HVB Group

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HVB Group

Am Tuckerpark
80538 Munich
Germany
Telephone: (89) 378-0
Fax: (89) 378-27784
Web site: http://www.hvbgroup.com

Public Company
Incorporated: 1869 as Bayerische Vereinsbank A.G.
Employees: 65,526
Total Assets: EUR 669.1 billion ($769.6 billion) (2003)
Stock Exchanges: Berlin Bremenk Düsseldorf Frankfurt Hamburg Hannover Munich Stuttgart XETRA Vienna Zurich Paris
Ticker Symbol: WKN 802200
NAIC: 551111 Offices of Bank Holding Companies; 522110 Commercial Banking; 522291 Consumer Lending; 523110 Investment Banking and Securities Dealing; 523920 Portfolio Management; 523930 Investment Advice; 523991 Trust, Fiduciary, and Custody Activities; 525910 Open-End Investment Funds

HVB Group not only ranks as the number two bank in Germany (behind Deutsche Bank AG) and the leading bank in its home base of Bavaria and in Austria (through its majorityowned subsidiary, Bank Austria Creditanstalt AG), it also has major presences throughout central and Eastern Europe, including in the five biggest nations in that region: the Czech Republic, Hungary, Poland, Slovakia, and Slovenia. Overall, it is one of the five largest banks in Europe. Its network of 2,100 branch offices serves more than 8.5 million customers in about 30 countries. The bank focuses primarily on individuals and midsized companies, offering deposit and lending services, private banking, asset management, mutual funds, investment banking, and corporate finance. HVB also has a substantial commercial real estate finance unit, but it is in the process of being spun off into a separate entity to be known as Hypo Real Estate Group.

HVB Group was created in 1998 through the merger of the two main Bavarian-based regional banks, Bayerische Vereins-bank A.G. and Bayerische Hypothekenund Wechsel-Bank AG—rivals since their 19th-century foundings. The new super-regional bank was initially known as Bayerische Hypo- und Vereinsbank Aktiengesellschaft, before adopting the more internationally palatable HVB Group. Unlike Deutsche Bank, for example, HVB has kept its focus on its core market, dubbing itself "the Bank in the Heart of Europe" and largely resisting the allure of overseas adventures.

Early History of Bayerische Vereinsbank

Bayerische Vereinsbank A.G. traces its origins to 1869, when King Ludwig II of Bavaria granted a license to a consortium of private bankers to found a Munich-based commercial bank that would serve the needs of the growing Bavarian economy. Ludwig II is better known as a patron of the composer Richard Wagner and as the eccentric sovereign who dotted the Bavarian landscape with a series of fairy tale-like castles, so the bank was not his most colorful legacy but it did prove to be a lasting one.

In 1869 trade licenses and compulsory guild memberships were eliminated in Germany, opening up new entrepreneurial opportunities, and Bayerische Vereinsbank's initial mission was to encourage economic expansion. In 1870 it loaned money to the Bavarian Railway, and in 1871 it was granted the right to operate as a mortgage bank, issuing real estate loans and mortgage bonds. This last development transformed Bayerische Vereinsbank into an institution remarkably similar to Bayerische Hypotheken- und Wechsel-Bank (commonly known as Hypo-Bank), a mortgage bank established in 1835 by decree of Ludwig I of Bavaria. The rivalry between these two Bavarian banks intensified in 1899 when the Mortgage Banking Act forbade the further establishment of banks offering both mortgages and commercial loans, and it endured right up to their late-20th-century merger.

Bayerische Vereinsbank did not participate to any substantial degree in the German foreign banking boom of the late 19th century. It did loan money to the Austrian railway and underwrite securities issued by the Turkish government, but international business was left mostly to the large, Berlin-based Grossbanken that have always dominated the German banking industry.

Second-Tier Player in First Half of 20th Century

Indeed, the bank remained a relatively small institution into the 20th century. Although it had 15 branch offices at the beginning of World War I, the size of a bank's branch network was not the only measure of its importance. If the Grossbanken, such as Deutsche Bank and Dresdner Bank, occupied the first tier of German banking, then Bayerische Vereinsbank ranked in the middle of the second tier, with other large provincial banks such as Hypo-Bank and Barmer Bank. German finance had been moving toward ever greater centralization since the nation was united under Bismarck, with the Grossbanken wielding considerable power from their bases in Berlin. This trend continued through the economic crises that characterized the years following Germany's defeat in 1918, as struggling banks found that size often determined whether they survived or not.

Both during and after the war, the second-tier banks responded to this trend by joining each other in "community of interest" agreements, exchanging representatives from their boards of directors and operating in accord with each other. These agreements allowed the provincials to fend off takeovers from Berlin and preserve their independence. In the early 1920s, Bayerische Vereinsbank sought to consolidate its position by acquiring an interest in the small Berlin bank E.S. Friedman & Company and by allying itself with Bayerische Handelsbank AG. In 1922 it entered into a community of interest agreement with Mendelssohn & Company, a prestigious banking house based in Berlin and Amsterdam. Mendelssohn acquired an interest in Bayerische Vereinsbank and representation on its board of directors; Bayerische Vereinsbank justified the deal on the grounds that it would gain a valuable friend in Berlin without sacrificing autonomy.

