Annual Financial Statements 2008 of Bank Austria

stock market prices – previously hardly thought possible – and the
combination of global recession and withdrawal from remaining exposures
triggered macroeconomic risks. The markets experienced a
panic attack with regard to CEE countries, regardless of their fundamentals
and long-term outlook. This led to balance-of-payments difficulties
and currency depreciation, phenomena seen especially in the
1970s and 1980s.
➔ These developments had a direct impact resulting from a sharp
fall in market prices and higher credit spreads. They also changed the
level and structure of demand from our customers as well as
turnover: entire market segments dried up, especially the primary
market; on the other hand, the related need for advisory services and
risk management also offered opportunities. Those were the factors
that characterised the MIB Division’s operating environment.
� The quarter-by-quarter analysis of revenues generated by MIB
(see chart) shows this dramatic development. Revenues reflect the
volatility of the net trading, hedging and fair value result, which
reached a low (net loss of € 196 m) in the first quarter of 2008 due to
significant mark-to-market adjustments, mainly on the portfolio of
asset-backed securities (ABS). The valuation result also had an impact
on the subsequent quarters, though to a lesser extent, while the
performance from trading in credit market instruments deteriorated
as the year progressed. At the beginning of the second half of 2008,
we applied the rules in the amendment to IAS 39 and reclassified the
ABS portfolio out of financial assets held for trading into loans and
receivables with customers. For the year as a whole, we thereby
avoided book losses of € 350 m in the net trading, hedging and fair
value result. In the fourth quarter, the net trading, hedging and fair
value result fell further, to a net loss of € 283 m. This was due to
sluggishness in current business and to the fact that the previously
stable link between spot markets (e.g. yield on corporate bonds) and
derivatives (related CDS spreads) no longer applied. This “basis risk”
caused problems in hedging and made trading activities more difficult,
leading to losses especially in credit-related areas. Moreover,
volatility in stock markets rose strongly in the fourth quarter. Given the
unusually strong correlation between global stock markets, even good
diversification had little effect. However, the negative net trading,
hedging and fair value result was almost fully offset in the fourth
quarter of 2008 by a record level of net interest income, which
resulted from accrued interest, successful interest rate management
and advantage being taken of the steeper yield curve.
Operating income in the MIB Division amounted to € 142 m in 2008,
down by 70 % on the previous year due to a net loss of € 662 m in the
net trading, hedging and fair value result and lower net fees and commissions
(€ 77 m after € 172 m); results for 2007 included two quarters
before the onset of the sub-prime crisis. Net interest income was
€ 731 m, double the figure for the previous year (€ 327 m).
� An analysis of performance by market segment provides more
meaningful information in economic terms than the analysis of items
in the income statement. This shows that apart from the losses in
market value, there were areas in current business which performed
well on account of their proximity to customers in 2008.
In the Markets area, classic trading operations comprising FIC (Fixed
Income, Currencies) made the strongest contribution. This shows that
interest rate management, foreign exchange trading and the Emerging
Markets team as well as Custody are the mainstay of the Markets
area; these units are particularly close to customers and are capable
of delivering a sustained contribution to value creation even in such
volatile periods as the second half of 2008. Within the Equity sector,
Sales helped to offset the very low level of market activity in private
equity transactions and capital market measures. Our Brokerage unit
benefited from turnover which was also related to the reduction of
positions and won new market participants as customers. The abovementioned
significant losses recorded in credit-near trading were
largely offset by current customer-related operating activities. Investment
Banking, the other MIB area, generated a profit for 2008 but
fell short of expectations. While many M&A projects were postponed
until further notice, Corporate Solutions / Austria achieved very good
results in the Financing sector, benefiting from its excellent customer
relationships. Corporate Finance Emerging Europe also made a good
contribution to revenues. Principal Investments, which manages
alternative investments of the Group, was affected by the liquidation
of numerous hedge funds and recorded losses.
� The MIB Division intensified its cost-cutting programme in view of
the difficult revenue situation and outlook. Operating expenses of the
Division were down by 12 % to € 206 m. Contributions to this improvement
came, above all, from lower provisions for performancerelated
remuneration components, which were substantially reduced.
A hiring freeze, fluctuation among traders and the implementation of
the restructuring project from the fourth quarter onwards have also
produced tangible effects. The number of employees declined by 16 %
to 770 FTE. Non-staff expenses were more or less unchanged. Nevertheless,
in view of the renewed escalation of the crisis, revenues were
too weak to absorb the lower costs. MIB recorded an operating loss
of € 64 m for 2008 (after an operating profit of € 238 m in the previous
year).
Bank Austria · Annual Financial Statements 2008
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