Annual Financial Statements 2010 of Bank Austria

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Management Report Management Report (CONTINUED) Adjustment measures and strategic projects in 2010 � In 2010, UniCredit Bank Austria AG concentrated on more swiftly implementing the enhanced UniCredit business model in response to changes in the banking environment. The key features of the business model were, and are: greater customer centricity, a stronger focus on regional business, a simplification of the range of products offered to customers, and sustainable development by giving priority to commercial business. This includes increasing the efficiency of back-office operations through the cross-regional bundling of production and settlement activities in specialised units or service units for the purpose of achieving cross-regional synergies. The measurement of customer satisfaction and the subsequent alignment of our services had a positive impact on day-to-day business with customers. In 2010, we took steps to maintain reputation levels and regain public confidence in banks which was eroded by the financial market crisis: we simplified the range of products, aligned our internal sales and performance incentives more closely with sustainability objectives, and revised the way the bank presents itself to the public. Bank Austria underlined its intention to show solidarity in society by launching a number of initiatives and a new programme for sponsorbased projects. In the area of personnel management we had adjusted our performance-based incentive system before the implementation of the relevant EU Directive, and placed greater emphasis on (constantly measured) customer satisfaction and other sustainable success criteria. The incentive system at top management level was realigned with long-term performance criteria, on the basis of deferred payments with the possibility of making downward adjustments. � The “One4C” (One for Clients) project was the strategic guideline for the entire UniCredit Group in 2010, and therefore also for Bank Austria. In line with this project, we streamlined the organisational structure with a number of individual projects and more closely defined the sub-segments of our sales operations according to customer centricity, simplicity and specific customer needs. In 2009 we had combined customer-related capital markets business and ongoing commercial business with corporate customers, which resulted in the creation of the Corporate & Investment Banking Division (CIB), and we started to bundle the entire target group comprising the top segment of private customers within the Private Banking Division; the necessary transfer of customers from other business segments has been completed. Priority in 2010 was given to creating specialised units for small and medium-sized companies (SMEs). We developed a separate service model for SMEs (according to qualitative criteria and/or turnover between € 3 m and € 50 m) with a decentralised sales network. This was implemented step by step at selected branches and became fully operational at the beginning of 2011, when the SME sub-segment was transferred from the CIB Division to what was still known as the Retail Division, but which was subsequently renamed Family & SME Banking Division (F&SME) to reflect the larger size of this business segment. In Central and Eastern Europe (CEE) we continued to press ahead with the divisionalisation process in selected countries, based on local market potential. In this context we gave greater attention to a pragmatic, selective approach and enlarged the branch network only in countries where this was warranted upon reaching a certain size threshold and with a foreseeable market outlook. This was primarily the case in Turkey, Romania, Russia, Bulgaria, Serbia, Hungary and Croatia. As we also focussed on high-growth regions within individual countries, the growth initiative involved branch office closures in areas with an excessively dense branch network and a slight reduction in the total number of branches. Business policy in CEE was geared to funding lending business on a local basis, notwithstanding the pursuit of a cross-regional approach. � The most far-reaching changes in 2010 concerned investment banking operations, which – across the entire UniCredit Group – were made to focus on customer-driven business and on the related trading activities. As was agreed at the time of the business combination which resulted in the creation of UniCredit Group in 2005, UniCredit Bank AG (the former Bayerische Hypo- und Vereinsbank), Munich, is responsible for this cross-regional competence centre, which conducts business from a number of different locations. For this reason, we sold UniCredit CAIB AG to UniCredit Bank AG in June 2010. This banking subsidiary was made to concentrate on trading activities not related to customer business in the period preceding its sale. Customer-driven investment banking activities were reintegrated in Bank Austria, which was also assigned responsibility for the further conduct of the bank’s Treasury operations and liquidity management. This also involved a reintegration of staff. The sale of UniCredit CAIB AG and its subsidiary UniCredit CAIB Securities UK Ltd. to UniCredit Bank AG, Munich, is a transfer of business interests under common control, and not a business combination for which IFRS 3 would be applied. UniCredit CAIB UK Ltd. was liquidated as of 31 May 2010. According to the extensive contractual documentation of this restructuring measure, Bank Austria now uses the products and services of UniCredit Bank AG (the former Bayerische Hypo- und Vereinsbank), Munich, instead of those of CAIB. As in the case of other intra-group transfers, continuity is assured by Bank Austria’s participation in profits of the “Markets” global product line of UniCredit’s CIB Division for a period of five years. Claims to future revenues constitute a derivative for accounting purposes and the valuation results are recognised in net trading, hedging and fair value income. The reorganisation and new division of labour is based on one of the cornerstones of the UniCredit business model: the cross-regional bundling of production while continuing to focus on local customer centricity. In this way Bank Austria meets the size threshold for participation in international financial markets and enhances its competitive abilities, while maintaining the principle of “one face to the customer”, i.e. offering local integrated customer services from a single source. Bank Austria · Annual Financial Statements 2010 12