Bayerische Vereinsbank prospered during the late 1920s; its capital grew from 21 million Reichsmarks in 1927 to 31.1 million in 1930, and its reserves grew from 9.3 million Reichs-marks to 13.8 million. Nonetheless, it remained somewhat smaller than rival Hypo-Bank in 1930 and considerably smaller than any of the Grossbanken.

Its lack of size and power relative to the Grossbanken should also be taken into account when considering the years of National Socialist rule. Virtually every major bank helped finance Germany's war effort to some degree until the German economy collapsed in 1944. When Allied occupation authorities investigated the extent to which the German business community had aided the Nazis, they found culpability among the Grossbanken, in part because their size and influence made their complete innocence inconceivable, but the investigation did not indicate that any of the second-tier banks were suspected of war crimes. Accordingly, in 1947, the occupation authorities decreed that the Grossbanken who survived the war should be broken up into smaller institutions, but smaller banks such as Bayerische Vereinsbank were not punished.

BV's Postwar Expansion

The bank emerged from the war with 52 branches. From there, it embarked on a course of expansion and internationalization that ensured it a position of prominence among West Germany's regional banks. In the 1950s, Bayerische Vereins-bank began to expand beyond its traditional base in Bavaria and to internationalize its business. It did so largely without opening foreign branches; it opened its first overseas representative office in Beirut in 1958, but eventually closed it. The bank did not venture abroad again until 1970, when offices were opened in Tokyo and Rio de Janeiro. It established a presence in the United States when its New York office opened on Madison Avenue in 1971; offices in Chicago, Los Angeles, Cleveland, and Atlanta appeared over the course of the decade. It also opened offices in Tehran (1971), Paris (1973), Johannesburg (1974), London (1976), Bahrain (1979), Hong Kong (1979), and Beijing (1986).

After the end of World War II, Bayerische Vereinsbank CEO Baron Hans Christof Freiherr von Tucher publicly suggested that his bank should merge with Hypo-Bank. The three surviving Grossbanken—Deutsche Bank, Dresdner Bank, and Commerzbank—had re-formed in 1958, just as large and influential as ever, to become West Germany's Big Three commercial banks. It was von Tucher's idea to merge Bavaria's two largest banks into an institution that could compete with them. Nothing came of his original proposal, but in 1969 Bayerische Vereinsbank and Hypo-Bank did begin merger talks. Negotiations continued for two years, then broke up when Hypo-Bank balked at the Bavarian state government's insistence the Bayerische Staatsbank, Bavaria's third largest bank, be included in the merger. In the aftermath of the failed merger, Bayerische Vereinsbank agreed to acquire Bayerische Staatsbank for DM 40 million—a bargain, because the latter's assets were valued at DM 5 billion.

Company Perspectives:

HVB Group has positioned itself with a distinctive profile in the market for financial services. We offer our customers in all business segments excellent, innovative, rapid solutions, thus making our customers the focus of our operations.

As the Bank in the Heart of Europe we focus on European retail and corporate customer business in the closely interconnected economic area of Germany, Austria & Central and Eastern Europe where we have established ourselves as Number One. This customer-focused market approach combined with short local decision paths enables us to accommodate the different requirements of our customers, thus achieving a high degree of identification on the part of our customers with "their" bank.

In addition to its international expansion, Bayerische Vereinsbank produced a record of steady asset growth throughout the 1970s. In 1982 Wolfgang Graebner, a managing partner of Berliner Handels- und Frankfurter Bank, told Euromoney, "The BV bank is a conservative bank, and that's a genuine compliment. … They've achieved balance sheet growth instead of dramatic headlines; a smooth ride through troubled waters. That's what I call banking." In the late 1970s and early 1980s, an economic downturn and crises, such as the collapse of Bank-haus IG Herstatt and a sharp drop in Commerzbank's profits after a bad hunch on the direction of interest rates, sent shudders through the West German banking industry. But Bayerische Vereinsbank, thanks to what Euromoney called its "pushy but conservative style," gained ground on Hypo-Bank and the Big Three. Depending on what statistical measure one used, Bayerische Vereinsbank either was very close to overtaking or had already overtaken Hypo-Bank as West Germany's fourth largest bank by 1982.

A contemporary trend in which Bayerische Vereinsbank did take part was the divestiture of business holdings. Public concern mounted during the 1970s over the influence that Germany's banks wielded in the commercial and industrial sectors through stock holdings and corporate directorships. To head off possible calls for nationalization, the banks began to sell off their portfolios. In 1982 Bayerische Vereinsbank sold its 36 percent interest in Hacker-Pschorr Brau, a Munich brewery, to local construction magnate Joseph Schoerghuber.

