Annual Financial Statements 2010 of Bank Austria

Management Report of UniCredit Bank Austria AG
Development of UniCredit Bank Austria AG 2010
1. Report on business developments and the economic
situation
1.1. Business developments
Economic situation and banking environment in our core
markets
The global economy grew by about 4.75% in 2010, after
contracting by 0.5% in the preceding year. After the implementation
of the anti-cyclical economic support programmes, which were
introduced to counteract the downturn in 2009, world trade provided
decisive impetus in 2010, with growth of 16% in the reporting year,
after a contraction of 11%. This time the drivers of the cyclical
reversal were the emerging markets, led by China, whose economy
grew by over 10%. Among commodities, the strongest price
increases were recorded for crude oil (+22%) and industrial metals
(+20%). The US economy, which used to act as global pacemaker
in previous years, also overcame recession and grew by 2.9% in
2010. But massive budget deficits as a result of measures aimed at
supporting the economy pushed the public debt ratio to 93%.
Despite the expansionary fiscal policy, unemployment remained at
an unusually high level of 9.4% and the real estate sector did not
recover to any significant extent, either. Therefore the Federal
Reserve went a step beyond the zero-rate policy by purchasing
substantial amounts of government bonds.
Average economic growth of 1.7% in the euro area in 2010 (after a
contraction of 4% in 2009) reflected huge differences: while the
German economy expanded at a rate of 3.6% (after shrinking by
4.7%), output in Spain, Ireland and Greece continued to contract.
The Austrian economy performed slightly better than the euro area
as a whole in both years, growing by 1.9% in 2010 after contracting
by 3.9% in 2009. The period from the end of April to the middle of
May saw the outbreak of the debt crisis in the euro area’s
peripheral countries: Greek government bonds fell to 65% of their
nominal value, with yields peaking at over 15% and 12% on 5-year
and 10-year bonds, respectively. The crisis continued to smoulder
even after the EU and the IMF put in place the € 750 bn rescue
scheme, after the European Financial Stability Facility (EFSF) was
established, and although dramatic austerity programmes were
initiated; sovereign ratings of highly-indebted low-growth countries
were reduced on several occasions. In November 2010, credit
spreads for Ireland (because of the restructuring of the country’s
banking sector), Portugal (in view of weak economic growth) and
Hungary (which refused IMF support) were between 4.8% and 6.0%.
Although Ireland and Greece used aid and guarantees under the
rescue scheme, which were provided against strict conditions, the
situation did not ease. The European Central Bank (ECB) therefore
adhered to its policy of low interest rates. In the course of the year, it
absorbed excess liquidity as money market dealings among major
international banks started to normalise. But the ECB continued to
allot bids in full at the fixed rate and thus supplied liquidity to the
banking systems of countries affected by the debt crisis. Unlike the
US and the United Kingdom, the ECB handled its “non-standard
measures” (purchases of government bonds and covered bonds) in
a highly restrictive manner. Spot and forward rates in money
markets rose in the final months of 2010, thereby only moving a little
closer to the key interest rate.
In the first nine months of 2010, financial markets focused on asset
classes which are – rightly or unjustifiably – seen as having the best
quality: benchmark bonds and gold. It was only in the final months of
2010 (and beyond the turn of the year) that risk tolerance rose
again, as the economic upswing gathered momentum and became
increasingly self-sustaining. The strong rise in benchmark bonds of
the euro area peaked at the end of August, when yields fell to an alltime
low of 2.09%. Yields subsequently rose to 2.97%, giving an
annual performance of 7.6%. Interest margins continued to narrow in
2010. The steepness of the euro yield curve, measured by the
interest rate differential between five-year benchmark bonds and 3month
money, became less pronounced, declining from 1.97
percentage points at the beginning of the year to one half of a
percentage point at the end of August, as interest rates in capital
markets fell rapidly; it was only in the fourth quarter that the
differential rose again slightly, to 1.20 percentage points at year-end
2010. Moreover, credit spreads for banks remained high, as did
liquidity and funding costs.
Credit spreads for non-financial corporate bonds, and also for
covered bonds and emerging markets bonds, hardly varied in the
course of 2010 compared with their levels in previous years; yearon-year,
they remained almost unchanged, reflecting stabilisation in
the corporate sector. The world stock index (MSCI / local
currency), which had recovered strongly in 2009 (+26.2%), moved
sideways until late summer before advancing in the remaining part
of the year (+8.3% in a comparison of year-end levels). Equity
markets in emerging economies outperformed those in other
countries from August onwards as capital inflows resumed.
Nevertheless, the EuroStoxx remained unchanged in a comparison
of year-end levels. The ATX advanced strongly (+16.4%), as did the
DAX (+16.0%) and the CEE blue chips (CECE +15.7%).
The public debt crisis flared up again and again, prompting support
measures at short notice and discussions of fundamental reforms.
All this failed to convince investors that the risk of debt rescheduling
in European debtor countries was dispelled. Therefore gold
continued its record-breaking run throughout the year, reaching an
all-time high of US$ 1,431 per ounce on 7 December 2010. Although
the Swiss central bank took temporary measures to contain the
appreciation of the Swiss franc against the euro, its value rose by
19.6% to a peak of CHF 1.2397 per euro on 30 December 2010.
The US dollar benefited significantly from European uncertainty until
the middle of the year, rising by 20.6% to a USD/EUR exchange rate
of 1.1875 on 7 June 2010; later in the year it eased again to reach
1.3377 at the end of 2010, a year-on-year increase of 7.0%.
Austria saw a stable economic recovery in 2010, with surprisingly
strong growth. While GDP was up by 1.9% in real terms, this did not
nearly compensate for the sharp downturn in the crisis year of 2009,
in which the economy contracted by 3.9%. This means that Austria
is among the countries experiencing the strongest growth in the euro
area. It should be noted, however, that the recovery was more or
less limited to the export sector in most of the year: net exports
accounted for close to 90% of economic growth. Austrian industry
benefited from the strong performance of the Asian and Latin
American emerging markets, mainly via supplies to the globally
oriented German economy.
Bank Austria – Annual Financial Statements 2010 159