Annual Financial Statements 2008 of Bank Austria

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Consolidated Financial Statements: Management Report of the Group Management Report 2008 (cONTINUED) Operating income in 2008 by country group € m 2008 SHARE +/– € m +/– % CEE business segment 1) 4,736 100 % + 1,369 + 41 % Central Europe 2) 879 19 % + 117 + 15 % South-East Europe (SEE) 3) 1,392 29 % + 186 + 15 % “Broader Europe” 4) 1,715 36 % + 384 + 29 % Recent acquisitions 5) 737 16 % + 707 5) 1) Difference in total: CEE headquarters in Vienna. 2) Slovakia, Czech Republic, Hungary, Slovenia. 3) Romania, Bulgaria, Croatia, Serbia and Baltics. 4) Russia and Turkey (proportionate share). 5) ATF Bank, Kazakhstan, consolidated since 1 December 2007; Ukrsotsbank, Ukraine, consolidated since 1 January 2008 A breakdown by revenue components indicates a steady trend: while the profile shows similar developments to those in the Group’s mature core markets (strong net interest income, weak net fees and commissions), growth is driven by the general expansion of the banking system: risk-weighted assets (average RWA) in the old perimeter increased by 27 % (if the recently acquired banks are included, average RWA rose by 45 %). Revenue components for 2008 compared with 2007 € m 0LD PERIMETER ACQUISITIONS 2008 +/– € +/– % 2008 Net interest income 2,544 + 416 + 20 % 524 Net fees and commissions Net trading, hedging and 1,037 + 110 + 12 % 127 fair value result 298 + 125 + 72 % 86 The strong increase in net interest income (old perimeter: + 20 %) was driven by volume expansion with satisfactory trends in margins; this applies to all country groups and all countries. Net fees and commissions grew by 12 %, a disproportionately low rate. The largest contribution to growth in this component came from Turkey (+ € 58 m / + 11 %) and especially Russia (+ € 162 m /+ 45 %). In 2008, the CEE Division also generated significantly higher net trading, hedging and fair value income: including the new banks, it reached € 384 m (without the new banks, € 298 m) after € 177 m in the previous year. This is an indicator of the commercial background of trading activities, reflecting the significance of instruments used for interest-rate and exchange-rate management in countries with large corporate banking operations. The best performance in this context (€ 171 m) and the strongest growth was achieved in Romania, followed by Russia (€ 74 m), Ukraine (€ 54 m) and Kazakhstan (€ 36 m). Costs in 2008 grew at a significantly lower rate than revenues in the previous year, both in the new consolidation perimeter (+ 29 %) and in the old perimeter (+ 13 %). As a result, the cost / income ratio improved on both definitions: from 51.4 % to 48.7 % (old) and from 51.4 % to 47.2 % (new). The cost / income ratio in the CEE business segment was significantly lower than the average for the bank as a whole (54.4 %). Operating expenses in 2008 by country group € m 2008 +/– € m +/– % C / I % 08 CEE business segment 2,234 + 504 + 29 % 47.2 % Central Europe 407 + 35 + 9 % 46.3 % SEE 713 + 90 + 15 % 51.2 % “Broader Europe” 719 + 90 + 14 % 41.9 % Acquisitions 294 + 283 39.9 % This is to be seen against the background of our ongoing branch network expansion programme, investments aimed at unlocking further cross-regional synergies, and the rebranding process. In our Three- Year Plan presented in the middle of 2008, we announced the opening of about 1,200 new branches, depending on future economic developments. In September 2008 we put the plan on hold for 2009 until further notice. In 2008, we opened 433 new branches, bringing the total number in our network to 2,824. The programme focuses on growth markets: we opened 176 new branches in Turkey, where a new branch reaches the break-even point in less than one year, on average. Romania is in second place in the old perimeter, with 101 new branches opened in 2008, followed by Hungary (34), Russia (20), Serbia (22) and Bulgaria (10) as well as the new markets Ukraine (24) and Kazakhstan (23). � The deterioration in economic conditions in 2008 is mainly reflected in the “non-operating” items between operating profit and profit before tax. Net writedowns of loans and provisions for guarantees and commitments were € 324 m in the old perimeter in 2008, up by one half on 2007; the reported figure was € 537 m (2007: € 211 m). Net writedowns of loans and provisions for guarantees and commitments in 2008 by country group € m 2008 +/– € m +/– % R / E % 08 CEE business segment 537 + 327 >100 % 17.5 % Central Europe 67 + 16 + 30 % 11.7 % SEE 89 + 41 + 84 % 10.9 % “Broader Europe” 168 + 55 + 48 % 15.2 % Acquisitions 214 + 218 40.9 % Bank Austria · Annual Financial Statements 2008 27
