Annual Financial Statements 2011 of Bank Austria

Management Report of UniCredit Bank Austria AG
Counterparty risk arising from derivative transactions is managed
by the Derivative Committee (DECO). DECO deals with classic
credit risk issues and aspects of reputational risk in customer
business.
The Management Board of UniCredit Bank Austria AG sets risk
limits for market risk activities of the entire Bank Austria Group at
least once a year, in coordination with UniCredit Group. MACO,
which holds a meeting every week, makes limit decisions at the
operational level and analyses the risk and earnings positions of
the bank’s Markets units. ALCO performs analyses and makes
decisions with regard to business activities closely connected with
customer business (in particular, balance sheet structure, liquidity,
and risk management issues arising between sales units and
overall bank management). The decisions and results of these
committees are reported directly to the bank’s full Management
Board. Risk Management, which is separate from the business
divisions up to Management Board level, is in charge of preparing
analyses and monitoring compliance with limits. The counterparty
risk model (NORISK CR), which was approved by the Austrian
supervisory authority in 2009, was extended in 2011 to include
further CEE countries for risk management aspects; special
mention should be made of the subsidiaries in Croatia and Russia
because of their size. In this context the focus is on risk
management and not yet on regulatory approval. The bank took
account of the growing importance of counterparty risk by creating
a separate unit for this purpose within Market Risk and Risk
Integration at the beginning of 2010.
The Bank Austria Group applies the principle of value-based
management.
Beyond compliance with the regulatory capital rules pursuant to
Section 39 of the Austrian Banking Act, economic capital (Pillar II)
is intended to reflect the bank’s specific risk profile in a
comprehensive and more consistent way. These unexpected
losses over a period of one year are calculated with a confidence
level of 99.97%.
Value-at-risk methodologies are used in the Bank Austria Group for
calculating or planning economic capital for all specified types of
risk (credit risk, market risk, operational risk, business risk, financial
investment risk and real estate risk). The Bank Austria Group is
included in the risk monitoring and risk management system of the
entire UniCredit Group. This ensures overall risk management
across the Group.
Management of balance sheet structure
The matched funds transfer pricing system applied throughout the
Group and the principle of causation applied in attributing credit
risk, market risk and liquidity risk enable the bank to determine
contribution margins from customer transactions in the bank’s
business divisions. The risk committees of the bank ensure that the
bank’s overall liquidity and interest rate gap structure is optimised,
with the results from interest maturity transformation being reflected
in the Corporate & Investment Banking Division. Factors taken into
account in this context include the costs of compensation for
assuming interest rate risk, liquidity costs and country risk costs
associated with foreign currency financing at CEE banking
subsidiaries. These funding costs burden lending business in
Austria and CEE and have remained at a high level on account of
the persistent government debt crisis.
Products for which the material interest-rate and capital maturity is
not defined, such as variable-rate sight and savings deposits, are
modelled in respect of investment period and interest rate
sensitivity by means of analyses of historical time series, and taken
into account in the bank’s overall risk position. Interest rate
sensitivities are determined and taken into account in hedging
activities, which results in a positive contribution to profits from
customer business.
To assess its balance-sheet structure, the bank uses the Value-at-
Risk approach, complemented by a scenario analysis covering
subsequent quarters and years. The bank thus also follows the
Basel 2 recommendation concerning the simulation of future net
interest income under different interest rate scenarios (“earnings
perspective”).
In the earnings perspective analysis, simulations of the future
development of net interest income and of the market value of the
banking book are generally based on assumptions regarding
volume and margin developments under different interest rate
scenarios. Parallel interest rate shocks as well as inversions and
low-interest-rate scenarios can be analysed to identify their
possible impact on the bank’s net interest income and the bank’s
value.
The analyses performed at year-end 2011 show that a further
interest rate decline in all currencies, from an already low level,
would have the strongest impact on the bank’s net interest income.
This is a typical feature of commercial banks, given the interest
rate remanence on the liabilities side of banks’ balance sheets
(sight deposits, equity).
The Basel 2 rules require the measurement at Group level of
“interest rate risk in the banking book” in relation to the bank’s
capital by comparing a change in the market value of the banking
book after a 2 % interest rate shock with the bank’s net capital
resources. In the event that such an interest rate shock absorbs
more than 20 % of a bank’s net capital resources, the bank
supervisory authority could require the bank to take measures to
reduce risk.
A 2% interest rate shock would absorb about 1% of UniCredit Bank
Austria AG’s net capital resources; this calculation also includes
the current investment of equity capital as an open risk position.
This means that the figure for UniCredit Bank Austria AG is far
below the outlier level of 20%.
Details of the use of financial instruments are given in the notes to
the financial statements.
Credit Treasury
Credit Treasury has two main tasks: preparing and monitoring the
risk-adequate pricing of loans; and executing risk-transfer
transactions.
To ensure uniform pricing within UniCredit Group, the risk-adjusted
spread is determined on the basis of multi-year probabilities of
default (depending on the term of the loan), added as a price
component and monitored on an ongoing basis.
Initially rolled out for a predefined customer segment of Austrian
corporate customers as at 1 January 2011, this system is to be
extended to cover other segments and regions.
Bank Austria – Annual Financial Statements 2011 196