Annual Financial Statements 2010 of Bank Austria

Management Report
Management Report (CONTINUED)
according to restated figures – grew by only € 38 m or 3%. In CEE,
operating expenses rose by € 177 m or 9%; at constant exchange
rates, the increase was 5.5%. Cost trends in CEE reflect the targeted
expansion of sales channels and the cross-regional bundling of
product development and back-office functions. Initiatives in mobile
banking services and the opening of new branches frequently involve
eliminating inefficiencies and restructuring branch networks which
have grown over many years, e.g. in Russia, and redimensioning
administrative structures which are too large, e.g. in Kazakhstan and
Ukraine. Operating expenses in Turkey rose by 15% in euro terms or
6% in local currency; this cost increase is justified because the operations
in Turkey achieved the strongest business expansion (average
risk-weighted assets up by 19% in euro terms/up by 10% in local
currency) and it also reflects investment in expanding the branch
network, for which the bank has to pay a tax on branches. Hungary
is a special case with cost growth of 29%. Without the local levy on
banks, which is included in other administrative expenses, costs
would have increased by 5.4%, or by 3.5% in local currency.
In Russia, currency appreciation was the main factor (+16%, in
rouble terms +6%). In Ukraine (+13%/+7%) training costs related
to IT modernisation were a significant item, and costs in Kazakhstan
(+9% / +3%) also reflected special effects resulting from the
reform of the deposit guarantee scheme. The expansion of the CEE
sub-holding functions and Vienna-based divisional head offices for
the CEE subsidiaries (+9%) had no significant impact on costs. The
cost/income ratio in CEE (45.8%) continued to be below the average
for the bank as a whole. In the Corporate Center, which also comprises
services for Global Banking Services and internal administrative
expenses as well as settlement of accounts with near-shoring
service providers, operating expenses were reduced by 7%.
Operating expenses (€ m)
2010 2009 ChANgE
Breakdown by segment:
Austrian customer business 1,334 1,296 +38 +3%
Cost/income ratio 52.8 46.6
Central Eastern Europe 2,128 1,951 +177 +9%
Cost/income ratio 45.8 42.2
Corporate Center 305 327 -23 -7%
Operating expenses 3,766 3,615 +151 +4%
Cost/income ratio 52.3 49.9
Breakdown by type of costs:
Staff costs 1,931 1,894 +37 +2%
Other, mainly administrative,
expenses *) 1,835 1,721 +114 +7%
*) Other administrative expenses (2010: € 1,527 m), recovery of expenses, amortisation,
depreciation and impairment losses on tangible and intangible assets.
➔ In 2010, operating profit was € 189 m or 5% below the figure
for the previous year (adjusted for one-off effects, operating profit
rose by 3%). As mentioned before, in Austria this reflects the decline
from the good performance in 2009 (operating profit generated by
Austrian customer business segments down by € 291 m or 20%, of
which CIB down by € 245 m or 21%). The year-on-year decrease of
€ 148 m or 6% in operating profit in the CEE business segment is
explained by the fact that net trading income in CEE returned to a
more normal level (down by € 351 m or 71% compared with 2009).
� Current customer business has been recovering since the second
half of 2009, while the situation in net writedowns of loans and
provisions for guarantees and commitments only started to improve
a year later. As the time lag is due to the logical phase shift of the
credit risk cycle to the business cycle, this development was characterised
by strong regional variations.
After rising sharply in 2009, net writedowns of loans and provisions
for guarantees and commitments declined by € 428 m or
19% compared with the previous year. In some countries and for
various industries, loan loss provisions were released in the reporting
year. But the income statement was still impacted by a high provisioning
charge which totalled € 1,839 m: in 2010, net writedowns of
loans and provisions for guarantees and commitments (i.e. additions
to and releases from loan loss provisions, and direct write-offs less
recoveries of loans previously written off) still absorbed 53% of the
operating profit, after 62% in the previous year. The cost of risk (provisioning
charge measured as a proportion of average loans to customers)
declined from 178 basis points (bp) to 144 bp.
Net writedowns of loans and provisions for
guarantees and commitments
(Charge, minus denotes improvement) 2010 2009 ChANgE
Bank Austria · Annual Financial Statements 2010
(€ m)
Bank Austria as a whole 1,839 2,267 –428 –19%
… Austrian customer business 384 549 –166 –30%
… CEE 1,454 1,718 –264 –15%
Cost of risk (in basis points) *)
Bank Austria as a whole 144 bp 178 bp –34 bp
… Austrian customer business 58 bp 81 bp –23 bp
… CEE 235 bp 287bp –52 bp
*) Provisioning charge/average loans to customers (net)
The Austrian business segments coped with the credit cycle better
than expected. In the reporting period, net writedowns of loans and
provisions for guarantees and commitments totalled € 384 m, after
an amount of € 549 m in 2009; this represents a decline of 30%.
Measured as a proportion of average loans to customers (net, based
on the figure in the statement of financial position), the cost of risk
fell from 81 bp to 58 bp. In the Family & SME Banking Division
(F&SME), where loan loss rates are fairly high across the cycle for
structural reasons, net writedowns of loans and provisions for guarantees
and commitments declined by 12% to € 212 m; the cost of
risk was 108 bp in 2010, much lower than in the previous year
(129 bp). Fears that rising unemployment would, with a time lag, lead
to a wave of loan losses in business with private customers were fortunately
not realised. Moreover, there was a shift in the portfolio
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