Annual Financial Statements 2011 of Bank Austria

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Management Report Management Report (CONTINUED) receive assistance under multi-year IMF support programmes. The countries with the greatest resilience to external shocks are Russia and Kazakhstan. Third, the banking sector in the western European countries is under pressure (capital requirements imposed by the EBA, funding problems). This has triggered fears of a repatriation of capital from CEE, of a retrenchment of local investment or a sell-off of local assets, and of a curtailing of cross-border lending. Foreignowned regional banks account for 46% of the € 2.5 trn in total assets of the banking sector in CEE. External funding, with funds Economic growth (real GDP, % over the previous year) 2009 2010 2011 2012 2013 World (IMF) –0.7 +5.2 +3.8 +3.3 +3.9 USA –3.5 +3.0 +1.7 +2.3 +2.5 Euro area –4.2 +1.8 +1.5 +0.6 +1.6 … Austria –3.8 +2.3 +3.3 +0.8 +2.0 Czech Republic –4.7 +2.7 +1.7 +0.4 +2.5 Slovakia –4.9 +4.2 +3.3 +2.4 +3.4 Hungary –6.7 +1.2 +1.7 –0.0 +1.9 Slovenia –8.0 +1.4 +0.5 –0.6 +1.1 Central Europe –5.7 +2.4 +1.9 +0.5 +2.3 Poland +1.6 +3.8 +4.3 +3.1 +3.5 Bulgaria –5.5 +0.2 +1.6 +1.2 +1.7 Romania –7.1 –1.3 +2.5 +1.4 +2.5 Croatia –6.0 –1.2 +0.0 –0.5 +2.0 Bosnia and Herzegovina –2.9 +0.7 +1.8 +0.5 +2.5 Serbia –3.5 +1.8 +1.7 +1.0 +3.0 Estonia –13.9 +3.1 +7.5 +2.6 +3.8 Latvia –17.8 –0.6 +5.9 +2.9 +3.5 Lithuania –14.7 +1.2 +5.2 +2.5 +2.8 SEE and Baltic states –8.0 –0.2 +2.7 +1.3 +2.6 Russia –7.8 +4.0 +4.3 +3.9 +4.2 Turkey –4.8 +9.0 +8.5 +4.8 +4.3 russia and Turkey –6.9 +5.5 +5.6 +4.2 +4.2 Kazakhstan +1.2 +7.3 +7.5 +5.5 +5.8 Ukraine –14.8 +4.2 +5.1 +2.0 +3.9 Kazakhstan and Ukraine –8.1 +5.5 +6.1 +3.5 +4.7 CEE (with Poland, GDP-weighted) –5.9 +4.3 +4.7 +3.3 +3.7 CEE (without Poland, GDP-weighted) –7.0 +4.3 +4.7 +3.2 +3.8 CEE (Bank Austria-weighted) *) –6.2 +3.6 +4.1 +2.4 +3.3 Bank Austria market (GDP-weighted) –6.7 +4.1 +4.6 +3.0 +3.6 Bank Austria market (Bank Austria-weighted) –5.5 +3.2 +3.8 +1.9 +2.9 *) weighted by contribution of Bank Austria’s subsidiaries to operating income in CEE region Source: UniCredit Research. Forecasts: 7 March 2012 being made available primarily by the parent company, has been practised in the banking sector in CEE on a large scale for many years. But for CEE, the short-term risk related to western European banks’ compliance with the capital requirements of the EBA is relatively low: on the one hand, a closer look reveals that capital outflows were lowest in the banking sectors where foreign banks are major players. Major banks moreover pledged themselves to a long-term commitment under the Vienna Initiative. On the other hand, the large banks announced that they would be able to meet the capital requirements by strengthening their capital base (via the market or through retention of profits). It has now for some time been in the interests of both sides to create a balanced business structure featuring a high proportion of funding from local sources. 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. Although the amount of outstanding loans in the CEE region at the end of 2011 totalled almost € 1.5 trn, a rise of about 9% compared with the previous year, liabilities amounted to an estimated 49% of GDP in CEE compared with 120% in the euro area. While opportunities for expanding consumer loans are limited, there is potential particularly in the area of business loans and mortgage financing. Developments among individual countries vary considerably; Russia and Turkey are likely to make the largest contribution to lending growth in the period 2011–2015. Progress in overcoming the government debt crisis � The second support package for greece: 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), with about € 90 bn being earmarked for early disbursement. 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. The PSI programme provides for write-downs of 53.5% on the nominal value of sovereign Greek debt held by private creditors, corresponding to a reduction of about € 150 bn of the total amount of bonds to be redeemed by 2020. 31.5% of the restructuring amount will be exchanged (under English law) for new government bonds with maturities between 11 and 30 years. The weighted average interest rate is envisaged to be 3.65% over the 30-year Bank Austria · Annual Financial Statements 2011 52
