Annual Financial Statements 2011 of Bank Austria

Management Report
Management Report (CONTINUED)
Outlook for Bank Austria’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 them-
selves 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
components, in 2011 and 2012, which will enable us to unlock synergies
in the coming years. This is particularly important as demands
on IT and back-office operations are rising (taxation of capital gains
on the sale of securities, reporting and regulatory requirements etc.).
� We expect that the moderate revenue growth planned for 2012
will be reflected in operating profit to a larger extent. We believe that
the reduction of net write-downs of loans and provisions for guarantees
and commitments in the past few years will be sustainable,
even though fluctuations over time cannot be excluded. While the
provisioning charge in Austria has declined to a very low level, there
is further potential for restructuring in CEE, especially in those countries
which originally caused the strong increase in the provisioning
charge. This points to a continued upward trend in net operating
profit. On this favourable basis we assume that the substantial
goodwill impairment charges which Bank Austria had to absorb in
2011 will not be repeated in 2012 and 2013. As far as sovereign
risks are concerned, we expect that there will be no further debt
restructuring outside Greece. After the lessons learned in the past
year, the determination of the Eurogroup, the EU and the European
institutions to avoid contagion enjoys credibility, as does the path
towards stricter fiscal discipline in Europe. We have adjusted the valuations
of our subsidiaries and equity interests in other companies
in CEE to the new business outlook on several occasions since
2008, most recently in 2011. These adjustments have been substantial,
so that similar charges should not recur. Apart from any
unexpected risks which may arise from geopolitical developments,
for example, we think that a larger proportion of the anticipated stable
or slightly stronger operating performance is likely to feed
through to Bank Austria’s net profit.
� Bank Austria coped well, without state aid, in the crisis years. Its
strong operating performance enabled the bank to absorb substantial
burdens arising from adjustments. Over the past few years we
have aligned our business model with sustainability criteria. The
main features are the top priority given to customer business and
the renewed attention to our core economic functions – and this
includes a permanent commitment to CEE. We are also determined
to play an active role and share responsibility as a corporate citizen
in all countries and local communities in which we operate. We want
to contribute to restoring the reputation of banking operations within
a short time.
Developments in the banking sector and at Bank Austria will not only
reflect economic trends and our response to them. A decisive factor
will be the regulatory framework in which we operate. We have prepared
for the regulatory changes arising from Basel 3, including
capital ratios, SIFI requirements, changes in the definition of equity
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