Annual Financial Statements 2010 of Bank Austria

Management Report of UniCredit Bank Austria AG
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 and 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%.
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 UniCredit Bank Austria AG’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.
UniCredit Bank Austria AG 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.
Credit risk
Net writedowns of loans and provisions for guarantees and
commitments in 2010 continued to reflect differences in the speed of
recovery in the various segments.
In the Corporates & Investment Banking segment, corporate
restructuring activities were very successful, leading to significant
releases of loan loss provisions especially in the first six months of
2010. At € 150.8 m, net writedowns of loans and provisions for
guarantees and commitments in this business segment were
reduced to a level slightly exceeding one half of the previous year’s
figure. Loans newly transferred to Special Credit units declined
significantly as the year progressed, and this will also lead to a
decrease in impaired loans with some time lag.
The strong rise in unemployment in 2009 was expected to push up
the provisioning charge in the sub-segments of Mass Market and
Affluent customers with some delay. However, such an increase did
not materialise: overall, net writedowns of loans and provisions for
guarantees and commitments in the Family & SME Banking
segment even declined noticeably, to about € 210 m. The
provisioning charge decreased although an additional writedown
was made on foreign currency loans in the fourth quarter as the
value of the Swiss franc rose significantly; among other reasons, the
additional writedown was made in anticipation of the amount
outstanding under loans with final maturity in view of further
appreciation of the Swiss franc. Quite generally, a large number of
advisory talks were held with customers in this segment in several
waves in order to evaluate the new situation and the credit risk
arising for the bank from this type of loan on a timely basis. At any
point in time, the risk-focused presentation (credit line in €, utilisation
in currency) shows the amount of the credit line originally granted to
the customer, the currency fluctuation allowed for when the loan was
granted, and the amount currently outstanding. The Small
Businesses sub-segment also made a substantial contribution to the
strong improvement in the overall provisioning charge in the Family
& SME Banking segment, with the provisioning charge in the Small
Businesses sub-segment declining to less than one half of the
previous year’s figure.
In 2010, net writedowns of loans and provisions for guarantees and
commitments in the CEE segment in UniCredit Bank Austria AG
were € 312 m. This amount includes risk assumptions for the Baltic
countries and for Slovakia, and a provision for the guarantee given
for the Kazakh loan portfolio to support the local subsidiary.
Moreover, as in previous years, writedowns were made on CEE
exposures booked in Vienna, especially in the Real Estate subsegment.
Credit risk methods and instruments
Very important factors in the credit approval process are a detailed
assessment of risk associated with each loan exposure, and the
customer’s credit rating in particular. Every lending decision is based
on a thorough analysis of the loan exposure, including an evaluation
of all relevant factors. Following the initial loan application, the
bank’s loan exposures are reviewed at least once a year. If the
borrower’s creditworthiness deteriorates substantially, shorter review
intervals are obligatory.
Bank Austria – Annual Financial Statements 2010 174