Annual Financial Statements 2011 of Bank Austria

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Preliminary remarks on the financial statements of UniCredit Bank Austria AG for 2011 UniCredit Bank Austria Aktiengesellschaft, the parent company of the Bank Austria Group, presents its balance sheet as at 31 December 2011 and its profit and loss account for the year ended 31 December 2011, as well as the management report and the notes pursuant to Austrian law. The consolidated financial statements of the Bank Austria Group for the financial year beginning on 1 January 2011 and ending on 31 December 2011 were prepared in accordance with International Financial Reporting Standards (IFRSs) published by the International Accounting Standards Board as adopted by the European Union. The annual report of the UniCredit Bank Austria Group, which includes, inter alia, the consolidated financial statements, as well as the Group’s management report and notes can be obtained, free of charge, under Investor Relations on the Internet (for contact details see page 251). The two reporting formats – under IFRSs and under the Austrian Banking Act (BWG) – cannot be compared with one another because the operations covered by the financial statements differ (consolidated financial statements versus separate financial statements of the Group’s parent company), and the valuation and accounting principles are also different. The annual report of the Group gives readers information on the status of the group of companies controlled by UniCredit Bank Austria AG. The consolidated financial statements provide international comparability, a fair value-based presentation of the financial position and performance, and more detailed information, for example through segment reporting. UniCredit Bank Austria AG’s separate financial statements, prepared in accordance with Austrian rules, fulfill other important functions, especially under supervisory aspects. They are also the basis for determining the profit available for distribution under Austrian law and the dividend of UniCredit Bank Austria AG. In making an economic evaluation of the bank, users of the separate financial statements should take into account especially the extensive financial relations between the parent company and its banking subsidiaries. For this reason the financial statements of the Group provide more comprehensive information. Bank Austria – Annual Financial Statements 2011 184
Management Report of UniCredit Bank Austria AG Development of UniCredit Bank Austria AG in 2011 1. Report on business developments and the economic situation 1.1. Business developments Economic situation and banking environment in our core markets The banking environment in 2011 was mainly determined by three factors: First, the economic slowdown: The global economy entered 2011 with a strong momentum gathered in the period of recovery after the recession seen in 2008/2009. In the first half of 2011, growth was stronger than predicted but then weakened in the remaining part of the year. Output in the industrial countries stagnated at a high level towards year-end without sliding back into recession. The economy in the euro area again benefited from the catchingup process in the Asian emerging markets. In China, growth again reached 9%, despite restrictive measures. Overall, the emerging markets recorded economic growth of over 6%. This trend mainly benefited the highly competitive European core countries, including Austria, and CEE countries whose industrial sector is closely integrated. Developments within the euro area were increasingly disparate in 2011, with marked differences between the core and the periphery. Germany achieved average annual growth of over 3%, while the economies of Spain and Italy grew by only 0.5%. The strong increase in core Europe reflected a strong momentum continuing from the previous year and an excellent performance in the first quarter of 2011. In the euro area as a whole, economic growth weakened from an annualised 3.1% in the first quarter to a slight decline in the fourth quarter; the average figure for 2011 was 1.6%. Second, the government debt crisis: Government debt accumulated over several decades, compounded by fiscal-policy measures taken to handle the crisis in 2008/2009, was suddenly seen by investors as unsustainable, especially against the demographic background and structurally weak growth in the mature industrial countries. The unprecedented loss of confidence was triggered by the protracted controversy over the US debt limit in the first half of 2011 and by the inclusion, at the end of July 2011, of a partial debt waiver by private creditors in the second support package for Greece. This quickly led to doubts about the sustainability of debt in other highly indebted countries. Irrespective of the fundamentals, rolling over government debt of these countries via the market became a problem, with interest rate spreads reaching high and partly