ALLIANZ GROUP 38 nearly all major markets, although there are some significant time lags. Overall, providing for the baby boomers’ retirement needs is a particularly strong growth engine for asset manage- ment in Europe and the U.S.A., and to an increasing extent also in Asia. Banks After the serious difficulties of 2002, the German bank- ing sector was dominated by such buzzwords as consolidation and restructuring. Now, it is in a process of fundamental trans- formation. The liberalization of the financial market and, even more, technical progress, are opening the door to vast economies of scale and thereby increase the pressure towards consolidation. To a growing extent, the banks are concentrating their efforts on profitable core business areas, a process that is accelerated by the prospect of new equity rules (“Basel II”). They are re- ducing vertical integration and breaking up the value-creation chain to make more effective use of their capital. In parallel, they are cutting costs through process automation, product stan- dardization, outsourcing and other efficiency drivers. Risk man- agement is being improved so that risk costs are leveling off, de- spite the still high number of insolvencies. These measures have strengthened the operating base of the banking business. Stock markets The stock indexes moved on a rollercoaster throughout the reporting year. After a three-year slump, they once again came under heavy pressure in the spring of 2003, mainly due to the Iraq crisis and the subsequent war. In this sit- uation, investors shied away from risk more than they had in a long time. The result of this attitude was clearly shown by the indexes in March 2003: the German stock index DAX slipped to 2,200 points, Standard & Poor’s to 800 points. When it be- came clear that the military confrontation in Iraq was going to come to a quick end, a steep recovery began. Surprisingly pos- itive economic indicators and corporate profits in the U.S.A. gave the turnaround considerable traction, which sustained these through the end of the year. Over the full year, the DAX rose 37 percent. Standard & Poor’s closed with a plus of 26 per- cent. For the business of Allianz – insurance, asset management and banking – the development of the capital markets plays a pre- ponderant role. It is reflected in its turnover as much as in its earnings positions, but also influences shareholders’ equity be- cause the valuation reserves fluctuate along with market  performance. In view of the uncertainties in the first half of 2003, customers remained cautious and preferred low-risk in- vestments. Capital markets At the same time, the general business context is showing signs of improvement. While the gradual recovery of the econ- omy in the second half was not sufficient to bring about a de- cisive revitalization of the retail business, the overall brighter picture in the capital markets had a positive impact on trading income and lent support to the securities business. But whether the current year will bring a palpable revival in the IPO busi- ness and in merger and acquisitions consulting remains to be seen.  German Banks continue to suffer from the structural deficits of their home market which, by international standards, is still highly fragmented. Even the four biggest institutions together have a market share of no more than 16 percent. In other Eu- ropean countries, the corresponding figure is three or four times as high. That deprives German banks of the strong domestic earnings base that their international competitors have. But the current restructuring and cost cutting drives show that, helped by economic recovery, they are well on their way to making up for this deficiency. Stock market performance 2003 December 31, 2002 = 100 May DAX DJ EURO STOXX 50 FTSE 100 S&P 500 85 90 95 100 105 110 115 120 125 130 135 Jan Feb Mar Apr Jun Jul Aug Sep Oct Nov Dec