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 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 its 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 financial year 2008, to 4.77 % (2007: 4.52 %).

The Group overheads, directly attributable to the Group companies, are 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 und Schlosshotel Velden GmbH) also contribute considerably to this segment. The entity HBInt. Credit Management Limited, as well as Norica Investments Limited, founded in 2008, were also included in the Austrian segment as they are managed though Hypo Alpe-Adria-Bank International AG.

The clearly negative result of the segment Austria is primarily attributable to very high credit risk provisions, in particular for non-domestic financing for corporate customers in Germany and SEE. As a result of the financial crisis, impairment writedowns were necessary on securities classed as available for sale, as well as on long-term securities investments made by HBInt. Credit Management Limited, in which Hypo Alpe-Adria-Bank International AG holds a 51 % stake, leading to significant charges against the result. In addition, the segment’s performance in 2008 was impacted negatively both by costs arising from hedge accounting inefficiencies as well as the final settlement of the “DAB” case, which had made a positive contribution to the result in 2007.

Italy refers geographically to Northern Italy, where the Group is represented by a bank and a leasing company. Whereas the leasing company is specialised in financing boats/launches and has generally reduced its new business activities, the bank, which is considerably larger, also conducts leasing business on a larger scale (in particular real estate financing) and makes a constant and positive contribution to the results of the Group.

The Slovenian segment consists of two central subsidiaries and is a significant segment for the Group, in a region in which Hypo Group Alpe Adria was active from a very early stage. The most important contributors to earnings here are Hypo Alpe-Adria-Bank d.d. Ljubljana and die Hypo Leasing d.o.o. Ljubljana.

Croatia is an important segment for the Group, The Group is represented in the banking market there by two banks, one each in Zagreb and Osijek, which will be merged into one legal entity in the first quarter of 2009. The Group is also represented here by Hypo Leasing Kroatien d.o.o., which is the largest leasing company in the country, as well as by the packaging manufacturer Aluflexpack d.o.o. (fully consolidated) and by various property companies. The negative segment result for Croatia has been greatly affected by very high credit risk provisions for the leasing area and by the negative results of non-core interests.

Bosnia and Herzegovina, in which Hypo Group Alpe Adria has a very high market share, consists primarily of two banks, in Mostar and Banja Luka, as well as a leasing company in Sarajevo. The segment’s results were impacted negatively, both by the leasing subsidiary, which had an extremely difficult year, and by the decrease in value of two funds.

Serbia consists of the business segments banking, leasing and other, all based in Belgrade. The operating and finance leasing activities are handled by two separate entities, respectively. The negative result for the Serbian segment is significantly impacted by the devaluation of the local currency (RSD), which then leads to negative currency results in the income statement through the application of the functional currency concept.

The Other regions segment covers the Group’s activities in Germany, Hungary, Montenegro, Bulgaria, Ukraine and Macedonia, as none of these countries individually exceeds the 10 % materiality limit as defined in IAS 14.35. The Hypo Alpe-Adria-Bank (Liechtenstein) AG business had been included in this segment up until its disposal at the end of December 2007 in the previous year’s figures.

Secondary Segment

Operations with identical core activities are grouped together. Thus the secondary segments of the Hypo Group Alpe Adria are:

• Banking
• Leasing
• Other

Banking comprises the holding company, Hypo Alpe-Adria-Bank International AG, and nine subsidiaries. Subsidiaries directly involved in banking activities and managed by the parent bank are also included. This comprises investment companies, valuation services and insurance brokers as well as other providers of banking-related services. As they are managed by Hypo Alpe-Adria-Bank International AG, Banking also covers HBInt. Credit Management Limited and Norica Investments Limited, founded in 2008, which, with the involvement of the co-investor, who holds 49 % of the shares, make long-term investments. The segment’s results in 2008 were impacted in particular by the need for high credit risk provisions and by the effects of the crisis in the financial markets.

Leasing covers all leasing entities including their fully consolidated special purpose companies. Main activities refer to real estate, movables, cross-border and ship leasing. Although Hypo Alpe-Adria-Bank S.p.A., Udine also engages in the leasing business, it is not shown here but in the banking segment. The result of the leasing business in 2008 suffered from a decrease in the interest margin; drastically higher risk provisions on loans to customers; writedowns of leasing assets; negative currency effects resulting from exchange rate developments (particularly with regard to the CHF) on operating leasing assets; and other effects of reclassification on operating leasing assets.

The segment denominated as Other comprises the entities that belong neither to banking nor to leasing. In particular, these are tourism entities (in particular Kärntner Holding Beteiligungs-AG and Schlosshotel Velden GmbH), real estate companies (especially the AAI Group as well as Croatian real estate companies), the Croatian packaging enterprise Aluflexpack d.o.o. and other Group companies. The clearly negative result for the segment in 2008 was mainly due to the negative performance of non-core Group companies as well as to impairment writedowns on property and equipment for own use and on investment properties.

Segment reporting by geographical markets