Annual Financial Statements 2011 of Bank Austria

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Management Report of UniCredit Bank Austria AG From the middle of January 2012, the exaggerated reactions seen in financial markets reversed, leading to more normal levels: from the end of 2011 to the middle of February 2012, the Hungarian forint appreciated significantly (+8.1% against the euro / +7.5% against the Swiss franc), CDS spreads and bond spreads narrowed (to 493 basis points and 6.73 percentage points, respectively, on 10-year bonds). The stock market also recovered lost ground. When the government accepted a number of regulatory demands by the EU, the fundamentals-based assessment of the highly integrated Hungarian economy got the upper hand again. Hungary has an open economy, external trade (exports + imports) totals 165% of GDP, the large stock of direct investment is a distinct feature of the country’s competitive industries, 65% of retail loans and 47% of business loans are denominated in foreign currency and banks with international owners account for 88% of the banking sector’s total assets. All this makes it unlikely that the country will go it alone. Hungary’s basic balance is highly positive (8.8% of GDP), and its currency reserves of € 37 bn are higher than the short-term foreign debt of the entire business sector (€ 25 bn). Overall, although there have been occasional fears of a default, we think that this is unlikely. In our base scenario we assume that Hungary will reach an agreement with the EU and the IMF in March/April 2012 and that the situation will continue to ease as the year progresses. The Hungarian banking subsidiary of UniCredit Bank Austria AG performed strongly in the difficult environment which prevailed in 2011. Although the provisioning charge rose slightly, and despite the bank levy, it generated the largest profit among the four Central European countries and achieved the highest return on equity. The NPL ratio is below the average for all our banks in CEE. The Hungarian banking subsidiary is the seventh-largest bank in the country, with a market share of about 5%. Its business focuses on the less exposed corporate customer segment. In our multi-year plan Hungary, an EU member country where integration has reached an advanced stage, is not among the growth markets. The strategy of expansion has been suspended, not least on account of political uncertainty, but this decision may be revised in 2013. Movements in CEE currencies in 2011 were volatile. Especially the shift from long-term capital inflows to short-term portfolio investments increased sensitivity to changes in sentiment among international investors. Weighted by contributions to operating income of CEE operations, CEE currencies (in Bank Austria’s perimeter, without Poland) depreciated by about 5.5% 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 yearend 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). Development of total assets Overview: UniCredit Bank Austria AG’s balance sheet showed moderate and balanced trends in 2011, despite the volatile environment and pronounced uncertainty among business partners and customers. As at 31 December 2011, total assets were € 125.0 bn, up by € 4.3 bn or 3.5% from the level as at 31 December 2010. As in 2010, the new focal areas of business policy, by which the bank responded to changes in the overall environment following the financial market crisis, were favourably reflected in movements in balance sheet items (and even more strongly in income statement items). Customer business being the top priority, the bank’s proprietary trading activities were reduced already in 2010 and the capital base was significantly strengthened. Overall, the assets side of the bank’s balance sheet reflected weak credit demand in the 2011 financial year. Loans and advances to customers rose by 2.1%. Significant increases were seen in medium-term and long-term loans, including mortgage loans (+6.1%) and local-authority loans (+5.0%), while loans to private individuals and low-volume loans as well as export loans declined slightly. As the cost of funding via wholesale markets rose strongly, the bank made efforts in 2011 to strengthen the funding side on a sustainable basis. Overall, primary funds rose by € 2.9 bn or 13% as the bank significantly increased the volume of its own issues (debts evidenced by certificates) while customer deposits were stable; this was the main change on the liabilities side. Especially mortgage bonds, which are covered bonds, met investors’ stronger preference for security. Loans and advances to customers (which amounted to € 68.1 bn, accounting for about 54.5% of total assets) were thus funded with primary funds (€ 70.3 bn or 56% of the balance sheet total) to the extent of 103.1% (year-end 2010: 100.4%). Shareholders’ equity (the sum total of items 9 to 12 on the liabilities side) remained at the high level of € 14.0 bn reached after the capital increase at the beginning of 2010; it accounted for a high 11.2% of the balance sheet total. Other significant changes in balance sheet items – a strong increase in bonds and other fixed-income securities (within which government bonds were reduced) on the assets side, and an increase in amounts owed to credit institutions on the liabilities side – are related to internal financing tasks performed by UniCredit Bank Austria within UniCredit Group, not least in its capacity as sub-holding company for CEE operations. Major balance sheet items – comparison of year-end levels 2011/2010 31 Dec. 2011 31 Dec. 2010 Assets Loans and advances to credit institutions (item 3) 18.3% 19.1% Loans and advances to customers (item 4) 54.5% 55.2% Securities including shares (items 5 and 6) 9.7% 7.8% Shares in group companies (item 8) 9.9% 10.4% Liabilities and Equity Amounts owed to credit institutions (item 1) 25.5% 25.0% Amounts owed to customers (item 2) 37.0% 38.0% Debts evidenced by certificates (item 3) 19.2% 17.4% Primary funds (items 2 and 3) 56.2% 55.5% Capital and reserves (total of items 9, 10, 11 and 12) 11.2% 12.0% Bank Austria – Annual Financial Statements 2011 188
