Annual Financial Statements 2010 of Bank Austria

Management Report of UniCredit Bank Austria AG
Demand from several countries in Central and Eastern Europe, the
Czech Republic and Slovakia in particular, also picked up in
response to the global recovery. In 2010, the Austrian manufacturing
sector increased its output by 6.5%. Capacity utilisation in this sector
consequently rose to over 83% by the end of 2010, thus exceeding
the multi-year average, a development which is unique in the euro
area. It was only later in the year, and somewhat hesitantly, that the
strong momentum of recovery spread to the domestic economy. The
prevailing uncertainty kept investment activity at a low level for a
long time; restraint on capital spending gradually disappeared only
in the second half of 2010. Investment in equipment was still down
by about 3% for 2010 as a whole. Private consumption held up well
(down by only 1% in real terms) as developments in the labour
market were comparatively favourable, with employment up by 0.7%
and the unemployment rate declining from 4.8% in 2009 to 4.4%.
Retail sales accelerated towards the end of the year, but a slightly
negative trend in real wages (less overtime work, more flexible
employment arrangements) curbed growth in 2010. As a result, all of
the marked increase in the inflation rate to an average 1.9% for
2010 (2009: 0.5%) was due to external factors (rising prices for
commodities).
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. 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 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. 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. 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. 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 CEE
government bonds (EMBI/Europe 270 bp at year-end 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 development was
supported by countries which export raw materials: Russia (+9.6%),
Ukraine (+6.4%) and Kazakhstan (+5.4%), whose currencies take
their bearings from both the euro and the US dollar. The currencies
of the remaining countries, notably Turkey (+8.3%) and the Czech
Republic (+4.5%), also strengthened against the euro or remained
unchanged; only Serbia’s currency depreciated more heavily (–
8.2%).
Lending volume in the CEE region is likely to have expanded by no
more than 11% in 2010; this compares with growth of over 30%
before the crisis broke out (2008: 32%, local currency, on a weighted
basis). In some countries, the banking sector even experienced
excess liquidity as a result of weak demand. Deleveraging and
competition for deposits continued to have priority only in countries
with a particularly large local financing gap, such as the Baltic states.
The credit risk cycle lagged behind the business cycle in 2010 and
mirrored the divergent trends. Turkey was the first country where
loan losses were past their peak by the end of 2009, and which not
only recorded a decline in additions to, but also an absolute
decrease in, non-performing loans. In most countries the proportion
of non-performing loans (NPL ratio) continued to rise in 2010, to
levels which were significantly higher than before the crisis. The NPL
ratio is likely to have peaked at the end of 2010/beginning of 2011;
in Kazakhstan and Latvia the peak will probably occur later, in the
second half of 2011. The equity capital ratios of banks in Central
and South-East Europe were higher than before the crisis as profits
were retained and because expansion was unusually weak; the
ratios were moreover well above the statutory minimum levels. In the
former CIS countries – Russia, Kazakhstan and Ukraine – the
capital buffers of state-controlled banks were increased through
national capitalisation programmes; the local banking sector is still
being restructured. Overall, the challenges for CEE banks’
profitability in 2010 were more or less equal to those of 2009: while
there was a slight improvement in the provisioning charge – except
in the problem countries –, the delayed upturn was responsible for
lower revenue growth, funding costs were still high, and credit
demand was slack (and limited to low-margin segments). Banking
business in the CEE countries still has significant catching-up
potential (general prosperity gap, disproportionately low financial
intermediation, low level of market penetration with banking
services). However, as a result of the economic and financial market
crisis, the time horizon of high growth expectations in the boom
years had to be extended in 2010, and growth expectations had to
be reduced in favour of moderate scenarios.
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