March 18 (Bloomberg) -- HVB Group, UniCredit SpA’s German banking unit, had a loss of 671 million euros ($874 million) last year because of writedowns on investments and higher provisions for risky loans.

The loss compares with a profit of 2.05 billion euros a year earlier, the Munich-based company said in a statement today. Operating profit declined to 453 million euros from 3.04 billion euros in 2007.

HVB, which aims to eliminate about 2,500 jobs by 2010 as part of a plan to cut 9,000 positions at UniCredit, boosted its capital position with the transfer of its Bank Austria Creditanstalt AG business to UniCredit in 2007, bringing the German unit’s Tier 1 ratio, a measure of a bank’s ability to absorb losses, to 14.3 percent at the end of 2008.

The Italian lender, which acquired Munich-based HVB in 2005 in a transaction worth about 15.3 billion euros and fully owns HVB following a squeeze-out of minority owners last year, earlier today reported a 57 percent decline in fourth-quarter profit and said it will seek as much as 4 billion euros in government aid.

“We expect the difficult economic environment to persist in the coming months,” HVB Chief Executive Officer Theodor Weimer said. “Against this background, we are in the process of adjusting the business model of the Markets and Investment Banking division to the changes in the market situation.”

Job Cuts

UniCredit, which has centralized its investment-banking activities at HVB in Munich, has said it plans to eliminate 700 jobs at the investment-banking division, of which 400 are being cut at HVB.

“It’s our claim to be a leading bank for corporate customers in Germany and you can’t achieve that without having an investment bank with a good knowledge of capital markets,” Weimer said at a press conference in Munich today.

HVB’s trading results were “severely affected by the extreme market turmoil which intensified in the fourth quarter of 2008,” the company said. The bank had a full-year trading loss of 1.91 billion euros, compared with a trading profit of 592 million euros a year earlier, following impairments on asset- backed securities, which amounted to 751 million euros and were mostly booked in last year’s first quarter.

HVB increased the amount of money set aside for potential bad loans by 42 percent to 760 million euros last year. The markets and investment banking unit raised risk provisions to 493 million euros as “loan-loss provisions required for Icelandic exposures weighed upon this division,” the company said.

“Loan-loss provisions are expected to rise significantly this year due to the difficult economic situation,” Weimer said. “Without belonging to the UniCredit group, we wouldn’t have been able to weather this crisis relatively unscathed.”

To contact the reporter on this story: Oliver Suess in Munich at osuess@bloomberg.net

Last Updated: March 18, 2009 06:03 EDT