In 1985, however, the bank made a substantial investment in West Germany's defense industry. It bought a 5 percent interest in Messerschmidt-Boelkhow-Bloehm, becoming the first bank to ever hold an interest in the nation's premier aerospace concern. It then joined Messerschmidt and Dresdner Bank in a takeover bid for Krauss Maffei, manufacturer of the Leopard 2 main battle tank.

In the late 1980s Bayerische Vereinsbank continued to expand its international presence. In 1988 it acquired First National Bank of Chicago's branch offices in Milan and Rome. Then, in May 1989, it concluded a historic agreement with four other European banks—Italy's Banca Commerciale, Austria's Creditanstalt-Bankverein, France's Credit Lyonnais, and the Finnish bank Kansallis-Osake-Pankki—and the Soviet banks Vnesheconobank, Promstroybank, and Sberbank, to form the International Bank of Moscow. The bank constituted the first joint banking venture between Western and Soviet institutions since the Revolution of 1917 and was intended to finance foreign trade and provide financial advice. By the end of the 1980s Bayerische Vereinsbank had also expanded into Eastern Europe by setting up cooperative arrangements with banks in Hungary and Bulgaria.

The Evolution of Vereinsbank into a European Superregional Bank, 1990s

In 1990 Albrecht Schmidt took over as chief executive, becoming the first non-Bavarian to head the bank. Schmidt engineered Bayerische Vereinsbank's shift from being a regional German bank to a superregional European bank—somewhat akin to the superregionals then being formed in the United States. Among the first moves was the securing of a presence throughout Germany. The bank had ended the 1980s with about 400 domestic branches, most of which were in Bavaria and the southwest. In 1990 Bayerische Vereinsbank increased its minority stake in Hamburg-based Vereins- und Westbank AG to 75 percent and began integrating the operations of this large northern German bank into its branch network. Following German reunification in 1990, the bank expanded rapidly into eastern Germany, operating nearly 80 branches there by 1994. And Bayerische Vereinsbank began filling in the one remaining hole in its German network by opening up new branches in the highly industrialized Ruhr area.

Key Dates:

1835:: Bayerische Hypotheken- und Wechsel-Bank AG (Hypo-Bank) is founded in Munich by decree of King Ludwig I of Bavaria.
1869:: King Ludwig II of Bavaria grants a license to a consortium of private bankers to establish a Munich-based commercial bank, Bayerische Vereinsbank A.G. (BV).
1879:: Hypo-Bank begins underwriting and securities trading.
1906:: New regulatory laws force Hypo-Bank to spin off its insurance operations, creating the separate but wholly owned Bayerische Versicherungsbank AG.
Early 1920s:: BV allies itself with Bayerische Handelsbank AG.
1921:: Hypo-Bank enters into community of interest agreement with Barmer Bankverein and Allgemeine Deutsche Creditanstalt of Leipzig.
1922:: BV enters into community of interest agreement with Mendelssohn & Company.
1923:: Hypo-Bank sells its share in insurance subsidiary Bayerische Versicherungsbank.
1970:: BV opens its first foreign representative offices in Tokyo and Rio de Janeiro.
1971:: Bayerische Staatsbank AG, Bavaria's third largest bank, is acquired by BV.
1990:: BV gains majority control of Hamburg-based Vereinsund Westbank AG.
1992:: Majority stake in Schoeller & Co. Bank AG, an Austrian private bank, is secured by BV.
1994:: Hypo-Bank launches Direkt Anlage Bank, the first discount telephone brokerage service in Germany.
1997:: BV and Hypo-Bank announce that they will merge.
1998:: Merger is consummated, creating Bayerische Hypound Vereinsbank AG, or HypoVereinsbank.
2000:: Bank Austria Creditanstalt is acquired.
2002:: HypoVereinsbank changes its name to HVB Group; records a net loss for the year; announces commercial real estate finance operations will be spun off as Hypo Real Estate Group.
2003:: About one-quarter of Bank Austria Creditanstalt is sold through an initial public offering.

In addition to Germany, the bank's initial superregion also included Denmark, Austria, Switzerland, and the Czech Republic. In mid-1992 Schoeller & Co. Bank AG, one of the largest private banking groups in Austria with assets of about $2 billion, was acquired. Schoeller operated 13 branches throughout Austria, making Bayerische Vereinsbank the first German bank to have nationwide representation there. In 1993 Bayerische Vereinsbank opened a regional branch in Prague, and one year later the bank took full control of Bankhaus von Ernst & Cie. AG, an old Swiss private banking firm with branches in Bern, Zurich, Geneva, and London and assets totaling $1.2 billion.

