A Heap Of Trouble For Hvb

Strategies and Policies-Al Prentice Seth Berge

Case Study 8 Box 165

November 2, 2005

A Heap of Trouble for HVB

Synopsis:

Dieter Rampl is a very brave and cold-blooded man with a hint of naпve optimism that is absolutely necessary for him to have any chance of succeeding in his goal to restore HVB Group, Germany's second largest bank, to the level of profitability it once had. With a share price less than half of what it was a year ago; Rampl was hired on as HVB's new chief executive in charge of rescuing the sinking ship known as HVB.

HVB's Troubles:

HVB Group, the world's tenth largest bank, is in a world of trouble. HVB has 8.5 million retail customers in Europe, and is the continents largest mortgage lender. While the company boasts assets of over $730 billion, a few bad decisions can lead to a massive loss in profits. Due to a series of poor investment decisions, HVB the bank was forced to make new bad-debt provisions of $1.25 billion in the third quarter of 2002, which was more than double their operating profit for that time. HVB's total loan losses were expected to reach $3.75 for the whole year, which means a pre-tax loss of about $670 million.

All of these losses result in the HVB not being able to use what capital it has left to do what it should be doing- investing in its business. Coupled with a weakening investment portfolio, deteriorating asset quality, and modest capital strength, borrowing money is becoming increasingly difficult for HVB.

What Went Wrong?

HVB came together in 1998 when Bayerische Vereinsbank and Bayerische Hypothekenbank formed. While the merger between these two successful banks created an immediately successful uber-bank in HVG Group, investment decisions made by Hypothekenbank in the mid 90's would prove to be extremely costly to new HVB's future. Hypothekenbank made real estate loans worth billions of dollars, concentrating heavily on what was old East Germany, which seemed promising at the time. However, the East Germany boom busted in the late 90's and the rest of the German economy went in the tank, leaving HVB with a load of bad debt. Much of that debt still hasn't been paid off.

On top of that, HVB also gave large loans to many now defunct German companies. A string of bankruptcy's