Following the collapse of Lehman Brothers in September 2008 the financial crisis intensified dramatically in the first quarter of 2009. Since the peak of the crisis in March 2009 the markets have calmed down quite noticeably in the second quarter of 2009. A significant improvement in macroeconomic parameters is not expected before the first half of 2010. If the improvement does not come, or not to the extent expected, then significant problems for the financial markets – in particular for the stock and credit markets – are to be expected.

After the turbulence in the currency markets at the end of 2008, there has been stabilisation in the exchange rates against the euro in the first six months of 2009, also for those currencies which are particularly important for Hypo Group Alpe Adria. There has been a reduction in volatility and a recovery of the currencies which are important for Group, in particular the Croatian kuna and the Serbian dinar. In Serbia, this stabilisation came about particularly as a result of the support of the International Monetary Fund (IMF) and the accompanying measures introduced by the government and the international banking groups. For the second half of the year, falls in local exchange rates in the markets in which we operate are possible, but these should be manageable and within the ranges forecast by the market participants.

The real economies of the Central, Eastern and South Eastern European countries, which flourished in recent years, have had to record significant falls in economic output in the first half of 2009 and are currently in deep recession. Economists are not agreed on how long and how deep this recession will be. While some of the markets are already forecasting a swift recovery, Hypo Group Alpe Adria is more reserved on this point – not least because the negative effects of the crisis in the financial markets, which began in 2007, only started to hit the real economies after a delay of more than a year. The Group therefore is assuming that the most important macro-economic parameters (unemployment rate, change in GDP, order book for the industrial sector, industrial output, overnight stays in the tourism sector) will continue to have a negative influence on the situation in the second half of 2009 and possibly also in 2010. The Group sees the negative effects of this crisis, which has scarcely left any sector untouched, continuing to impact on its customers for the foreseeable future. Falling demand is leading to falling sales and ultimately profits for companies, with a consequent negative influence on their short and mid-term liquidity. Companies and customers, in turn, are increasingly only getting through their financial difficulties by making late payments on their loans. As a result, the proportion of customers in Hypo Group Alpe Adria’s portfolio who were in arrears on their agreed repayments rose significantly in the second half of 2009. As a rapid recovery of those sections of the economy which are important for the Group is not evident, an easing of the situation is not to be expected in the second half of 2009.

A further, and most important, factor in 2009 will be the future development of the market price for the items which will have to be sold off because of failure to honour the terms of their financing agreements. This affects both sale of collateral put up for classical financing transactions as well as early returns of leased objects or residual values on items which were the object of operating lease transactions. A general trend to significantly reduced secondary market prices for property as well as for second-hand vehicles, ships and equipment has been observed, which has already had a significant effect on the extent and size of risk provisions for loans and advances created in the first half of 2009. As there is currently no sign of reversal in the prices which can be achieved for such goods in secondary markets, the Group expects to have to make further risk provisions for loans and advances in the second half of the year.

The Executive Board will focus on, amongst other areas, active credit risk management with the best possible asset protection in the second half of the year.

With regard to the development of the overall result for the Group, the Executive Board expects that, on the basis of the measures already implemented to increase income from the interest-bearing areas of the business as well as the limits on spending set throughout the Group, there will be a clearly positive result prior to risk provisions. A negative consolidated full-year result is expected for 2009 because of the effects of the economic crisis on risk provisions, as described above.

Along with the focus on credit risk management, the Executive Board will in the second half of 2009 also take all the necessary measures to complete the restructuring of the Group, to push efficiency optimisation further, and to bring the total project to secure sustained profitability to a successful conclusion.