During the mid-1990s both Bayerische Vereinsbank and Hypo-Bank outperformed the Big Three German banks because of the Bavaria-based banks' strong mortgage banking business. By 1995 Bayerische Vereinsbank ranked as the number four German bank with total assets of DM 320 billion ($229.2 billion). That year the bank raised about DM 1 billion ($731 million) through a rights issue to help fund further expansion of its activities at home and abroad. One area in which the bank was investing heavily was in new technology, spending DM 400 million on information technology alone during 1994. Bayerische Vereinsbank became the first German bank to introduce telephone banking nationwide, and it also launched an online banking service that enabled customers to access their accounts and make transactions via their home computers. In 1996 the bank introduced a new direct online bank called Advance Bank.

The bank also continued its international expansion. Its European superregion grew with the bank's entrance into Poland. It established a presence in Asia, opening a regional branch in Singapore in 1995 and an office in Shanghai, China, as well. Most surprisingly, Schmidt announced in November 1995 that Bayerische Vereinsbank had reached an agreement to acquire the U.S. brokerage firm Oppenheimer & Co. for about $400 million. Through this deal, the bank hoped to be able to offer its corporate customers, most of which were medium-sized companies, more investment banking services. But the proposed takeover ran afoul of U.S. regulatory acts, particularly the Glass-Steagall Act, which mandated the separation of commercial banking and securities underwriting. Thus to take over Oppenheimer, Bayerische Vereinsbank would have had to shutter its existing U.S. banking operations. It was willing to do so after acquiring Oppenheimer, but the U.S. Federal Reserve Board wanted the closure of the banking operations to come first, something that Bayerische Vereinsbank was unwilling to agree to. The deal was therefore scotched.

In July 1996 Deutsche Bank revealed that it had bought a 5 percent stake in Bayerische Vereinsbank. Speculation immediately became rife about a possible takeover of Vereinsbank by Deutsche, which by that point was the largest bank in Europe. Schmidt, however, used this potential prelude to a raid as a spur to engineer his own takeover, that of Hypo-Bank, finally bringing together the two longtime Bavarian rivals.

Early History of Bayerische Hypothekenund Wechsel-Bank

Bayerische Hypotheken- und Wechsel-Bank AG was founded in 1835 by decree of King Ludwig I of Bavaria, who believed that his nation needed a new bank to increase the availability of credit and to stimulate the economy. His economic advisers decided that the new bank should be formed as a private company and, accordingly, Hypo-Bank's first share offering was made in December 1834. Hypo-Bank opened in October 1835 in the Preysing Palace in Munich, and two years later, it opened its first branch office, in the Bavarian city of Augsburg.

At its inception, Hypo-Bank's activities fell into three principal categories: mortgage banking, commercial banking, and insurance. Deposits were not an important part of its business; they were, in fact, regarded as a potential capital drain. The bank's founding charter prohibited all forms of speculation, merchant banking, or investing in foreign securities. As the national bank of Bavaria, it had the exclusive privilege of issuing paper currency, but abandoned this practice in 1875 when the new Imperial Bank Law placed severe restrictions on issuing banks. The mortgage business was the bank's most popular activity from the outset. The introduction of mortgage bonds in 1864 added another popular and profitable dimension to its operations.

As an important part of the Bavarian economy, Hypo-Bank was vulnerable to the force of larger events. The political upheavals of 1848–49 threatened its securities business and prompted the bank to stop paying interest on its few deposits. It prospered, however, as a result of the Franco-Prussian War of 1870–71. It placed three million Gulden worth of war bonds at the outbreak of hostilities to support the imperial government's financial needs, and its commercial operations prospered during the economic boom that followed the German victory.

Hypo-Bank entered underwriting and securities trading in 1879 when it syndicated a Bavarian railroad bond worth 60 million Reichsmarks. It also began underwriting and dealing in foreign securities, although its 1879 annual report sought to reassure shareholders by emphasizing that the bank would touch only blue-chip issues. At first, it marketed only Austro-Hungarian, Russian, Romanian, and Bulgarian issues, but in 1889 it began marketing Asian, American, and Latin American securities in small quantities as well.

These latter developments came at a time when large German commercial banks were rapidly expanding their international operations. While Hypo-Bank was already a leading mortgage bank, its commercial banking department remained small compared to the Berlin-based Grossbanken. Nonetheless, it joined the big banks in founding the Deutsch-Asiatische Bank in Shanghai in 1889. It was also part of the Asiatische Konsortium, a famous group of German banks that cooperated with each other in loaning money to Asian nations.

Hypo-Bank began to outgrow its facilities in the Preysing Palace 50 years after its founding. During the 1880s the bank began purchasing houses around Munich and converting them into headquarters for its various divisions. A project converting its property on Theatinerstrasse into a new headquarters for the entire bank was proposed in 1893 and finished in 1898; this building was destroyed in World War II but Hypo-Bank's headquarters were rebuilt on the same site.

