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experience in the past. Moreover, since 1 January 2005, a general provision in accordance
with IAS 39 has been maintained for impairment losses incurred but not reported in business
with retail customers.
Risks associated with large-volume real estate business developed even more favourably than (42f) Real estate risk
in previous years. After a steady reduction from € 46 m in 2001 (with a risk/earnings ratio of
59 %) to about € 21 m in 2004 (with a risk/earnings ratio of about 20 %), the provisioning
charge for 2005 was € 11.6 m (with a risk/earnings ratio of about 10 %). For the next few
years (2006 – 2008) we are confident that the provisioning charge will remain below € 20 m.
In dealing with this type of risk, Bank Austria Creditanstalt takes into account market price
fluctuations in its equity holdings in listed and unlisted companies.
Not included are equity interests in operating subsidiaries of the Group because risks associated
with such companies are determined and recorded under the various other risk types.
The portfolio includes various strategic investments and real estate companies; real estate
holding companies are taken into account in real estate risk.
Generally, Value at Risk is determined on the basis of market values and volatilities of the
relevant equity interests. For shares in unlisted companies the bank uses book values and
volatilities of relevant stock exchange indices and takes account of residual variances.
– actions brought by individual employees (current and former) for additional payments
into the pension funds
– action brought by the German Bundesanstalt für vereinigungsbedingte Sonderaufgaben
(BVS) in Switzerland for repayment of credit balances held, and disposed of, by the
Communist Party of Austria (KPÖ) at the former banking subsidiary in Zurich
– preliminary penal investigation due to alleged tax evasion and illegal corporate activities
by former indirect subsidiaries of Bank Austria Creditanstalt in Russia.
Derivatives are financial instruments defining prices and maturities by reference to an (44) Financial derivatives
underlying instrument. Derivatives may be interest rate contracts, foreign exchange contracts,
equity-related and other instruments. Within the “other derivatives” category, the
significance of credit derivatives has grown in the past years. Derivative transactions may
be concluded over the counter (OTC), i.e. directly with the counterparty, or via exchanges.
The exposure is reduced by a margin which must be deposited for exchange-traded contracts
(futures and options) to absorb current price fluctuations.
In this business category, notional amounts provide relatively little information on default
risk. Amounts receivable or payable under derivatives are reflected in their fair values.
Derivatives are mainly used for trading purposes. Market participants include banks
(proprietary trading), securities houses, mutual funds, pension funds, and corporate
customers. Customers can use these instruments to hedge risk positions against
unfavourable price fluctuations and, depending on the strategies pursued by customers,
they can benefit from changes in prices, exchange rates and interest rates.
Bank Austria Creditanstalt also uses derivatives for hedging proprietary positions in the
banking book and for asset/liability management purposes. The bank hedges proprietary
166 Risk report
(42g) Risks arising from the
bank’s shareholdings and
equity interests
Provisions have been made for pending legal risks in line with the estimated probability of (43) Legal risks
costs arising from litigation. No provisions have been made for the following pending legal
proceedings due to the low probability of losses occurring. An outflow of funds cannot,
however, be excluded in these cases, either: