(37) Segment reporting

Segment reporting is adopted in accordance with IAS 14 and provides an overview of the relevant business segments and activities in the geographical markets of the Hypo Group Alpe Adria. It is the aim of segment reporting to explain how business results are generated from the segments.

Segments are formed by distinguishable geographical markets and business segments. The analysis of the segment results enables the user of financial statements to:

• better understand the entity’s past performance;
• better assess the entity’s risks and returns; and
• make more informed judgements about the entity as a whole.

The business segments as defined by the Group’s Executive Board provide the basis of the segmentation. Hypo Group Alpe Adria differentiates is activities by regional aspects (primary segment) and also by business lines such as banking, leasing and other (secondary segment).

Refinancing costs of participations in the parent company are allocated to the related segments. The interest rate used is that of long-term debt capital (roll-over estimation) and amounted, in the first half of financial year 2007, to 4.52 % (2006: 4.38 %).

The Group overheads, directly attributable to the group companies, is allocated to the segments on the basis of average risk-weighted assets (RWA).

Segment results are determined by operating profits (before taxes) of the related business segment. Furthermore, the return on equity ratios (ROE and ROA) and the cost/income ratio are used to measure the result. Return on equity is calculated by relating segment results to average allocated equity. The cost/income ratio is operating expenses divided by operating income.

Primary Segment

Primary segments are geographical because material risks and rewards come from the countries where the Group is active. Group Executive Board defined the following markets:

• Austria
•  Italy
• Slovenia
• Croatia
• Bosnia and Herzegovina (BiH)
• Serbia
• Other Regions

The allocation was made mainly based on the registered office of the entities. Some entities, whose business activities are directly dependent on and controlled by a group company, were allocated to the segment to which the steering entity belongs.

The segment denominated as Austria comprises all income and expenses of entities located in Austria, of which Hypo Alpe-Adria-Bank International AG, the parent of Hypo Group Alpe Adria, which is particularly engaged in the cross-border loan business with customers in SEE (South and Eastern Europe), is an important part. Apart from the traditional Austrian business in which the second bank, Hypo Alpe-Adria-Bank AG, engages, there are also several leasing companies. Hypo Alpe-Adria-Immobilien AG (AAI) and Carinthian tourism entities (in particular Kärntner Holding Beteiligungs-AG and Schlosshotel Velden GmbH) also contribute considerably to this segment. The entity HBInt. Credit Management Limited, Jersey, was also included in the Austrian segment due to the direct connection of its activities with the parent company.

The negative result of the segment Austria is primarily attributable to negative valuation results concerning long-term investments in securities. At EUR –210 m, these are almost entirely attributable to HBInt. Credit Management Limited, in which Hypo Alpe-Adria-Bank International AG holds a 51 % stake. Due to full consolidation, 100 % of the results of this company show up in the segment result, whereas the negative result portion attributable to the 49 % minority shareholder only shows up in minority interests and therefore cannot be reported in the segment.