Surviving the Volatile First Half of the 20th Century

Hypo-Bank became Germany's leading mortgage banker when its volume of mortgage loans topped one billion Reichs-marks in 1908 and its total of mortgage bonds reached that level in 1909. But new imperial laws passed in 1906 regulating the insurance industry forced Hypo-Bank to spin off its insurance operations. The new insurance bank, which was named the Bayerische Versicherungsbank AG, nonetheless remained a wholly owned subsidiary of Hypo-Bank and inherited the Preysing Palace offices.

Despite its new stature, Hypo-Bank stayed a regional bank into the 20th century, while the Grossbanken grew ever larger and more powerful. As a result of this increasing centralization in the German banking industry, many smaller institutions were forced into alliances with the largest banks, surrendering their independence in exchange for the security that went with size. Hypo-Bank allied itself with both Dresdner Bank and Discontogesellschaft, but broke away in 1921 by entering a "community of interest" agreement with Barmer Bankverein and Allgemeine Deutsche Creditanstalt of Leipzig. Under the terms of the agreement, which was typical of provincial banks in the 1920s, the three institutions exchanged representatives from their boards of directors and agreed to coordinate their operations.

Of the years 1914–48, Hypo-Bank's official history says, "Business was at best difficult. … Success was measured simply in the ability to survive and assure long-term viability." After the outbreak of World War I, the bank's mortgage business benefited from money that flowed into agriculture from military purchases, but it suffered as the war hastened a crack in the urban real estate market. The bank continued to suffer as building activity, and the demand for mortgages, slackened during the war. Governmental decree also closed the stock market at the beginning of hostilities, limiting activity in the commercial sector. But the war did not stop Hypo-Bank's expansion; it purchased the Munich bank Fränkel & Selz in 1915, and in 1916 it bought the 50 percent of Nuremberg's Bayerische Disconto- und Wechsel-Bank it did not already own. It also expanded its branch network throughout Bavaria.

Hypo-Bank floundered along with the rest of the nation in the economic crises of the 1920s. Radical currency devaluation and skyrocketing inflation in 1922 and 1923 forced the bank to virtually shut down its mortgage business, as loans made under more favorable economic conditions were paid back in increasingly worthless paper currency. The Weimar government undertook currency reform in 1923, and the next year Hypo-Bank began to rebuild its mortgage business from scratch. Bank employees had to convert 73,000 old mortgages and 1.2 million mortgage bonds into the new currency, and the bank introduced gold-backed mortgages and bonds. Also in 1923, the bank suddenly sold all of its shares in its insurance subsidiary to the insurance concerns Münchner Rückversicherungsgesellschaft and Allianz Versicherung.

The economic crisis of 1928–29 that presaged the Great Depression in Germany hurt the bank's commercial department as rising deposits and declining demand for loans coupled to strain its resources. Economic conditions worsened in 1930 and all forms of commercial business declined significantly. In 1931, public panic reached its peak with a run on the nation's financial institutions, culminating in the closing of all banks and stock exchanges on July 14. As a result of the crisis, the bank was forced to reduce its annual dividends by 50 percent in 1933 and 1934. Nevertheless, its fortunes began to improve slightly in 1934. Although demand for credit was low, government rearmament and war financing stimulated the economy.

Hypo-Bank's official history is largely mute about the war years, saying only that the bank's mortgage business "continued to develop satisfactorily" until the economy collapsed in 1944, while deposits increased and commercial lending declined. The Allied occupation authorities investigating the German banking industry after the war turned up evidence of possible war crimes principally among the Grossbanken; smaller institutions such as Hypo-Bank were seldom, if ever, mentioned in American newspaper accounts of the investigation. The years immediately following the war also proved painful for Hypo-Bank, as it had to write off mortgages on German property destroyed by the fighting, as well as those in Alsace-Lorraine and Soviet-occupied eastern Germany.

Postwar Expansion of Hypo-Bank

All of that began to change, however, on June 20, 1948, when the West German government enacted radical currency reform and began to rebuild its shattered economy. Aided by the Marshall Plan, economic conditions in the Bundesrepublik gradually approached a state of normalcy during the early years of the Cold War, and Hypo-Bank, riding the tide of increasing prosperity, could report in 1953 that its assets had reached DM 1 billion.

The 1950s for Hypo-Bank were marked by expansion and fundamental strengthening of its financial position. Its capital stock increased from DM 27 million in 1948 to DM 100 million in 1960, and its reserves went from nothing to DM 155 million in the same period. The bank's mortgage sector, its traditional mainstay, remained strong, but was surpassed in business volume by its general banking division. Hypo-Bank's workforce more than doubled, from 2,603 employees in 1948 to nearly 5,600 ten years later. It also began expanding beyond its geographic base in Bavaria, making business contacts in other German states as well as abroad. Nonetheless, Euromoney characterized Hypo-Bank's philosophy during these years as adhering to the old Bavarian proverb: "Bleib im Land und nähre dich redlich"—stay at home and live off the fat of the land.

