Treasury, as the most important controlling element, is responsible for liquidity management, the Group’s asset liability management, capital management and own account trading in the subsidiaries. Global Markets is responsible for operational treasury transactions and for issuances.

As a result of the crisis in the capital markets, the Treasury division was confronted with difficult conditions in the year just ended. The focus of activities lay in liquidity management in 2008. The Group Executive Board instigated timely measures to secure liquidity in the first half of the year and these were strengthened following the Lehman Brothers insolvency. The liquidity management process introduced in 2007 proved itself to be robust in the predominantly difficult market conditions. Not only was Hypo Group Alpe Adria’s liquidity secured throughout the whole of the financial year, but an additional liquidity buffer was also created. New business transacted within the framework of existing pledges was put through without restrictions, however the examination criteria prior to granting credit was modified to fit the general liquidity and capital markets situation for completely new involvements.

The funding situation also proved to be difficult because of the crisis in the capital markets and was reflected in the refinancing actions of Hypo Group Alpe Adria. Certain planned measures with regard to liquidity and to issues could not be carried out because of the tight situation in the money and capital markets, with the result that Hypo Group Alpe Adria concentrated on internal BayernLB refinancing lines as well as on activating existing liquidity reserves for liquidity creation. Customer deposits remained consistently at the previous year’s levels throughout the year, although there were withdrawals because of uncertainty on the part of the customers in the fourth quarter, in particular in South Eastern Europe.

In addition to liquidity management, great attention was also paid to management of interest and currency risk in 2008. The main objective was to balance out the huge market swings arising from the crisis. Appropriate actions were taken not only for the banking segment but, above all, for the leasing companies as well, and these will be developed further in 2009. All foreign currency lending in USD and CHF was halted in the autumn of 2008 as a result of the volatility in currency markets, a move which was also in the interests of customers.

Hypo Group Alpe Adria also had to record higher refinancing costs as a result of repricing the banking and country risks. Following on from this, local currencies were devalued, which in turn had a negative effect on the interests held. Whereas the higher liquidity costs could in the main be regrouped, by contrast the devaluation of local currencies had negative effects. These were lessened through active foreign currency management, for example through partial hedging in Serbian Dinars against a weakening of that currency.

Although share involvements and investments in alternative instruments only play a minor role, Hypo Group Alpe Adria could not avoid the negative market conditions and, despite the continual reduction of the exposure, had to record losses. The same applies to credit investments: exposure was already reduced in 2007 and significant writedowns made. But the loss of market liquidity combined with strong exchange rate swings meant further losses could not be avoided.

Hypo Group Alpe Adria also suffered risk and writedown losses in its liquidity reserve portfolio during the year. Due to statutory and internal provisions, the size of the portfolio comes to more than EUR 1 bn, of which the majority is held in bank floating rate notes. The losses resulting from the Lehman Brothers insolvency and that of the Icelandic banks were small; however, impairment writedowns on total stock were also necessary. There was a clear decision, however, not to make use of the possibility under IFRS to restate the balance sheet. Hypo Group Alpe Adria assumes that there will be a full redemption of the assets held in the years following, so that the impairment writedowns of the liquidity reserve will in the main not be permanent.

It must be assumed that, due to the difficult conditions in the capital markets which are expected to continue, in 2009 stock markets will perform weakly and the central banks will pursue an expansive monetary policy. As interbank lending is still only taking place on a very limited basis, the liquidity situation will only improve slightly. In order to ensure that the markets can function, state interventions in the banking system as well as regulatory measures are to be expected. State support for all banks which are important for the capital markets, for example in the form of guaranteed take-up of issues is also conceivable. The Treasury section will therefore continue to concentrate on liquidity and asset liability management and to follow its risk-conscious policy. Accordingly there will not be a significant role for own account trading, which will be further reduced.