Annual Financial Statements 2011 of Bank Austria

Management Report of UniCredit Bank Austria AG
In our base scenario we assume that the impact of the debt crisis,
at least the volatility and the unpredictable elements, will ease: the
external financing needs of the CEE countries – and thus
vulnerability to external shocks – are today lower than they were
many years ago. Moreover, vulnerable countries can count on IMF
and EU support. And we do not expect that foreign banks will
withdraw capital in response to pressure to adjust to the new rules
concerning capital requirements. In the medium to long term, the
CEE banking sector still has the potential to achieve growth in
terms of turnover and income at a level above the EU average in
view of the market penetration gap which still exists in the area of
financial services. For example, lending volume as a percentage of
GDP is estimated at 49% in CEE, compared with 120% in the euro
area.
One of the major risk factors in the banking environment in 2011
was the European government debt crisis, with Greece at the
centre of the crisis and the credit ratings of other highly indebted
countries deteriorating. Significant progress was made in
overcoming the debt crisis towards the end of the previous year
and in 2012 to date; as a result, apart from Greece itself, the
situation has eased. On 21 February 2012, representatives of the
Eurogroup, the EU and the European Central Bank reached
agreement with Greece on a second support package with private
sector involvement (PSI). Under the agreement, the Eurogroup is
prepared to provide additional funds of up to € 130 bn (by the end
of 2014). The bulk of the immediate financing requirements is
accounted for by a recapitalisation of the Greek banking sector (€
50 bn) and an EFSF guarantee facility (€ 30 bn) for the remaining
claims of the private sector after PSI. Private investors, primarily
international banks, have agreed to a debt restructuring package
under which the present value loss arising from the debt
restructuring amounts to about 75%. Implementation of the overall
package still involves risks; for example, one cannot rule out the
possibility that the Greek government will apply Collective Action
Clauses, triggering a “credit event”. But even if the implementation
of the package for Greece suffers a further setback, the European
Union, the Eurogroup and the European Central Bank are
determined not to let the situation repeat itself, and their
determination enjoys credibility. All European decision-making
bodies see the case of Greece, and private sector involvement in
particular, as a singular event.
This has also reduced the risk of contagion. Spain (and Portugal) is
negotiating with EU authorities with the objective of deferring the
agreed consolidation targets in order not to deepen recession.
Interest rates on recent bond issues of Spain were significantly
lower. Portugal will not be able to access capital markets for some
time to come, but the country can count on support from the IMF
and the EU. Italy is a large and competitive economy playing in a
different league. Italy’s main problem is the legacy burden of public
debt amounting to 119% of GDP, which has been rolled over at this
level without any problems for over fifteen years. In 2011, Italy
achieved a primary surplus of over 1% and its government intends
to strongly increase the primary surplus by achieving a balanced
budget in nominal terms by 2013. Interest rate spreads on Italian
bonds declined significantly in the current year. Risk premiums on
bonds issued by Hungary (see introductory section) also declined
recently, though the downward trend was not as pronounced as in
the case of Italy. Although pressure is easing, we expect that
Hungary will resume negotiations with the IMF and the EU.
The policy pursued by the European Central Bank (ECB) has
provided strong impetus to crisis management in the past few
months. In addition to a more relaxed monetary policy via standard
instruments, the two large-volume three-year tenders made a
significant contribution toward easing the general situation. The
ECB’s outstanding open market operations thus reached a record
level of € 1.2 trn, with the surplus liquidity probably resulting in
additional pressure on interest rates.
Outlook for UniCredit Bank Austria AG’s performance
The outlook for banking business in Bank Austria’s perimeter of
operations is determined by expectations of low growth in Western
Europe, at a rate which will be just above zero, and of more
moderate growth in Central and Eastern Europe, and by the
probability of a deflationary rather than inflationary monetary
environment. The foreseeable stricter regulatory requirements are
likely to reduce the credit multiplier. Given the confidence crisis,
and despite ample supplies of liquidity by the ECB, the interbank
market is still not operating effectively; this has an impact on
liquidity management and also indirectly affects a number of capital
market-related financing instruments. The operating environment
for the banking industry means that volume trends and margins in
the coming year will not enable Bank Austria to generate a level of
annual revenue growth which was quite normal in the years before
2009; growth will be moderate, in line with the overall market.
However, after the substantial one-off charges absorbed in 2011,
we expect that the bank’s strong operating performance will again
feed through to bottom-line profits to a larger extent.
� The objective of our multi-year plan is to make the bank’s
performance sustainable in this scenario of what is widely
referred to as “the new normal”. These are the basic pillars of
the plan: targeted employment of capital, pursuing a focused
growth strategy in CEE, simplifying our organisational set-up and
processes, and maintaining strict cost management. Bank
Austria’s strong equity capital base enables the bank to pursue
further growth and will exclusively support commercial banking
business with customers. We will give close attention in Austria
to risk-adjusted capital efficiency down to the level of individual
transactions. Capital allocation provides CEE, one of the few
growth regions, with a sound base for further expansion. In
pursuing expansion, we will focus on countries which are ahead
in terms of revenue/risk considerations as well as market size
and growth, and where we hold strong market positions: these
countries are Turkey, Russia and the Czech Republic. In the
other countries we will pragmatically focus our business portfolio
on a case-by-case basis. We seek to achieve a sound balance
of local credit expansion and local deposit growth in all
countries.
All this does not change our determination to operate as a
European bank throughout Central and Eastern Europe. Despite
regional divergence and structural differences, the growth
potential of the banking sector in CEE countries remains intact.
This is based on the economic catching-up process and the
accelerated monetary cycle, and also on convergence in terms
of wages, standard of living and consumer habits. The latter
factors hold out the prospect of gradually closing the gap in the
supply of modern banking products and services. Various cost
reduction programmes are under way to enhance cost efficiency
by redimensioning head offices after the numerous integration
tasks performed in the past years; this process involves the
pooling of real estate used by the banks themselves in several
countries. The establishment of cross-regional infrastructure for
transaction settlement, IT and internal services is also of great
significance in the long term. A major step forward in this context
was the creation of UBIS, with UBIS Austria as one of its
Bank Austria – Annual Financial Statements 2011 206