Hypo-Bank continued to prosper and expand through the 1960s. In 1967, Barron's described it as one of three West German regional banks with more than $1 billion worth of assets, along with Bank für Gemeinwirtschaft and longtime Bavarian rival Bayerische Vereinsbank. In 1969 it began to negotiate a merger with Bayerische Vereinsbank that would have produced an institution large enough to rival the nation's Big Three commercial banks (Deutsche Bank, Dresdner Bank, and Commerzbank), but it broke off talks in 1971 when the Bavarian state government insisted that Bayerische Staatsbank be included. Also in 1969, it officially joined the trend among financial institutions worldwide by declaring that it would expand and diversify in order to keep up with its major competitors. Hypo-Bank opened 100 new branches between 1969 and 1975, including 37 outside Bavaria. It also internationalized its securities operations, entered the currency trading business, and loaned more money overseas. In 1972, it joined with Banque de Bruxelles, Algemene Bank Nederland, and Dresdner Bank to form ABD Securities Corporation in New York, offering securities and investment banking services to European investors interested in the United States.

This penchant for limiting risks through joint ventures also marked two of Hypo-Bank's other major enterprises during the 1970s. In 1972 it joined ABECOR (Associated Banks of Europe Corporation) along with its ABD Securities partners; Banque Nationale de Paris, Banca Nazionale de Lavoro, Barclays Bank, Banque Internationale à Luxembourg, and Österreichische Länderbank later joined them. Despite early doubts from some observers, by 1983 ABECOR had 12,000 branches and $440 billion worth of assets. Hypo-Bank also joined 11 other European and Latin American banks to form the EuroLatin-American Bank in 1974.

Acquisitions and portfolio expansion also marked the bank's activities during this time. In 1971 Hypo-Bank purchased Westfalenbank of Bochum, and between 1968 and 1973, its stock holdings constituting a 10 percent or larger stake in a company increased from DM 148 million to DM 995 million. It made its most famous purchases in the brewery industry, including minority interests in Dortmunder-Union-Brauerei in 1969 and Löwenbräu in 1973. In the late 1970s, the bank began to sell off its industrial holdings amid mounting public concern over the power that West German banks were able to wield through their extensive stock portfolios and numerous company directorships. In 1982 Hypo-Bank began to concentrate instead on acquisition and expansion in finance, both foreign and domestic. In 1987 it bought a 15 percent interest in Italy's Banco Trento & Bolanzo. By the late 1980s Hypo-Bank ranked as the seventh largest bank in Germany and had been surpassed by Bayerische Vereinsbank as the largest Bavaria-based bank earlier in the decade.

Hypo-Bank's International Growth in the 1990s

Leading Hypo-Bank into the 1990s was Eberhard Martini, who had been named chairman in May 1988. Martini had two initial aims: transforming the bank's core property-lending business into a pan-European operation and diversifying into international asset management for private and institutional investors, including pension funds. By going after these two niches on a wider basis, Martini hoped to stop Hypo-Bank from being swallowed up by its ever larger rivals, both inside and outside of Germany. On the asset management side, Hypo-Bank bought a 50 percent stake in Foreign & Colonial Management Ltd., a London-based manager of international investment trusts, in 1989.

Following German reunification in 1990, Hypo-Bank moved aggressively into eastern Germany, opening up 23 branches and subbranches in 19 cities. The bank took an even more aggressive approach in funding real estate projects in eastern Germany—an expansion that would later come back to haunt Martini. Hypo-Bank was also quick to establish bank subsidiaries in the emerging Eastern European states. In 1992 Hypo-Bank CZ a.s. was set up in the Czech Republic. One year later came the creation of three more subsidiaries: Hypo-Bank Hungaria Rt., Hypo-Bank Polska S.A., and Hypo-Bank Slovakia a.s. In 1994 Hypo-Bank enlarged its pan-European network of property-lending operations by purchasing a 25 percent interest in Vienna-based Hypo-Bausparkasse Wien and by forming a Czech building society called Hypo Stavebni Sporiteina a.s. That same year, the bank launched Direkt Anlage Bank, the first discount telephone brokerage service in Germany, and opened representative offices in Beijing and Shanghai, China. In 1996 Hypo-Bank began installing bank branches in German supermarkets. The bank's asset management ambitions turned to the United States in 1996 when it entered into an alliance with Massachusetts Financial Services, a mutual fund company owned by Sun Life of Canada. By mid-1997, when the merger of Hypo-Bank and Bayerische Vereinsbank was announced, Hypo-Bank had assets of DM 339 billion ($188 billion).