Two-thirds of the increase in the provisioning charge resulted from the consolidation in 2008 of ATF / Kazakhstan (€ 124 m) and USB / Ukraine (€ 89 m). The consolidation effect should not obscure the fact that the risk position in these countries is precarious. The risk / earnings ratio of these two banking subsidiaries is 50 % and 32 %, respectively, the cost of risk is close to 240 basis points in both cases. In the Kazakh banking sector, work on adjusting the loan portfolio has been underway for some time, recently in a more challenging environment. In Ukraine, economic trends are the main reason for the deterioration. Added to country-specific factors is the strict application of UniCredit risk management methodologies with a view to putting the loan portfolio on a healthy basis. Based on the old consolidation perimeter, net writedowns of loans and provisions for guarantees and commitments were also substantially higher, at € 324 m, than in the previous year (€ 215 m). Of the € 109 m increase, € 37 m was accounted for by Russia, in connection with credit risk resulting from large trading operations. Romania (+ € 22 m) and the Baltics (+ € 12 m) also recorded strong increases. In the other countries, the rising provisioning charge is currently well in line with general business expansion and the focus on retail banking and business with medium-sized companies. Benefiting from diversification, the risk / earnings ratio is still comparatively low, at 17.5 %, also in the extended consolidation perimeter. The cost of risk, i.e. the ratio of provisioning charge to average lending volume, was 90 basis points in the CEE business segment (new) in 2008, compared with 51 basis points in the previous year. Net income from investments was significantly larger in 2008 (€ 123 m) than in the previous year (€ 20 m). Most of the increase was due to gains on the sale of Hypo Stavebni, our building society in the Czech Republic, and of the equity interest in the Budapest Stock Exchange. ➔ Operating profit was € 2,502 m, up by € 864 m or 53 % on the previous year. In 2008, the CEE Division generated a profit before tax of over two billion euros (€ 2,019 m), an increase of 50 % over the previous year; without the banks in Kazakhstan and Ukraine, which were included for the first full year, the increase in profit before tax was 35 %. Return on equity (ROE before tax) rose from 18.9 % to 21.3 %. Risk-weighted assets including the two new banks grew by 45 %. RWA productivity – i.e. the ratio of revenues to risk-weighted assets – declined only slightly compared with the previous year (7.00 % as against 7.23 %). Profits (+ 50 %) rose more strongly than riskweighted assets (+ 45 %). Volume expansion went hand in hand with improved capital efficiency: allocated equity increased by 34 %, from € 7.1 bn to € 9.5 bn (annual averages). Value creation beyond the cost of capital (marginal Economic Value Added) in the CEE business segment amounted to € 783 m, up by 35 % on the previous year. RARORAC was 12.5 %. � At the editorial close of this report, the capital market is taking a critical view of banking business in CEE in connection with the predominantly macroeconomic risks involved. This scepticism is reflected in further increases in credit spreads on debt instruments of CEE countries and in continued depreciation of several currencies. In view of the balance-of-payments problems experienced by some countries, coordinated action by public and international institutions is important to maintain capital flows into the region. Nevertheless, regardless of the current difficult conditions, Bank Austria is convinced of the medium-term and long-term potential of the CEE region. The economic convergence process as growth driver remains intact and the deepening of financial markets is an additional structural factor supporting the outlook for banking business on a sustained basis. (More details are given in the Outlook section.) We will continue to pursue the integration of our network – while maintaining local responsibility for customer business – by implementing our divisional business model and bundling production and back-office functions. Bank Austria · Annual Financial Statements 2008 28
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1. Stock Options MANAGEMENT BOARD/S
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Annual Financial Statements 2008 of Bank Austria

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