Trends in Markets & Investment Banking in 2006

Interest rate management:

Against the background of rising short-term interest rates and flat yield curves in the major currencies, interest rate management generated substantially higher revenues in 2006, exceeding the results achieved in previous years. More or less equal contributions came from money market business, especially repos, from the long-term global macro strategy and from interest rate derivatives trading.

Credit spreads:

The combination of favourable trends in the global economy, a high level of corporate profits and a limited number of business insolvencies resulted in narrower spreads over government bonds in all credit markets.

Treasury Sales:

focus on risk management derivatives for customers. The trend for corporate customers to restructure portfolios continued in 2006. Companies are responding to volatility in currency and interest rate markets by using market opportunities to improve their interest expense and income while also hedging their currency and interest rate-related positions. Treasury Sales developed innovative products to meet higher requirements in this area. Taking advantage of developments in markets for currencies and interest rate instruments in 2006, product innovations helped to respond quickly to market conditions and use opportunities to meet customer needs. The large network of treasury specialists with excellent product know-how and long-standing experience in advising customers ensures that customers benefit from a comprehensive range of services in this area.

The trend towards using derivatives in retail business – directly and indirectly – is intensifying. Personal customers are becoming increasingly interested, for example, in optimising foreign currency loans or hedging them against risk. Cooperating with product developers and account managers, our experts can provide this customer group with various services to meet their needs.

Sales of carry trades and of cross-asset products and commodities round off the range of services and meet customers’ growing demand for innovative products.

Targeted sales measures and a focus on specific products helped to improve results in this sector by 30% and further expand the market position.

The CEE banking subsidiaries also increased sales of treasury products to corporate customers, an area in which UniCredit Group now holds a leading position. The combination of local market presence and UniCredit Group’s specific product expertise in money and capital markets enabled the sales specialists to offer our customers in CEE attractive opportunities for managing interest-rate and currency risk. The product range was further expanded in 2006, especially in local CEE currencies.

Sales of interest rate products and derivatives to institutional investors in CEE and also further west increased, driven by strong profit growth in the previous year. Relationships with global asset management companies were broadened and deepened; in this respect, active marketing and a focus on execution quality helped to benefit from strengths in research and the excellent market position in Emerging Europe. Major contributions to overall earnings in institutional business again came from local CEE currencies and derivatives, from structured products tailored to meet customers’ needs, and from the sale of new issues of MIB’s own origination teams.

Strong increase in structuring activities for retail business:

The Financial Engineering experts provide the guarantees for retail funds of the R.I.C.H. family (issued by Capital Invest, now Pioneer Investments Austria), which have so far accounted for the largest sales volume within capital-guaranteed retail funds. In 2006, slight variations of the R.I.C.H. product (a USD tranche and the extension of markets to include Japan and Taiwan) and a new product (Meine Zukunft) with MSCI World underlying were developed.

The two issuers BA-CA and HVB operate as independent legal entities offering Austrian private investors a wide range of equity-linked bonds, bonus certificates, express certificates, index certificates and, as a focal area, guarantee certificates and structured funds. Since 2006, intensive sales efforts have been made together with HVB in the Austrian market. The issue volume generated by BA-CA via structured products for private investors in 2006 totalled about € 700 m.

By joining Zertifikate Forum Austria, a group of five issuers of certificates, BA-CA demonstrated its strong commitment to the Austrian market for structured investment products. BA-CA thereby supports the activities of Zertifikate Forum Austria, including -information for investors on the advantages and risks of certificates and efforts to achieve a fair tax treatment of certificates in Austria.

New issue business:

In 2006, BA-CA acted as lead manager, directly and through its network banks in Central and Eastern Europe, for a total of 40 bond issues placed nationally and internationally for CEE borrowers. These activities made a significant contribution to the Group’s fee income and to the development of capital markets in Central and Eastern Europe.

In the area of new issues of Austrian corporate bonds, BA-CA slightly expanded its top position as lead manager with a market share of 35%. Highlights included the new issues of Andritz AG and CA Immo AG, both of which were lead-managed by BA-CA, significantly oversubscribed and placed with a volume of € 200 m each. Further transactions for which BA-CA acted as lead manager were the euro bond issues of Christ Water Technologies and Allgemeine Baugesellschaft – A. Porr AG, demonstrating the absorption capacity of the Austrian bond market. BA-CA proved its competence for bond issues in CEE currencies with new issues in TRY (Turkish lira) and RON (Romanian leu) for Austria’s Kommunalkredit Group.

Using the strong performance momentum of the Vienna Stock Exchange, CA IB successfully carried out a number of major equity transactions; most of them related to the real estate sector, where CA IB has built up specific know-how over the past few years. These transactions included the capital increases of Immoeast (€ 2.7 bn), Immofinanz (€ 923 m) and Conwert, and the IPO of CA Immo International. CA IB also lead- managed the IPOs of Zumtobel and Polytec.

In Central and Eastern Europe, CA IB played a leading role in about 30 stock market transactions and further expanded its market position. Significant equity capital market transactions in CEE included the IPO of Bulgarian American Credit Bank in Bulgaria and the € 170 m SPO of Turkish Airlines. In Poland, CA IB arranged the IPOs of Multimedia (€ 210 m), Dom Development and Cinema City.

Equity trading:

The Vienna Stock Exchange continued to perform strongly in 2006. At 21.72%, the annual performance was slightly lower than in previous years. Yet it was a good year for equities. Fresh capital raised via the Vienna Stock Exchange in 2006 totalled € 11.87 bn and turnover increased by 71% to € 125 bn. Results from brokerage in 2006 exceeded the already excellent figure achieved in the previous year. The number and volume of orders rose significantly, especially in equity and derivatives brokerage; the strongest growth in derivatives business was seen in the CEE markets, primarily Poland. In Vienna, BA-CA remained the undisputed leader in customer-driven trading activities on ÖTOB, the Austrian Futures and Options Exchange. Strong efforts to win new customers and offer commodity trading opportunities helped to broaden the customer base.

Becoming a member of the booming Warsaw Stock Exchange, BA-CA made a major step
towards attracting primarily institutional customers for brokerage business in the future.

MLA League Eastern Europe 2006 (pro rata)