Management Report Management Report (CONTINUED) term. The present value loss arising from the debt restructuring amounts to about 74%. Prices of Greek government bonds reflected this level already in December 2011. – According to information provided by the Greek government, Greece’s official debt restructuring offer concerning € 177 bn in bonds under Greek law was accepted by 85.8% of bondholders as at 9 March 2012. The Greek government has announced that it would increase this percentage by applying Collective Action Clauses (CAC). For this reason the International Swaps and Derivatives Association (ISDA) said that a “restructuring credit event” had occurred, triggering credit default swaps (CDSs). At the editorial close of this report, the new Greek government bonds from the debt restructuring were quoted at large discounts. Considerable residual risks remain even after the – successful – restructuring. There are plans to set up a European team of experts to support the implementation of reforms in Greece; escrow accounts are to be used in order to ensure the proper use of funds and the debt service of the new bonds, independently of the respective decision-makers. The period within which Greece will have to achieve a primary surplus is further extended. There is uncertainty, however, about the required ratification by the parliaments on the creditor and borrower sides. The acceptance of the debt restructuring package has also paved the way for a large-volume IMF loan. Quite generally, ahead of the forthcoming parliamentary elections in Greece, there are doubts in the market about the continuity of the austerity programme. Political and economic risks exist also in the medium term if international aid helps to achieve an initial primary surplus and the economy has not recovered by then. � Among the other highly indebted countries, Portugal lost access to capital markets as early as April 2011, when it became the second state after Ireland to be bailed out. As the Greek crisis escalated, risk premiums on Portuguese bonds rose. Banks and companies have found it difficult to borrow from foreign lenders since June 2011. In January 2012, Portuguese bonds were rated as speculative investments. The new government implemented a consolidation programme totalling 4.8% of GDP (through numerous one-off measures), thereby exceeding the target set by the IMF/EU programme. Recession reduced external financing requirements. The business sector’s low levels of competitiveness and administrative efficiency remain the basic problems. Therefore Portugal is exposed to a particularly high risk of contagion. However, the country has liberalised the labour market, implemented a pension reform and initiated privatisations. Portugal aims to be able to tap capital markets again in 2013. The government debt ratio is about 110% of GDP. European institutions emphasise that the Greek model is an isolated case. This suggests that the line of defence is set also at the expense of international loans and support programmes but with strict conditions imposed on Portugal. Interest rate spreads are therefore secondary market appraisals, at 1,572 basis points (15.7%) they are lower than Greek risk premiums of April 2011. � Spain was also targeted by financial markets on account of the country’s current budget deficit (most recently about 8% of GDP), and not so much because of its public debt which amounted to 67% of GDP. The increase in risk premiums on Spanish debt (measured by the yield differential between 5-year government bonds and the benchmark bond, June 2011 to the peak in November, +435 basis points to 522 bp – see chart) was narrower, however, than for other countries. The country was mainly impacted by the bursting of the real estate bubble. Declining property prices, business failures, distressed regional savings banks and a downturn in the construction sector ultimately led to a recession, with the unemployment rate rising to over 20% and youth unemployment soaring to almost 50%. Under the “European semester”, the new government is trying to defer its deficit targets as recession is deepening and a downward spiral should be avoided. Bond issues in 2012 have nevertheless so far been successfully placed. The interest rate spread declined by 244 bp, from the peak level in November 2011 to 278 bp on the most recent issue. Yield spreads of European government bonds Yield spread of five-year government bonds over European benchmark bond Basis points 900 Hungary 800 700 600 500 400 300 200 100 0 Italy Spain Austria Q1 Q2 2011 Q3 Q4 Q1 2012 Bank Austria · Annual Financial Statements 2011 Yield spreads of European government bonds 53
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Annual Financial Statements 2011 of Bank Austria

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