The basis for segment reporting is provided by IFRS 8 »Operating Segments«, which must be applied from 2009 onwards. The previous standard IAS 14 »Segment Reporting«, in accordance with which Hypo Group Alpe Adria had hitherto prepared its presentation of primary and secondary business segments, is no longer applicable.

The new segment reporting is based on the information prepared and presented monthly to the Executive Board, which in accordance with IFRS 8.7 functions as the principal decision maker (the so-called Management Approach). The basis for segment reporting is the business structure of Hypo Group Alpe Adria. Reports are provided on nine segments in total, which comprise the Group’s key strategic country markets, other markets, other business areas and Hypo Alpe-Adria-Bank International AG (HBInt.), as the holding company.

Apart from the operating result for each of these units, both the costs of the refinancing of carrying amounts for investments and the overhead costs have been allocated to each segment on the basis of costs directly incurred.

Refinancing costs of ultimate parent company participations are allocated as a Group recharge to the segments on the basis of the interest rate for long-term debt capital, inclusive of average borrowing costs, which are calculated on a rolling basis. The basic recharge rate for the first six months of 2009 was 4.44 %: in the previous year comparable period, it was 4.49 %. In addition to the rate for debt capital, a percentage rate for the country risk and liquidity costs is also allocated in each case. The liquidity costs, which vary according to segment, lay between 0.34 % and 1.26 % in the first half of 2009 (for the comparable period 1.1.–30.6.2008: 0.46 % across the board) and the country risk cost between 0 % and 2.52 % (for the comparable period 1.1.–30.6.2008: between 0 % and 2.0 %).

The Group overheads are allocated to the segments on the basis of average risk-weighted assets, in line with Basel II.

In accordance with IFRS 8, the business structure of Hypo Group Alpe Adria is made up as follows:

Austria, Italy, Slovenia, Croatia, Bosnia and Herzegovina, Serbia

These six countries represent the most important core markets of the Group, which is represented through its banking and leasing units in these countries.

Other markets

The non-core countries, which in terms of size are of minor relevance for the Group, are summarised and presented in this segment. These have a banking and / or leasing unit and comprise the following countries: Montenegro, Macedonia, Ukraine, Hungary, Bulgaria and Germany.

Other business areas

Other business areas cover companies which are not in core business areas. This primarily includes property companies and tourism-related companies.

Holding company

The »Holding company« business segment comprises Hypo Alpe-Adria-Bank International AG, the ultimate Group holding company headquartered in Austria, and the directly-controlled subgroup holding company Hypo Alpe-Adria-Leasing Holding AG; the investment and issuing companies in St. Helier (Jersey); and the activities in the Netherlands.

Consolidation

There are no companies in this segment. In addition to consolidation transactions which are independent of business segment, this covers contributions to income which cannot be directly attributed to an individual business segment.

Austria

In the first half of 2009, net interest income from the Austrian banking and leasing business fell from EUR 42,421 thousand to EUR 39,696 thousand compared to the same period in the previous year, equivalent to a 6.4 % fall. This reduction is due in large part to a redeployment of customer deposits in the retail business to higher interest-bearing savings products. The net fee and commission income in contrast, improved by 17.3 % from EUR 11,565 thousand to EUR 13,561 thousand.

Total operating income fell to EUR 53,287 thousand and was thus EUR 5,748 thousand or 9.7 % lower than the figure of EUR 59,035 thousand for the previous year. The increase in risk provisions on loans and advances from EUR – 55,906 thousand to EUR – 58,282 thousand reflected the continuingly high requirement for risk provisions due to the ongoing economic crisis.

There was a further decline of EUR – 6,932 thousand or 19.8 % in the consolidated net result for the period (after minority interests), from EUR – 35,039 thousand in the first half of 2008 to EUR – 41,971 thousand. The cost / income-ratio stood at
69.2 % (comparable period 1.1.–30.6.2008: 65.3 %) and was therefore clearly above the average for the Group.

Italy

As a consequence of the general worsening of economic conditions in Italy, the risk provisions on loans and advances rose significantly for the banking unit operating in Northern Italy, and at EUR – 19,176 thousand was more than 100 % higher than the comparable figure for the previous year (EUR – 9,005 thousand).

This had the net effect of reducing the business segment’s result considerably (operating income reduced from EUR 18,831 thousand in the first half of 2008 to EUR 4,881 thousand in 2009). After allowing for taxes on income, the segment’s contribution to the consolidated net result came to EUR 2,635 thousand, after EUR 11,777 thousand in the previous year comparable period.

Slovenia

 The net interest income for the Slovenian banking and leasing subsidiaries came to EUR 43,849 thousand in the first half of the year, some EUR 14,379 thousand or 48.8 % over the previous year (EUR 29,470 thousand). This rise is due above all to the changes implemented to customer conditions, accompanied by a higher average financing volume.

Despite the increase in risk provisions on loans and advances by EUR – 5,025 thousand, or 119.1 %, to EUR – 11,012 thousand, the Slovenian business segment achieved a clearly positive consolidated net result of EUR 17,080 thousand (comparable period 1.1.–30.6.2008: EUR 12,575 thousand) and was thus the Group’s most profitable business segment.

