Annual Financial Statements 2010 of Bank Austria

Management Report
Management Report (CONTINUED)
Credit demand in Austria remained weak in 2010. Adjusted for the
translation effect associated with the strong Swiss franc, lending
volume in Austria in 2010 declined slightly. Demand for housing
loans was very weak, though somewhat higher than in the previous
year. Repayments of consumer loans and SME loans exceeded new
business, leading to a slight decrease in total volume. Loans to corporate
customers remained constant until the middle of 2010 and
increased in the course of the second half of the year, in parallel
with the recovery in investment activity. Although lending rates and
deposit rates rose slightly towards the end of the year, bank customers
in Austria saw interest rate levels in 2010 which were
among the lowest in history. These developments reflected low
money market rates and the flat yield curve. Moreover, the average
period for which interest rates are locked in has shortened significantly
over the past years.
Although the Austrian economy recovered strongly in the course
of 2010, the repercussions of the sharp economic downturn in
2008/2009 still had an impact on business insolvencies. While the
total number of business insolvencies declined by about 8%, the
total liabilities of insolvent businesses rose by 17%. Insolvencies of
private individuals also increased in 2010, though not dramatically.
As income trends were moderate and consumer demand was relatively
robust, financial assets held by Austrian private households in
the first nine months of 2010 increased at only half the growth rate
seen in 2009. This development also reflects repayments of consumer
loans. Deposits showed a particularly weak trend, hardly
rising year-on-year. Somewhat stronger demand was again seen for
mutual funds, but this did not yet compensate for the outflows in
the period from mid-2007 to early 2009. New investments in
Industry driving growth
Monthly survey of purchasing managers in industry (PMI).
64
62
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56
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52
50
48
46
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36
34
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30
Germany
Austria
Euro area
50 = growth
threshold
2007 2008
2009 2010 2011
shares and bonds in 2010 were modest. The only sector which
continued to record steady inflows was life assurance, not least
thanks to long-term policies.
� Economic activity also picked up in Central and Eastern
Europe (CEE) in 2010, but progress varied significantly from region
to region. In addition, nearly all countries had to address legacies
and restore structural imbalances which were not so evident in the
boom years before 2009. For these reasons, banking business in
most CEE countries was impacted by weak credit demand and a
persistently high proportion of loan losses. Countries such as Turkey
and Russia, which showed an impressive performance, compared
with countries at the other end of the scale where the banking sector
is still being restructured (Kazakhstan, Ukraine).
The CEE region’s combined GDP expanded by a real 3.6% in 2010,
twice the rate of western Europe, after the region was severely hit
by the recession in the previous year (2009: –5.9% including
Poland / –6.9% without Poland). Developments in the individual
countries and country groups varied considerably depending on a
country’s size and degree of economic autonomy, the extent to
which a country has opened its economy, and on factors such as
production specialisation and the starting position before the onset
of the crisis. While the catching-up process resumed by the CEE
countries in 2010 still has significant potential, it is far from the
momentum seen before the financial and economic crisis. The “CEE
Development Model“ has changed: in the initial stages, inclusion in
the industrial division of labour often involved the rapid development
of externally financed key industries, while the strategic focus in the
post-recession years has been on strengthening the domestic economy
with the aim of reducing volatility, strengthening mass purchasing
power, and achieving monetary stabilisation.
In 2010, especially those countries which experienced a boom
before the crisis had to focus on reducing their substantial external
financing requirements (partly by curbing significant public deficits)
to make themselves less crisis-prone in a nervous international
climate. This was achieved with low wage rises, or in some cases
even nominal wage reductions, austerity programmes, and subsequently
a downturn in domestic economic growth. Thanks to the
timely implementation of specific measures – partly supported by
EU and IMF stand-by arrangements with conditions attached – and
because of initially low public debt levels (which averaged less than
40% of GDP) the CEE countries managed to emerge from the
public debt crisis unscathed. This is reflected in the performance of
share prices (MSCI Emerging Europe +16.3%), the stability of
interest-rate spreads on government bonds (EMBI+ 270 bp at yearend
2010 / 291 bp at year-end 2009), and especially exchange
rate developments. The CEE currencies of countries in our perimeter
of operations together (weighted by the operating profit of our local
subsidiaries) appreciated against the euro by 3.2% compared with
year-end 2009 and by 5.0% in average annual terms. This devel-
Bank Austria · Annual Financial Statements 2010
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