Annual Financial Statements 2011 of Bank Austria

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