The ratings reflect Fitch’s view of an extremely high likelihood of support by the Federal Republic of Germany if needed. Given its ownership structure, Fitch believes HVB would, however, first look to its 100% owner, UniCredit S.p.A. (UC; ‘A’/Rating Watch Negative/’F1’) for support, if needed. HVB’s Long-term IDR could be downgraded if Fitch came to the conclusion that government support in Germany was being diluted through a combination of regulatory, legal and political changes.HVB’s Viability Rating reflects the bank’s standalone credit strength which benefits from its well entrenched regional banking franchise and strong capitalisation (Fitch core capital ratio at end-H111: 18.1%). While the loan/deposit ratio (end-H111: 174%) shows some reliance on wholesale funding, sources seem well diversified by type and geography. HVB manages its liquidity prudently and has substantial counterbalancing capacity, based on its pool of central bank eligible and unencumbered assets. In this context, Fitch considers HVB’s exposure to its parent UC has increased over time. Fitch recognises that HVB’s relative funding advantage compared to its parent is positive for UC’s overall funding profile. However, at the same time, being part of UC group might pose potential contagion risk for HVB’s funding franchise from further negative developments in the European sovereign crisis, which cannot be fully excluded.HVB’s credit profile is also characterised by income volatility due to the bank’s corporate and investment banking focus, and moderate levels of sustainable operating profitability. However, Fitch expects income volatility to reduce, as the bank increases its focus on customer-driven business and reduces riskier exposures such as private equity.HVB’s CIB business continues to drive financial performance, with profit contribution from retail and private banking remaining small. Through an initiative to enhance the focus on clients’ needs and organisational efficiency called One4C (One for Customers), Fitch expects some improvement in the profitability of weaker segments. Fitch acknowledges that retail banking operations provide HVB with access to more stable retail deposits. However, a commercial benefit cannot be easily quantified.Across categories, asset quality continued to stabilise or improve in H111. Fitch expects this general trend to continue in coming quarters, but given the fragile economic recovery this trend could reverse quickly. In this context, some risk pockets remain, including risks from high concentrations in the bank’s leveraged buyout exposure and project finance business. Non-strategic assets are being worked out and the bank continues to reduce its exposure to riskier asset classes.The Short-term rating of the Commercial Paper Programmes of UniCredit US Finance LLC, which is wholly owned by HVB, is equalised with HVB’s Short-term IDR and reflect the likelihood of systemic support.The ratings of HVB’s hybrid capital instruments reflect the financial standing of the UniCredit group. While Fitch acknowledges that the German regulator could demand a deferral of coupon payment on these profit-linked instruments in line with the terms and conditions of the instruments, the agency does not anticipate such intervention in light of the bank’s standalone financial profile.