Annual Financial Statements 2011 of Bank Austria

Management Report
Management Report (CONTINUED)
The major challenges facing the banks (buildup of additional
risk buffers, difficult funding conditions, management of liquidity
ratios) led to high and rising interest rates on bank deposits in
the second half of 2011 (while money market or capital market
rates recently declined). Given the uncertainty surrounding the
debt crisis, deposits in Austria rose by over 3%. Deposits from
private customers increased by close to 2% and accounted for
about one-half of additions to financial assets held by private
households, slightly more than a year earlier. In 2012, monetary
capital formation could be somewhat more pronounced, mainly
as a result of more favourable trends in real incomes while
inflation will decline. At the current very low valuation levels in
some areas, capital markets offer attractive investment opportunities.
But on the other hand, given the strains on bank funding,
deposit interest rates are also attractive.
� Countries in Central and Eastern Europe (CEE) were also
affected by the deterioration in the global economic environment
in the second half of 2011 and around the turn of the year.
Overall, however, the region continued to pursue sound expansion.
As the European debt crisis escalated, risk aversion again
became more pronounced. But given the relatively low levels of
government debt in the region, CEE coped well with this situation.
CDS spreads on government bonds of CEE countries (Traxx
SovX CE), which tracked the West European CDS index up to the
peak of 386 bp in November, have in the meantime decoupled
from this trend and are now significantly lower, at 282 bp (Traxx
SovX Western Europe: most recently 353 bp).
The surprisingly high level of industrial output and expectations
of an easing of the EMU crisis have prompted our economists to
raise their growth forecasts for 2012 and 2013 by 0.3 percentage
points for both years. But developments in the euro area
will continue to be among the factors determining trends in the
CEE region, via multiple transmission paths, later in 2012:
First, via real economy links: we expect that weak economic
trends in the first half of 2012 will affect regions and countries
in CEE to varying degrees, depending on their foreign trade
orientation and product mix, before the second half of the year
sees a recovery. The closely integrated Central European countries,
in particular, will have to overcome a period of lower
growth in the first half of 2012, all the more so as domestic
demand will also be weak, reflecting pressure to consolidate
public finances. Slovenia will again slide into recession (2012:
–0.6%). Hungary – where a new Mercedes car factory, another
assembly plant exposed to cyclical trends, will start production
in the next few weeks – was hit hardest, compounding a negative
external impact by domestic curbs (GDP growth in 2012:
0%). Nevertheless, growth in this country group will pick up as
the year progresses, reaching a level of about 2½% in 2013.
South-East Europe’s (SEE) trading links with Greece (mainly in
Bulgaria) are acting as a brake. Romania returned to a growth
path in 2011, not least thanks to a good harvest, and will be
able to pursue further expansion in the coming years. In 2012
and 2013, SEE as a whole (together with the Baltic countries,
which have returned to growth) will expand at a faster pace
than Central Europe. The strongest economic momentum will be
seen in Russia and in Kazakhstan, a major exporter of commodities,
with growth reaching 4% to 6%, though the economy in
these countries is focused on a narrow range of products. Commodity
prices remained high during the cooling-off process in
the past few months and they will persist at high levels. Turkey
has shown autonomous economic developments over the past
few years. After a constant risk of overheating in 2010 and
2011, with real growth rates of 9% and 8.5%, the economic
momentum is likely to slow to about 5%, also because economic
policy is having a dampening effect. While most other
CEE countries recorded current account improvements despite
weaker exports (which is not always to be seen in a positive
light because domestic demand is even weaker), Turkey’s main
problem is its current account deficit. Overall, we expect that
economic growth in CEE (in Bank Austria’s perimeter) will be
3.2% (2012) and 3.8% (2013) in real terms, double or triple
the figure for Western Europe.
Second, the government debt crisis has significantly lowered
risk tolerance worldwide while curbing capital flows to emerging
markets. The first six months of 2011 still saw strong portfolio
inflows in the CEE region, a trend which reversed in the
second half of the year. In the third quarter of 2011, the financial
account reflected a net outflow of funds accompanied by
downward pressure on currencies, underlining sensitivity to
financial market fluctuations. The developments affected portfolio
investments, while direct investments remained at their previous
levels. However, in our base scenario we assume that the
impact of the government debt crisis, at least the volatility and
the unpredictable elements, will ease and that the external
financing needs of the CEE countries are today lower than they
were many years ago. For this reason, we believe 2012 will be
characterised more by currency appreciation than depreciation.
External financing requirements of governments, banks and
companies will probably remain within limits in the course of the
next few quarters. This will in any event apply to the stronger
CEE economies with adequate reserves, which we believe to
comprise Turkey, Poland, the Baltic states and the Czech
Republic. Countries with an inefficient economic policy and/or
inadequate buffers may experience volatile capital movements.
In this regard, the risk is highest in Croatia, Hungary, Ukraine
and possibly Slovenia. The first three countries are likely to
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