Results for the 2008 financial year:
Bank Austria: EUR 1.1 billion profit despite financial crisis
- Operating profit reached a high level exceeding the previous year's figure also in the fourth quarter, when the financial market crisis came to a head
- Operating profit for 2008 at all-time high of EUR 3.3 billion
- Performance from Austrian customer business slightly stronger than in the previous year despite difficult market conditions
- Central and Eastern Europe again generates a substantial increase of 53 per cent
- However, negative result from trading activities weighs on good operating performance in customer business
- Strict cost management and synergies within UniCredit Group lead to flat cost trend
- Exceptional effects have an impact on profit
- Provisioning charge of EUR 1 billion, double the figure for the previous year
- Impairment losses of EUR 1 billion on goodwill related to banks in CEE
- With a consolidated profit of EUR 1.1 billion, Bank Austria continues to be the Austrian bank with the strongest profit performance despite exceptionally large negative impacts
Erich Hampel, Bank Austria's Chief Executive Officer: "2008 was a very difficult year for banks, with exceptional negative impacts resulting from the financial market crisis, which started one and a half years ago, and from the global economic downturn towards the end of the year. Our focus on customer business and our business model of a widely diversified universal bank again proved successful in this market environment.
Our customer business operations generated an operating profit of EUR 3.3 billion, a new record level driven by contributions from both Austrian customer business and our CEE banking subsidiaries. However, as the crisis spread to the real economy, Bank Austria had to double the provisioning charge for lending business and it recognised impairment losses on goodwill related to some of our banks in CEE in response to significantly lower economic growth forecasts.
Despite these exceptional charges of about EUR 1.5 billion in the crisis year 2008 we generated a consolidated profit of EUR 1.1 billion. On this basis we are the Austrian bank with the strongest profit performance, which also compares favourably in an international context.
This performance was generated by our 67,000 employees in Austria and in our banking subsidiaries in Central and Eastern Europe. I would like to thank them all for their commitment and dedication in the interests of our 26 million customers. These results would not have been possible without the hard work of our employees."
Items in the income statement1
The stable trend in operating activities despite turbulent developments during the year confirms the widely diversified business model of a universal bank with a clear focus on customer business.
Net interest income rose by 36.3 per cent to EUR 5,367 million in 2008 (2007: EUR 3,936 million), remaining the mainstay of our revenue base. Even adjusted for consolidation effects and one-offs, net interest income increased by 18.2 per cent over 2007.
Net fees and commissions amounted to EUR 2,076 million and were thus slightly lower, by 2.2 per cent, than in the previous year (2007: EUR 2,124 million); adjusted for consolidation effects, net fees and commissions were down by 7.5 per cent on the previous year, due to lower demand for securities investments, capital market-related financing instruments and structured investment products.
The net trading, hedging and fair value result was a net loss of EUR 414 million, reflecting the direct impact of the global financial market crisis. The comparative figure for the previous year was net income of 141 million, although the credit market crisis gathered momentum in the second half of that year.
Operating expenses amounted to EUR 3,935 million, at first sight a significant increase over the previous year (2007: EUR 3,351 million). However, it should be noted that some 75 per cent of the increase in costs was due to changes in the group of consolidated companies (acquisition of ATF Bank and Ukrsotsbank). Adjusted for consolidation effects resulting from the acquisitions, operating expenses rose only slightly, by 4.7 per cent, compared with the previous year, despite investment in the establishment of 433 new branches opened in Central and Eastern Europe in 2008. This highly positive trend is not due to short-term cost-reduction programmes but has a sustained effect as back-office, production and administrative functions are increasingly organisated at Group level, with significant cost synergies being unlocked within UniCredit Group.
Bank Austria's operating profit was EUR 3,296 million, up by 7.6 per cent on the previous year (2007: EUR 3,063 million); adjusted for consolidation and one-off effects1, the difference compared with the previous year is minus 9.7 per cent. Apart from changes in the cost base as a result of acquisitions (significantly higher payroll costs in particular), the decline is mainly due to the negative swing of EUR 555 million in the net trading, hedging and fair value result compared with the previous year.
The financial market crisis escalated following the collapse of Lehman Brothers in the middle of September, and economic activity showed a sharp downturn towards the end of 2008. These developments had a significant impact on risk trends, with net writedowns of loans and provisions for guarantees and commitments doubling to EUR 1,012 million (2007: EUR 483 million). The increase of EUR 529 million compared with the previous year for the first time includes EUR 214 million in provisioning charges for the operations in Kazakhstan and Ukraine, which were not yet included in the previous year. Adjusted for these consolidation effects, net writedowns of loans and provisions for guarantees and commitments were up by 67 per cent on the previous year.
Net income from investments rose by 27 per cent to EUR 340 million (2007: EUR 268 million). The largest component within the total figure was the share of profits of the Polish banking subsidiary2, which amounted to EUR 237 million. Moreover, the bank realised gains on the sale of equity interests in line with the strategy of focusing on core business.
Impairment losses on goodwill: The reassessment of the medium-term outlook for some CEE countries which are highly exposed in macroeconomic terms required a revision of the business cases that applied when the respective banking subsidiaries were acquired. Therefore, impairment losses of EUR 1,027 million on goodwill were recognised in the income statement.