Management Report of UniCredit Bank Austria AG Major balance sheet items – comparison of year-end levels 2011/2010 On the assets side, cash in hand and balances with central banks and postal giro offices declined by € 185.9 m or 15.2% to about € 1 bn. Treasury bills and similar securities eligible for repurchase transactions declined by € 250.7 m or 7.3% from the level a year earlier; but at € 3.2 bn, they were a significant liquidity reserve. Loans and advances to credit institutions were € 22.9 bn, down by € 209 m or 0.9% from the year-end 2010 level. This reflects a reduction of domestic interbank business (–19.2%, mainly denominated in foreign currency). Loans and advances to foreign credit institutions, on the other hand, rose slightly (by 1.4%, mainly denominated in euro) although export credits declined. The amounts of the changes are small compared with the large total volume. At the end of 2011, 91% of interbank loans were loans and advances to foreign credit institutions, reflecting the significance of funding for banks within the Group. Loans and advances to customers rose by € 1.4 bn or 2.1% to € 68.1 bn after loan loss provisions (the gross amount rose by 2.3% to € 70.6 bn). Overall (domestic and foreign customers, all currencies), mortgage loans recorded the strongest growth (+6.1%), followed by local-authority loans (+5.0%). Low-volume loans to private individuals were down by 9.3%. The total amount of other loans (€ 47.1 bn or 69% of total lending volume) rose by € 1.5 bn or 3.3%. Export loans remained at a stable level. Domestic borrowers accounted for three-quarters of total loans and advances (€ 50.8 bn), slightly more (+1.2%) than at the end of 2010. Loans and advances to foreign borrowers increased by 7% in 2011. Foreign currency loans were no longer actively offered by the bank; the volume of such loans rose as the respective currencies continued to appreciate (currency translation effects). Bonds and other fixed-income securities – almost all of which were securities issued by non-public issuers – rose by € 3.1 bn or 34.2% to € 12.1 bn. The increase was mainly due to the acquisition of foreign euro-denominated securities. On the liabilities side, amounts owed to credit institutions were up by € 1.7 bn or 5.7% to € 31.9 bn, which mainly reflects the increase in repurchase transactions. As at 31 December 2011, amounts owed to customers were € 46.3 bn (up by € 381 m or 0.8%). Within the total amount, savings deposits rose slightly, to € 16.7 bn. The increase of 0.6% to € 29.6 bn in other liabilities within this item reflects a reduction of time deposits in favour of deposits repayable on demand. This development may be explained by declining opportunity cost in view of the low interest rate environment. Debts evidenced by certificates rose by € 2.9 bn or 13.8% to € 23.9 bn in 2011, mainly as a result of the increase in new issues of mortgage bonds and public-sector mortgage bonds (previously local-authority bonds); the total amount of mortgage bonds and public-sector mortgage bonds rose by € 3.2 bn or almost two-thirds (+63%). At € 14.6 bn, bonds remained the largest sub-item within debts evidenced by certificates, but the total amount outstanding rose at a lower rate (+5%). Mortgage bonds are covered bonds and were therefore easier to place in the market; they were also seen as a lower-cost funding alternative by the bank. Money market instruments such as commercial paper and CDs, which were of significance in commercial international business in previous years, continued to decrease substantially (–62%). Other liabilities, mainly comprising trading liabilities, were down by € 659.5 m or 41.5% to € 931 m. Provisions increased by € 472.5 m to € 4.6 bn in the reporting year. The major part (68%) related to provisions for severance payments and pension provisions. The total amount of other provisions (+ € 393.9 m to € 1,467.1 m) included provisions for taxes, for pending losses on lending and securities business, for risks associated with equity interests, and for litigation risks and guarantee obligations. Subordinated liabilities declined by € 176 m or 6.3% to € 2.6 bn. As a result of the release of reserves, capital and reserves (equity) – including subscribed capital, capital reserves and revenue reserves as well as the reserve pursuant to Section 23 (6) of the Austrian Banking Act – declined to € 14 bn, which represents 11.2% of the balance sheet total. Profit and loss account for 2011 Overview: The profit and loss account for the reporting period reflects various developments: economic trends were positive although growth weakened as the year progressed; the interest rate environment became increasingly difficult; the government debt crisis caused uncertainty among customers; and divergent business trends at UniCredit Bank Austria AG’s banking subsidiaries in CEE resulted in lower dividend income. Positive factors in commercial banking business included the fact that after the decline in the provisioning charge in the previous year, net expenses for the disposal and valuation of loans and advances were again significantly reduced across all customer segments. But a number of special factors had a strong impact on the profit and loss account. These included the bank levy (– € 75 m), write-downs on Greek government bonds (– € 263 m) and adjustments of the book values of equity interests as part of a general reassessment of the outlook for several banking subsidiaries (– € 419.4 m net of income from the valuation and disposal of equity interests). The above-mentioned non-operating items had a combined negative impact of almost € 757 m, which was not offset by movements in the other items. On the income side, credit demand in 2011 was low after years of strong growth; this development reflected the economic slowdown, with low levels of investment activity in the business sector, and the favourable liquidity position of corporate customers. Moreover, the yield curve flattened during the year, reducing income generated from maturity transformation. Against this background, the bank achieved a significant increase in net interest income in 2011: although interest expenses rose more strongly than interest income because of the higher interest rate spreads which banks had to pay, net interest income rose by 6.2% to € 1,390 m, accounting for 53% of operating income (2010: 46%). But revenue trends were impacted by uncertainty and risk aversion among institutional and private investors. In combination with structural factors, including a further decline in derivatives business, this led to a decrease of 18.0% in net fee and commission income. Dividend income was also lower, not least because CEE banking subsidiaries’ balance sheets were strengthened. Overall, operating income declined by € 226 m or 7.9% to € 2,615 m. After deduction of operating expenses, which rose by 6.8% to € 1,802 m, operating results amounted to € 812.4 m (down by € 340 m or 29.5%). The items between operating results and results from ordinary business activities were a net expense of over one billion euros (€ 1,199 m), which was composed of net income/expenses from the disposal and valuation of loans and advances and securities (– € 566 m), essentially the provisioning charge for lending business, and net Bank Austria – Annual Financial Statements 2011 189
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Annual Financial Statements 2011 of Bank Austria

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