Annual Financial Statements 2011 of Bank Austria

Management Report
Management Report (CONTINUED)
� The long-term outlook for the CEE region is now, after the fundamental
reappraisal of banking business in 2011, perceived differently.
The convergence process has made substantial progress in
the 22 years after the opening of the East, and entails weaker
growth rates after the boom years – even if these are still double
the growth rates of Western Europe. This has increased sensitivity to
cyclical influences and disruptions in capital movements. But in most
CEE countries, especially in the large economies, the upturn of the
banking sector remains assured, even if it may be more moderate
than in the past.
But there are some countries with a promising economic environment
where the restructuring of the banking sector is not yet complete,
or where there is strong dependence on external capital
inflows. In Kazakhstan NPL ratios (non-performing loans as a percentage
of gross lending volume) will remain disproportionately high
for some time, which is partly due to local legislation. Ukraine is suffering
from a large external funding gap, and the domestic circular
flow of money is only slowly gaining momentum, not least on account
of political uncertainty. When, in 2011, international banks reevaluated
risks and were confronted with the new regulatory requirements
and more difficult funding conditions, they also adjusted their plans
for exposed countries to the new scenarios, a process which involved
impairment losses on goodwill.
In Hungary, a number of amendments to the Constitution and to the
legal framework were not entirely acceptable to the EU and the IMF,
the country’s most important lender. Hungary’s credit rating was
moreover downgraded to speculative investment, which made the
rollover of its large foreign debt much more expensive and triggered
a sharp depreciation of the forint. This led to the adoption of countermeasures
which aggravated the crisis. Finally, the levy on banks
introduced in 2010 was compounded by efforts to ease the solvency
problems of private households through administrative procedures,
placing a larger burden on banks which acted as lenders. The Home
Protection Act passed in May 2011 among other things gave mortgage
debtors the option of rescheduling their debt at fixed exchange
rates. In September the government went even further with the
option of early repayment of loans denominated in euro or foreign
currency at a fixed mandatory conversion rate. In December 2011,
the government and the Hungarian Banking Association reached
agreement on easing the burden on banks, permitting the latter to
offset 30% of the losses thereby incurred against the levy on banks
in 2012.
� In the past, CEE integration was accompanied by considerable
exchange rate stability and occasionally even by strong currency
appreciation. Movements in CEE currencies in 2011, however, were
volatile. Especially the shift from long-term capital inflows to shortterm
portfolio investments increased sensitivity to changes in sentiment
among international investors. While depreciation of the CEE
currency basket until the middle of April reflected the euro’s
strength and the US dollar’s weakness at the time, CEE currencies
lost ground against both currencies in the third quarter (see chart
below). Weighted by contributions to operating income of CEE operations,
CEE currencies (in Bank Austria’s perimeter, without Poland)
depreciated by about 5 ½% in the reporting period (based on a comparison
of year-end data) against both the euro and the US dollar.
It should be noted in this context that this average figure includes
two euro area countries and three countries with de facto fixed
exchange rates against the euro. Overall developments were strongly
influenced by the Turkish lira, which has a strong weight in the
calculation and showed autonomous depreciation of 15.3% against
the euro and 18.0% against the US dollar (year-end 2011 compared
with year-end 2010). The Hungarian forint depreciated at double-digit
rates against the euro and the US dollar (as the situation in the
country came to a head in the autumn of 2011). The currencies of
those countries whose exchange rate regime is also guided by the
US dollar strengthened against the euro as the year progressed
(mainly Kazakhstan, Russia and Ukraine).
A comparison of annual averages for 2011/2010, which are used
in translating local income statements, shows that CEE currencies
(Bank Austria-weighted) depreciated by 4.5% against the euro. The
main factor for this development was exceptionally strong depreciation
of 14.5% of the Turkish lira. The currencies of Kazakhstan and
Ukraine also depreciated significantly (by 4.2% and 5.1%, respectively)
in average terms, whereas changes in year-end exchange
rates were less pronounced.
CEE currency movements
108
106
104
102
100
98
96
94
92
90
index 2010 average = 100
avg.
avg.
avg. –4.5 %
Dec –5.3 %
Appreciation/
depreciation
against the US dollar
avg.
Appreciation/depreciation against the euro,
weighted by countries’ contribution to CEE operating income
of Bank Austria in 2010
avg. +0.4 %
Dec –5.4 %
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2010 2011 2012
Bank Austria · Annual Financial Statements 2011
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