Management Report Management Report (CONTINUED) Income statement of Bank Austria for 2010 compared with the previous year Bank Austria’s income statement for 2010 reflects the underlying pattern of economic trends: � Operating performance shows a moderate upswing of commercial banking business (with wide regional variations in Central and Eastern Europe). The effects of the sale of UniCredit CAIB have a discernible influence on the overall picture. � The repercussions of the crisis years are tapering off: this led to a significant decline in net writedowns of loans and provisions for guarantees and commitments in 2010. However, charges for non-operating items remained high, especially in light of credit risk trends in several highly exposed countries, which are lagging the business cycle. � In 2010, valuation adjustments entailing the recognition of impairment losses on goodwill in the Corporate Center prevented an improvement in profits. Profit before tax for 2010 reached € 1,146 m after € 1,335 m in 2009. The decrease of € 189 m or 14% compared with the previous year resulted from the € 360 m increase in impairment losses on goodwill. The goodwill impairment charge recognised in the income statement for 2010 was € 378 m, of which € 359 m related to JSC ATF Bank, Kazakhstan. A low charge for goodwill impairment was accounted for by the local bank in Latvia. In 2009, the total impairment loss on goodwill amounted to € 19 m. Without the goodwill impairment charge, profit before tax would have improved by 13%. The higher charge for income tax translated into an even more pronounced decline of € 355 m or 32% in consolidated profit (net profit attributable to the owners of Bank Austria) to € 747 m for 2010. The combined effects of the above factors are shown in the table and chart below: operating income (€ 7,208 m) was only 1% lower than in the previous year. In this context one should note the base effect resulting from significant trading-induced interest income gen- Profit before tax for 2010 compared with 2009 2009 AS PUBlIShEd erated in the first quarter of 2009 (and to a lesser extent, also in the second quarter of 2009). The trading activities of the former UniCredit CAIB, which are now included in the “Counterparts” product line following organisational changes, reduced net interest income by € 364 m compared with the previous year. Excluding this negative special effect, net interest income – from commercial banking operations – rose by 4%. The participation (recognised in the Corporate Center) in the profits of the UniCredit Markets product line is also connected with the UniCredit CAIB transaction, representing compensation for the disposal of these business activities. If this positive special effect is also excluded from the comparison with the previous year, the resulting revenue growth of 3% indicates a – moderate – increase in the performance from customer business. Based on unadjusted figures, operating profit was down by 5% to € 3,442 m. The € 189 m decrease resulted from the above special effects, which totalled minus € 288 m; on an adjusted basis, operating profit grew slightly, by 3% to € 3,729 m. Net writedowns of loans and provisions for guarantees and commitments in 2010 were down by € 428 m or 19% from the previous year; at € 1.8 bn they were still exceptionally high. The total of provisions for risks and charges, restructuring costs and net income from investments – i.e. other “non-operating” items – was down by a net € 68 m. This resulted in an increase of € 360 m in the combined figure for the items between operating profit and profit before tax compared with the previous year. This improvement was offset by impairment losses on goodwill and other non-operating expenses in 2010, which were up by exactly the same amount, € 428 m, on the previous year. This means that the € 458 m improvement (adjusted, i.e. generated in commercial banking operations) was more than offset by a net charge of € 647 m reflecting the combined special effects. On the basis of adjusted figures, profit before tax would have increased by 34% instead of falling by 14%. UNdErlyINg ChANgE 2010 ONE-OFFS tOtAl ChANgE € M % AdjUStEd € M € M % 2010 AS PUBlIShEd Net interest income 4,877 +188 +4% 5,065 –364 1) –176 –4% 4,701 Net non-interest income 2,369 +62 +3% 2,431 +76 2) +139 +6% 2,507 Operating income 7,245 +250 +3% 7,495 –288 –38 –1% 7,208 Operating expenses –3,615 –151 +4% –3,766 +0 –151 +4% –3,766 Operating profit 3,630 +99 +3% 3,729 –288 –189 –5% 3,442 Net writedowns of loans –2,267 +428 –19% –1,839 +0 +428 –19% –1,839 Other non-operating items –29 –68 >100% – 97 –360 3) –428 >100% –456 Profit before tax 1,335 +458 +34% 1,793 –647 –189 –14% 1,146 1) Decrease in trading-induced interest income (which mirrors the restructuring of UniCredit CAIB and the exceptional interest rate environment at the beginning of 2009). / 2) Participation in profits of the Markets product line of UniCredit (compensation for the sale of UniCredit CAIB) – 1) and 2) are related to proprietary trading, which has been concentrated in a specialised UniCredit competence centre. / 3) Increase in impairment losses on goodwill. Bank Austria · Annual Financial Statements 2010 13
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Annual Financial Statements 2010 of Bank Austria

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