only 1 % higher than in 2005; without the consolidation of CA IB Corporate Finance, operating expenses would have been down by 6 %. The cost/income ratio was thus reduced from 43.0 % in the previous year to 41.2 % or – excluding CA IB Corporate Finance – to below 40 %.

On the basis of the one-off effects – repeatedly referred to in this report – resulting from methodological adjustments and the application of higher risk standards, net writedowns of loans rose from € 86 m in 2005 to € 124 m in 2006, also because some 17,000 companies were transferred from the former SMEs Austria to the Corporates business segment. Adjusted for one-off effects (€ 50 m relating to IBNR losses and € 17 m in connection with provisioning for rating category 8 –), current writedowns of loans declined by 35 % to € 57 m. There are two main reasons for this decrease: over the past years, companies have steadily improved the structure of their balance sheets; and our efforts to reduce large-volume exposures through active credit portfolio management via the secondary market and through activities in the credit risk market have been successful, without adversely affecting customer relationships. Based on adjusted figures, the risk/earnings ratio in 2006 was below 10 % (more precisely, 8.7 % compared with 13.0 % in 2005).

The comparison of net income from investments in 2006 with the previous year’s figure is equally distorted by a one-off effect: the 2005 figure included a capital gain on the sale of Investkredit shares (€ 121 m). For this reason, net income from investments in 2006 (€ 7 m) was lower by € 151 m (or by € 31 m, on an adjusted basis) and profit before tax (€ 507 m) was 21 % lower than in the previous year despite a higher operating profit. Without one-off effects in 2006 and 2005, profit before tax rose by € 41 m or 8 %, which means that the Corporates Division accounted for almost two-fifths (38 %) of BA-CA’s profit before tax on an adjusted basis; this translates into an ROE before tax of 23.3 % after 22.9 % (not adjusted: 20.5 % after 27.5 %).

Outlook: With the redefined business segment we created the basis in 2006 for close international cooperation in the UniCredit Corporate Division. The advantages of a cross-regional network of regionally operating divisions with the same structure are obvious, especially in corporate banking. The new structure enables us to use network advantages, mainly through our Cross Border Client Group (CBCG) approach, and economies of scale. This covers the whole range of products and services: trade finance and cash management; special financing activities such as leasing transactions, which are a cross-regional product line; commercial real estate financing; and corporate finance and M&A. In Austrian customer business, we aim to outgrow the market in 2007. Based on the new customer segmentation, we can meet customers’ specific needs more precisely (with an approach ranging from “high touch” to “high tech”). We will pursue further expansion in Public Sector business at an above-average level of profitability. And we will also continue our efforts to keep on-balance sheet business volume and allocated capital as low as possible through risk-adjusted pricing in the lending business and by using capital-strengthening products and advisory services.