The Early, Troubled Years of HypoVereinsbank/HVB Group

By 1997 executives at Hypo-Bank were becoming concerned that Allianz, the huge Munich-based insurer, which had a 10 percent stake in Hypo-Bank, would pressure them into a merger with Dresdner Bank, which was also allied with Allianz. Meantime, Schmidt, over at Bayerische Vereinsbank, wanted to avoid a takeover by Deutsche Bank, which had bought a 5 percent stake in Vereinsbank in 1996. Schmidt approached Martini about a possible merger to stave off these unwanted advances, and a deal was soon struck and announced in July 1997. Although touted as a "merger of equals," the deal, as consummated in September 1998, really amounted to a Vereinsbank takeover of Hypo-Bank. Part of the unique structure of the deal involved Vereinsbank exchanging 19.3 million shares of Allianz stock for 45 percent of Hypo-Bank. Bavarian politicians, wishing to facilitate the creation of a Munich financial giant, declared the exchange of shares to be tax-free for shareholders (an incentive that was later outlawed). The politicians were also mollified by assurances that job cuts following in the wake of the merger—expected to total about 2,000 workers per year over a five-year period—would come from normal attrition and not the mass layoffs typical of a U.S.-style bank merger.

The merged entity, which was officially created on September 1, 1998, was called Bayerische Hypo- und Vereinsbank AG, or HypoVereinsbank. It ranked as the second largest bank in Germany, trailing only Deutsche Bank, with assets of about DM 800 million ($450 million), and had 40,000 employees. Given Vereinsbank's lead role in the merger, it was no surprise that Schmidt was named chairman of HypoVereinsbank; Martini took a spot on the supervisory board. HypoVereinsbank adopted Vereinsbank's strategy of being a superregional player in the European banking sector.

An unfortunate legacy from the Hypo-Bank side was that bank's reckless approach to funding real estate projects in eastern Germany in the early 1990s. By the late 1990s many of these loans had gone sour as the eastern boom went bust. In late 1997, during the period in which the Hypo-Bank-Vereinsbank merger was being consummated, Martini attempted to deal with the growing problem by setting aside a DM 1.5 billion ($840 million) provision to cover the bad real estate loans. But audits conducted in the immediate weeks following completion of the merger revealed this provision to be wholly inadequate. Schmidt announced in October 1998 that an additional DM 3.5 billion ($1.9 billion) provision was needed to cover the shaky Hypo-Bank loans. This led to a very public and lengthy battle between executives of the two predecessor banks; Martini and other Hypo-Bank executives contended that the problems had been exaggerated in an effort to force them from office. In October 1999, however, an independent audit supported the action taken by Schmidt, criticized Hypo-Bank for not recognizing the extent of the bad loans in 1997, and essentially declared Hypo-Bank's results for 1997 invalid. Martini and six other senior executives, all formerly of Hypo-Bank, resigned from HypoVereinsbank, leaving Schmidt and his followers from Vereinsbank firmly in charge.

Dealing with this scandal occupied much of the bank's attention, but integration efforts and some strategic deals did move forward. During 1998 and 1999, HypoVereinsbank purchased majority control of Bank Przemyslowo-Handlowy S.A. (BPH) of Poland. BPH was then enlarged in 1999 through the acquisition of Hypo-Bank Polska. Also during 1998 HVB Bank Czech Republic a.s. was created from the merger of Hypo-Bank's and Vereinsbank's subsidiaries in the Czech Republic.

During 2000 HypoVereinsbank acquired Bank Austria Creditanstalt, the largest bank in Austria, in a deal valued at about EUR 7.7 billion ($7.2 billion). The bank not only gained the number one position in Austria, it also secured Bank Austria's holdings in central and Eastern Europe. Among these was a majority stake in one of the largest banks in Poland, Powszechny Bank Kreditowy (PBK), which in 2001 was merged with BPH to form Bank Przemyslowo-Handlowy PBK S.A., which was the third largest bank in Poland—the largest market in Eastern Europe. The newly enlarged HypoVereinsbank had total assets of EUR 716.5 billion ($615 billion) by the end of 2000, making it the third largest bank in Europe.

During the early 2000s HypoVereinsbank was hit hard as weak economic growth depressed earnings. The bank responded in 2001 with a massive restructuring involving the closure of numerous branches and the elimination of more than 10,000 jobs—nearly 14 percent of the total payroll. Many of the job cuts were in Germany, but the bank also shed 4,000 jobs in Poland and 2,000 in Austria. The branch closures were made possible in part by customers' increased use of telephone and online banking services. HypoVereinsbank also began centering its asset management business around its Activest unit, which started to sell other companies' mutual funds. These developments made the Foreign & Colonial Management unit in the United Kingdom redundant, and it was sold to Eureko B.V., a European-wide insurance consortium. In a further retrenching move, HypoVereinsbank exited from the economically troubled country of Brazil in 2002, selling its 48 percent stake in Banco BBACreditanstalt S.A. to Brazil's Banco Itau S.A.