prohibitive levels. Despite the countermeasures taken by the ECB, sovereign bonds suddenly became high-risk bonds, with a strong impact on the overall interest rate structure. Third, stricter regulation of the banking sector against the background of more difficult funding conditions: in view of the close interdependence of banks and their home countries, the government debt crisis rapidly spread to banks. Liquidity and medium-term funding via banks’ own issues became much more expensive, and so did the raising of equity capital in view of the sharp fall in prices of bank shares (EuroStoxx/Banks down by 38% year-on-year). Money markets also saw a decline in banks’ confidence in each other; as a result, clearing took place via the ECB euro system. These developments were accompanied by increasing regulatory pressure on banks: Based on stress tests carried out by the European Banking Authority in March/June and October/December, rules under the Basel 3 package were tightened and their application was brought forward, including the equity capital definitions and the target of a Core Tier 1 capital ratio of 9% to be met by the middle of 2012. As a result, banks had to build substantial risk buffers and increase their core capital. However, after reevaluating the medium- to longterm outlook in their markets, banks started to adjust their business models to the new environment in 2011. In many cases, these efforts involved a targeted reduction of assets and a focus on core commercial banking, especially the attraction of deposits, as well as strengthening the equity capital base. The stark contrast between the first and the second half-year was reflected in economic trends and in all segments and key indicators of financial markets. In the first half of 2011, strong economic growth coupled with inflationary pressure resulting from trends in commodity prices prompted the European Central Bank to raise key interest rates twice – at the beginning of March and as late as the beginning of June – to a level of 1.5%. When the government debt crisis came to a head in July/August, this triggered an abrupt trend reversal in all market segments. The credit ratings of the GIIPS countries (Greece, Ireland, Italy, Portugal and Spain) were downgraded, with Greece falling to CCC (S&P) on 13 June. On 18 July, the US was placed on review for possible downgrade, losing its AAA rating on 6 August, for the first time since 1941. Following the publication of the stress test results by the EBA on 15 July 2011, and subsequent to the European Council decisions of 21 July 2011, which for the first time provided for a voluntary remission of debt as part of the second support package for Greece, market strain escalated. Prices for Greek government bonds (mid-prices in per cent, five-year) fell from 75.45 (year-end 2010) via 53.42 (end of June 2011) and 42.67 (end of September 2011) to 23.25 (year-end 2011); yields, which are of little informative value, were around 50%. Scepticism spread from debtor countries like Greece and Portugal to such highly indebted countries as Italy and Belgium, and later also France, which were previously seen as being beyond doubt. The CDS spreads on long-term government bonds of the GIIPS group of countries – in pre-Lehman times around 60 basis points (bp) and in the middle of 2009 still below 100 bp – rose from an average of about 400 bp in the middle of 2011 to 1,200 bp by the end of the year. The creditworthiness of core European countries enjoying the top rating also came to be questioned from November/December onwards, including that of Austria with a reference to the banks’ large exposure to Hungary. In summer 2011, stock markets tumbled worldwide and showed volatile trends in the remaining part of the year. By the middle of August, the world share index MSCI had fallen by 18%; at the end of 2011 it was 8.5% lower than a year earlier. The EuroStoxx index was down by 26% from the end of July to the lowest point in 2011 (and down by 18% in a comparison of year-end 2011/2010 levels), the ATX index lost even 38% (or 36% based on year-end levels). The flight to quality saw benchmark bonds (denominated in US dollars and euros) gaining in value. The 10-year euro benchmark yield reached its low at 1.64% on 23 September 2011 and was only slightly higher at the end of the year (1.86% compared with 2.97% at the end of 2010). At the end of July, spot and forward rates in money markets fell far below key interest rates levels, which were reduced to 1% much later, at the beginning of November and in early December. The ECB intensified its expansionary monetary policy at the beginning of August by resuming three-month and six-month long-term tenders with full allocation, and increasing purchases of government bonds and covered bonds. An essential sign of easing was the first of two announced three-year tenders in December Bank Austria – Annual Financial Statements 2011 185
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