Croatia

The Croatian business segment was able to improve its net interest income in the first six months of 2009 in comparison to the previous year, by 64.6 % to EUR 84,594 thousand. This improvement was due to an improvement of the margins and to a higher financing volume compared to the first half of 2008. The higher result from trading (moving from EUR 8,463 thousand in the previous year to EUR 18,465 thousand) came mainly as a result of improvements in currency transactions. As a result of the successful completion of the amalgamation of the two banks which had hitherto existed in Croatia into one credit institution, a positive effect on operating expenses was already apparent.

These positive developments in interest income and operating costs were, however, completely cancelled out by the significantly higher risk provisions on loans and advances in the first half of 2009, with provisions being particularly necessary for the leasing portfolio. Risk provisions on loans and advances for this segment rose from the previous year’s (1.1–30.6.2008) figure of EUR – 13,879 thousand by EUR – 39,768 thousand or 286.5 % to EUR – 53,647 thousand.

The Croatian business segment was nevertheless still able to make a positive contribution of EUR 4,942 thousand to the consolidated net result (comparable period 1.1.–30.6.2008: EUR 8,013 thousand).

Bosnia and Herzegovina

In particular because of adjustments to external interest conditions and to the fact that the negative fair value option result of EUR – 6,582 included in the 2008 result did not apply in 2009, the operating income for the first half of 2009 increased by EUR 14,180 thousand to EUR 46,808 thousand. This positive development was, however, impaired by the increase in risk provisions on loans and advances, which rose from EUR – 10,224 thousand (2008) to EUR – 23,827 thousand (2009).

Whereas a negative contribution of EUR – 1,541 thousand was made to the consolidated net result in the first six months of 2008, primarily because of negative valuation effects on two local funds, an improved – although still negative – contribution of EUR – 832 thousand was made in the first half of 2009.

Serbia

In the first half of 2009, the net interest income from the Serbian banking and leasing subsidiaries rose from EUR 29,177 thousand to EUR 41,836 thousand, which equates to a rise of EUR 12,659 thousand or 43.4 %. Risk provisions, at EUR – 25,006 thousand, were significantly higher than the figure for the same period in the previous year of EUR – 9,387 thousand and reflected the negative developments in the economy. Operating expenses came to EUR – 24,252 thousand in the first half of the year, which was 5.4 % higher than the previous year comparable figure (EUR – 23,015 thousand).

Despite the difficult economic environment in Serbia, the Serbian business segment made a positive contribution of EUR 5,526 thousand (comparable period 1.1.–30.6.2008: EUR 12,311 thousand) to the result for the Group.

Other markets

This segment, which comprises all the other country markets, recorded an increase in the financing portfolio in 2008, which accounts for the significantly improved net interest and operating income figures in the first half of 2009. While risk provisions on loans and advances had come to EUR – 4,112 thousand in the previous year, there was a dramatic increase in risk provisions in the first half of 2009 to EUR – 68,911 thousand, which stemmed almost entirely from those countries most particularly affected by the economic crisis, Bulgaria and Ukraine. A major factor in the rise was the massive decline in market value of the collateral for the financing transactions, which impacted on the leasing operations in those countries.

Whereas the contribution to the consolidated net result had been a more or less break-even result of EUR 6 thousand in the first half of 2008, this deteriorated significantly in the first half of 2009 because of the large risk provisions, and stood at EUR – 54,083 thousand for the first six months of the 2009 financial year.

Other business areas

As the property companies included in the segment Other business areas are financed almost entirely through borrowings (within the Group), there was a clearly negative net interest income result for the first six months of 2009 as there had been for 2008 (of EUR – 10,716 thousand, as compared to EUR – 10,385 in 2008). The negative result shown in the first six months of the year for financial investments – available for sale, of EUR – 4,636 thousand, resulted exclusively from write-downs on tourism projects.

Overall, this segment, from which Hypo Group Alpe Adria will withdraw in the medium term, posted a negative consolidated net result again in the first half of 2009, as in the previous year. It came to EUR – 26,130 thousand, which was EUR – 6,228 thousand worse than the corresponding period in 2008.

Holding

The significant fall in the net interest income, from EUR 95,541 thousand to EUR 69,914 thousand, is due in particular to the time-lag-effect of interest rate adjustments. The net interest income should therefore be viewed in conjunction with the highly positive result from hedge accounting, as this shows the corresponding compensatory effects. If these two items are viewed together (EUR 100,653 thousand for 2009), there is no significant change over the comparable figure for 2008 (EUR 97,423 thousand).

There was, however, a significant increase in risk provisions on loans and advances in 2009, which rose compared to 2008 from EUR – 51,770 thousand to EUR – 88,308 thousand. This was in part due to an increase in arrears in the portfolio – caused by the economic crisis – and in part to the defaults expected from large individual credit engagements, in particular in the area of cross-border financing, which is run out of Austria.

The increase of EUR 12,230 thousand in operating expenses stemmed primarily from higher consultancy costs for the ongoing restructuring project.

Furthermore, the result from companies accounted for at equity, which in the period under review included provisions for the liquidation of the bank in Liechtenstein, is recorded by this business segment.

The business segment posted a clearly negative consolidated net result for the first half of 2009, of EUR – 70,030 thousand (comparable period 1.1.–30.6.2008: EUR – 49,833 thousand), in particular because of the risk provisions made in the first half of the year.