Annual Financial Statements 2010 of Bank Austria

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Consolidated Financial Statements in accordance with IFRSs E – Risk report (CoNTINuED) E.4 – Counterparty risk Bank Austria has made further efforts to refine the risk management model for derivatives, securities lending and repurchase agreements. The model was refined especially with regard to validation and backtesting. For the purposes of portfolio management and risk limitation in the derivatives and security financing business with banks and customers, Bank Austria uses an internal counterparty risk model (IMM) based on a Monte Carlo path simulation to estimate the potential future exposure at portfolio level for each counterparty. In 2010, the requirements which the Austrian supervisory authority specified in respect of the counterparty risk model when it approved the model were met. The relevant report on compliance with the requirements was sent to the Austrian Financial Market Authority (FMA) at the beginning of the fourth quarter of 2010; from Bank Austria’s perspective, the approval process was thereby successfully completed. In addition to compliance with the requirements, further CEE countries were included in the model with a focus on risk management, not yet on regulatory approval. The bank took account of the growing importance of counterparty risk by creating a separate unit for this purpose within Market Risk at the beginning of 2010. The calculations are based on market volatility, correlations between specific risk factors, future cash flows and stress considerations. Netting agreements and collateral agreements are also taken into account for simulation purposes. The simulation calculations are performed for all major types of transactions, e.g. forward foreign exchange transactions, currency options, interest rate instruments, equity/bond-related instruments, credit derivatives and commodity derivatives. Other transactions are taken into account with an add-on depending on factors such as maturity. The bank applies a confidence interval of 97.5%. At the end of 2010, derivative transactions, repurchase agreements and securities lending transactions resulted in the following exposures: Exposures (€ bn) Austria 2.68 CEE 1.96 tOtal 4.64 In addition to further refinement of the model (in 2010 especially through CVA – Credit Valuation Adjustment), regular separate reporting on counterparty risk was introduced with a view to informing Bank Austria’s Market Risk Committee and Derivative Committee (DECO) of current exposure trends and providing additional information relevant to risk management. An example is reporting on stress test calculations. Moreover, backtesting is performed at regular intervals, at the level of individual counterparties and at overall bank level, in order to check the quality of the model on an ongoing basis. Line utilisation for derivatives and security financing business of customers is available online in WSS (“Wallstreet”), the central treasury system, on a largely group-wide basis. In addition to determining the potential future exposure, the path simulation also enables the bank to calculate the average exposure and the modified average exposure pursuant to Basel 2 (exposure at default), as well as the effective maturity of the exposure to each counterparty. This makes it possible to integrate counterparty risk in an internal model compliant with Basel 2. Bank Austria additionally limits the credit risk arising from its derivatives business, repurchase agreements and securities lending business through strict use of master agreements, the definition and ongoing monitoring of documentation standards by legal experts, and through collateral agreements and break clauses. Management takes proper account of default risk, especially because the relevance of this risk category has increased and on the basis of experience gained in the international financial market crisis, despite the good average credit rating of our business partners. Bank Austria · Annual Financial Statements 2010 124
Consolidated Financial Statements in accordance with IFRSs E – Risk report (CoNTINuED) E.5 – Credit risk Breakdown of financial assets by portfolio and credit quality (carrying value) (€ m) pOrtfOliO/quality NONperfOrmiNg lOaNs dOubtful assets baNKiNg grOup Other cOmpaNies restructured expOsures past-due Other assets impaired Other tOtal Financial assets held for trading 10 – – – 4,286 – 8 4,304 Available-for-sale financial assets 3 13 – 17 16,999 – 512 17,544 Held-to-maturity financial instruments – – – – 4,446 – – 4,446 Loans and receivables with banks 2 16 – – 19,703 – 29 19,749 Loans and receivables with customers 2,378 3,587 276 197 123,608 – 47 130,093 Financial assets at fair value through profit or loss – – – – 304 – – 304 Financial instruments classified as held for sale – – – – – – – – Hedging instruments – – – – 2,449 – – 2,449 tOtal 31 december 2010 2,393 3,616 276 214 171,794 – 595 178,888 Breakdown of financial assets by portfolio and credit quality (gross and net values) (€ m) pOrtfOliO/quality grOss expOsure impaired assets perfOrmiNg specific WritedOWNs Net expOsure grOss expOsure pOrtfOliO adJustmeNts Net expOsure tOtal (Net expOsure) Financial assets held for trading 10 – 10 X X 4,294 4,304 Available-for-sale financial assets 40 7 33 17,512 1 17,511 17,544 Held-to-maturity financial instruments – – – 4,446 – 4,446 4,446 Loans and receivables with banks 79 61 18 19,731 – 19,731 19,749 Loans and receivables with customers 12,478 6,040 6,438 124,552 896 123,655 130,093 Financial assets at fair value through profit or loss – – – X X 304 304 Financial instruments classified as held for sale – – – – – – – Hedging instruments – – – X X 2,449 2,449 tOtal 31 december 2010 12,607 6,108 6,499 166,241 897 172,389 178,888 On-balance sheet and off-balance sheet exposure to banks: gross and net values (€ m) expOsure types/amOuNts grOss expOsure specific WritedOWNs pOrtfOliO adJustmeNts Net expOsure On-balance sheet exposure Non-performing loans 43 39 X 4 Doubtful loans 25 10 X 16 Restructured exposures 12 12 X – Past due – – X – Other assets 26,782 X 1 26,781 total 26,863 61 1 26,801 Off-balance sheet exposure Impaired 27 1 X 25 Other 25,770 X – 25,770 total 25,797 1 – 25,797 tOtal 31 december 2010 52,660 62 1 52,598 Bank Austria · Annual Financial Statements 2010 125
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