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Letter by the Chairman of the Management Board

Willibald Cernko, Chief Executive OfficerLetter by Willibald Cernko as of 31 December 2011

Ladies and Gentlemen,

The year covered by this report has brought further farreaching changes in banking business. After the financial market crisis in 2008, deep recession in 2009 and the recovery in 2010, the year 2011 presented us in Europe with the bill for problems which failed to be addressed in past decades, especially the government debt crisis. The warranted reform of the banking industry includes various requirements hastily imposed by the new European regulatory authorities and uncoordinated fiscal charges in several countries. This has created an unpredictable environment distorting competition. Interbank business, which is a prerequisite for other market segments, is still not functioning properly, despite ECB intervention of unprecedented dimensions. All things considered, the principle of trust has been shaken on many occasions. Road traffic follows the same principle: everyone should be able to rely on other users behaving in conformity with stable rules – and everyone should comply with the same rules themselves. In early 2012 we can see some positive signs. EU institutions assure us that the debt restructuring of Greece was a singular case and that solidarity and soundness will count from now on, pointing to the newly formulated EU stability pact which carries sanctions. Companies, banks and private households again concentrate on classic business, on the "real economy", on sustainable development and sound budget policy principles – even if the cost of adjustment will have an impact for many years to come. All have learned from the past crisis.

Acting in a timely manner and fully along UniCredit's lines, Bank Austria adjusted its business policy to changes in the overall environment, giving top priority to customer business. We thereby coped well with the challenges of the past years: we are among the few banks which have reported profits in each year and each quarter since the onset of the crisis in 2008 – though profits were moderate, without a doubt too low. We did not use state aid but made our contribution in a spirit of solidarity. Thanks to the capital increase at Bank Austria, for which UniCredit used funds from its own capital increase in 2010, we now have a Common Equity Tier 1 capital ratio of 10.55 %, well above the minimum requirement. We did not make dividend payments in the past years and profits were also retained at our banking subsidiaries in CEE. This means that we have built risk buffers on our own.

And we have performed our most important function as a bank: although credit demand in Austria was weak, lending volume at the end of 2011 was up by 3.2 % on a year earlier and 8.3 % higher than two years before. In Central and Eastern Europe (CEE), credit expansion – adjusted for exchange rate movements – was more than double the average rate. But in Austria, too, growth was achieved in loans to small and medium-sized enterprises and in housing loans to private borrowers. Primary funds also increased, mainly in the form of new deposits but also through new issues including our AAA-rated mortgage bonds. Customer loans are covered by deposits and debt securities in issue to the extent of 100 %. Over the past years, the proportion of customer business has strongly increased on the assets side and on the liabilities side.

In 2011 we received an award as Austria's most customeroriented service provider. Customer satisfaction, measured on the basis of about 40,000 customer interviews, continued to rise. I would like to thank all employees for this achievement in times when banks meet with excessively strong criticism.

The income statement for 2011 shows that operating income, though not growing at a rate comparable with previous years, more or less matched the high level of € 7.0 billion achieved in 2010. As in 2010, net write-downs of loans and provisions for guarantees and commitments declined significantly in all regions and business divisions. In 2011 the provisioning charge was down by € 488 m, i.e. more than one-quarter, from the previous year. The decline in CEE was strongest in those countries which previously accounted for the increase; in Austria, the provisioning charge was at its lowest level since 2007. On this basis Bank Austria's net operating profit rose by close to € 200 m or 13 % to € 1.7 bn, although this figure reflects the impact of various additional charges such as bank levies.

The strong improvement in operating performance in 2011 enabled Bank Austria to absorb exceptional charges of over € 1 bn and nevertheless report a net profit of € 209 m. Writedowns (in Austria and CEE) on Greek government bonds had a negative impact of almost € 400 m. We also recognised further impairment losses on goodwill relating to banking subsidiaries in Ukraine and Kazakhstan, which we had acquired in boom years. Goodwill impairment had an impact of € 737 m. The impairment losses on goodwill have no effect on capital ratios and liquidity. We have thus adjusted the valuations to the new outlook for the medium to long term, and we do not expect any major additional burdens on future results in this context.

Based on our strong capital resources and liquidity position, we will pursue expansion. Customer centricity in lending and deposits business and day-to-day banking services will continue to guide our future development. But the pattern of growth will differ from previous years – our commitment and our investment will not increase to the same extent in all countries, segments and product areas, but will more strongly reflect risk / return considerations, market position and available opportunities. In the new regulatory environment we need to give closer attention to profitability after taking risk aspects into account, not least with a view to employing capital efficiently in order to free up funds for new loans. Our commitment to CEE is unchanged. We will open 300 additional branches in the region by 2015 and increase staffing levels there by adding more than 1,100 full-time equivalents. Expansion will focus on the Czech Republic, Russia and Turkey. In the other CEE countries we will build on our strengths.

Our work as an international bank would be easier in a reliable regulatory framework and on a level playing field based on the European Union's four freedoms.

The uncertainty that prevailed during the winter months has now given way to a brighter outlook reflected in sentiment surveys and economic indicators, just in time for the beginning of spring. The underlying recovery seems to be stronger than expected so far. In 2012 we will fully support this recovery, in our commercial banking business with private customers and small and medium-sized enterprises and in our international activities. We will continue to make our contribution, in a spirit of solidarity, as good corporate citizens in all regions.

Yours sincerely,
Willibald Cernko

Chairman of the Management Board of UniCredit Bank Austria AG