During 2002, a year in which HypoVereinsbank changed its name to the less German-sounding HVB Group, the bank had to take EUR 3.8 billion ($4.1 billion) in bad-loan provisions. These stemmed both from the continued hangover from Hypo-Bank's ill-advised eastern German loans of the 1990s and from the stagnant German economy of 2002, which led to record bankruptcies. The provisions resulted in a EUR 858 million ($917 million) net loss for HVB, forcing it to cancel its dividend.

At the beginning of 2003, HVB restructured its operations into three main operating units: Germany, Austria & Central and Eastern Europe (Austria/CEE), and Corporates & Markets. The Austria/CEE unit was led by Bank Austria Creditanstalt. A fourth unit comprising the bank's commercial real estate finance activities had been placed into discontinued operations during 2002, in advance of the 2003 spinoff of the unit into a separate entity to be known as Hypo Real Estate Group. Leading this restructuring was new chief executive Dieter Rampl, who in January 2003 was named to succeed Schmidt, who became chairman of the supervisory board. HVB also announced in early 2003 that in order to shore up its balance sheet it would dispose of EUR 100 billion in assets. The bank began divesting nonstrategic holdings and selling off pieces of its huge investment portfolio. Proceeds of about EUR 1 billion were raised through the sale of about 25 percent of Bank Austria Creditanstalt, HVB's best-performing subsidiary, through an initial public offering on the Vienna stock exchange. HVB also sold Nuremberg-based norisbank, a consumer-finance unit, to DZ Bank for EUR 447 million ($500 million); and the Swiss private bank Bank von Ernst to the Royal Bank of Scotland plc for SFr 500 million ($381 million). In addition, in what promised to be an important streamlining of HVB's domestic operations, the bank announced in July 2003 that it would fully integrate the operations of Vereins- und Westbank, the group's retail banking unit for northern Germany, into its core German subsidiary, Bayerische Hypo- und Vereinsbank.

Principal Subsidiaries

GERMANY: Bayerische Hypo- und Vereinsbank AG; HVB Banque Luxembourg S.A.; Vereins- und Westbank AG (76.3%); Activest GmbH Marketing und Vertrieb; Activest Investmentgesellschaft mbH; Bankhaus Gebrüder Bethmann; Bankhaus Maffei & Co. KGaA; Bankhaus Neelmeyer AG; Bankhaus C.L. Seeliger (53.7%); DAB Bank AG (75.4%); FSB Fonds-ServiceBank GmbH (50%); H.F.S. Hypo-Fondsbeteiligungen für Sachwerte GmbH; HVB Leasing GmbH; Internationales Immobilien-Institut GmbH (94%); INDexCHANGE Investment AG (95.1%); Nordinvest Norddeutsche Investment-Gesellschaft mbH; Vereinsbank Victoria Bauspar Aktiengesellschaft (70%); Activest Investmentgesellschaft Luxembourg S.A.; Banco Inversión S.A. (Spain); direktanlage.at AG (Austria). AUSTRIA/CEE: Bank Austria Creditanstalt AG (77.5%); Asset Management GmbH (Austria); Bank Austria Creditanstalt d.d. (Slovenia; 77.5%); Bank Austria Creditanstalt Leasing GmbH (77.5%); Bankprivat AG (Austria); Bank Przemyslowo-Handlowy PBK S.A. (Poland; 71%); Capital Invest die Kapitalanlagegesellschaft der Bank Austria/Creditanstalt Gruppe GmbH (77.5%); Commercial Bank Biochim AD (Bulgaria; 99.7%); HVB Bank Croatia d.d. (80%); HVB Bank Czech Republic a.s.; HVB Bank Hungary Rt.; HVB Bank Romania S.A.; HVB Bank Slovakia a.s.; HVB Bank Yugoslavia A.D. (99%); Schoellerbank Aktiengesellschaft (Austria); Splitska Banka d.d. (Croatia; 90.1%). CORPORATES & MARKETS: Bayerische Hypo- und Vereinsbank AG; Bank Austria Creditanstalt AG (77.5%); HVB Banque Luxembourg S.A.; Vereins- und Westbank AG (76.3%); Bode Grabner Beye AG & Co. KG; Chemie Pensionsfonds AG; HVB Pensionsfonds AG; CA IB Corporate Finance Beratungs Gesellschaft m.b.H. (Austria); HVB Capital Asia Limited (Hong Kong); HVB Risk Management Products Inc. (U.S.A.); HVB Singapore Limited; HVB U.S. Finance Inc.; International Moscow Bank (Russia; 43.2%); Joint Stock Commercial Bank HVB Bank Ukraine (91.2%).

Principal Operating Units

Germany; Austria & Central and Eastern Europe; Corporates & Markets.

Principal Competitors

Deutsche Bank AG; Dresdner Bank AG; Commerzbank AG; DZ BANK Deutsche Zentral-Genossenschaftsbank Aktiegesellschaft; Westdeutsche Landesbank Girozentrale; Landesbank Baden-Württemberg; Bayerische Landesbank Girozentrale; Bankgesellschaft Berlin AG.