An impairment loss of EUR 333 m on goodwill relating to Ukrsotsbank, a bank acquired in 2007, was recognised when it became clear that Ukraine is one of the countries hit hardest by the global economic crisis. At ATF Bank, a bank in Kazakhstan acquired in November 2007, an impairment loss of EUR 417 million on goodwill was recognised as forecasts of medium-term growth had to be lowered. Among the units combined in the Investment Banking (CAIB) segment, an impairment loss of EUR 125.4 million on goodwill was recognised for CAIB Polska and an impairment loss of EUR 140 million on goodwill was recognised for ATON. Moreover, an impairment loss of EUR 11.4 million on goodwill was recognised for our unit in Latvia.
Operating profit reached EUR 3,296 million. After deduction of the balance of non-operating items, which was a net charge of EUR 1,791 million (2007: EUR 323 million), profit before tax was EUR 1,505 million, down by 45 per cent from the previous year's figure (2007: EUR 2,740 million). Adjusted for consolidation and one-off effects1 profit before tax amounted to EUR 2,154 million, a decrease of 14.2 per cent on the previous year.
Consolidated profit for 2008 (after minority interests) was EUR 1,144 million. This means that Bank Austria continues to the bank with the strongest profit performance in Austria although consolidated profit was down by 49.2 per cent on the previous year (2007: EUR 2,254 million). Adjusted for consolidation and one-off effects1 consolidated profit was 18.9 per cent lower than in the previous year.
On the basis of the above-mentioned results, the following key financial data have been calculated:
- Return on equity before tax was 9.8 per cent.
- Return on equity after tax was 7.8 per cent, significantly lower than in the previous year (17.0 per cent) but still higher than the long-term yield on government bonds.
- The cost/income ratio was 54.4 per cent (2007: 52.2 per cent).
- The risk/earnings ratio (provisioning charge as a percentage of net interest income) rose to 18.8 per cent (2007: 12.3 per cent).
- The Tier 1 capital ratio (based on credit risk) was 7.70 per cent under Basel II3.
- The Tier 1 capital ratio (based on all risks) was 6.82 per cent under Basel II.
- Earnings per share were EUR 5.66 (2007: EUR 11.69) based on the annual average number of shares outstanding, which was 202 million shares in 2008.
Results of the Divisions
Bank Austria reports its results in five Divisions: Retail, Private Banking & Asset Management, Corporates, Markets & Investment Banking and Central Eastern Europe (CEE). The bank also shows results for its Corporate Center.
In 2008, the Retail Division faced the challenge of maintaining the positive trend of 2007 despite the difficult market environment. With the turnaround two years ago, the Retail Division underlined its position as a stable success factor in Bank Austria. The Retail Division used cross-selling potential in 2008, optimised customer satisfaction and succcessfully marketed guarantee products, thereby proving that the turnaround is sustainable. Moreover, continuing to pursue its successful course, the Retail Division achieved its best results in many years.
Operating profit generated by the Retail Division in the 2008 financial year rose by 16 per cent to EUR 383 million (2007: EUR 330 million). Profit before tax was up by 27 per cent to EUR 172 million after EUR 135 million in 2007. The favourable performance trend is reflected in return on equity (ROE) before tax, which rose from 13.3 per cent to 17.4 per cent. The cost/income ratio also improved, from 73.9 per cent to 69.0 per cent. The improvement in cost efficiency was again due to successful cooperation with Administration Services, Bank Austria's back-office service provider, which helped to reduce non-staff expenses by 14 per cent.
Net interest income was EUR 774 million, up by 3 per cent on the previous year (2007: EUR 748 million). Contributions to the increase came from the deposit side and from lending business. Time deposits increased by more than 20 per cent compared with the previous year. Among the savings account products, our attractive capital savings accounts were particularly successful. In lending business, medium-term and long-term loans rose by 6 per cent. There was strong demand for housing loans, mainly in the Affluent Customers sub-segment.
The Private Banking & Asset Management Division was particularly affected by developments in credit and financial markets in the course of 2008. Losses in value of almost all segments of the gobal financial market – except cash, precious metals and top-quality government bonds – had a direct impact on the valuation of portfolios and mutual funds. Investors withdrew from medium/high-risk instruments. Even satisfactory relative performance lost its attractiveness as the financial crisis progressed. As a result, there was strong demand for structured products, especially guarantee products, in 2008. A total of 14 structured bond issues were launched in the market in 2008 (six for the Retail segment, eight for Bank Privat) with a combined volume of EUR 365 million, up by 12 per cent on the previous year.
In 2008, the Private Banking & Asset Management Division achieved an operating profit of EUR 54 million (2007: EUR 98 million). Profit before tax declined by 38 per cent to EUR 62 million (2007: EUR 99 million), reflecting the developments described above. Return on equity (ROE) before tax fell by 15 percentage points, from 48.9 per cent to 33.9 per cent. The cost/income ratio deteriorated from 51.5 per cent in 2007 to 65.4 per cent in 2008.
The Corporates Division's operating profit for 2008 reached EUR 658 million, exceeding the very high level of the previous year (2007: EUR 652 million). Adjusted for consolidation effects in the leasing business4, operating profit rose by 4 per cent. Despite the good operating performance in customer business, profit before tax declined by 14 per cent to EUR 492 million (2007: EUR 570 million); the decrease was mainly due to significantly higher net writedowns of loans and provisions for guarantees and commitments. Return on equity before tax (ROE) fell to 19.9 per cent (2007: 25.2 per cent). However, the cost/income ratio continued to improve to 29.2 per cent (2007: 35.1 per cent), as a result of the further reduction of non-staff expenses while staff costs rose in connection with the regional business initiatives in Western Austria.
The business of the Corporates Division – like that of its customers – came under pressure from different sides in 2008. Based on its leading market position and wide range of products and services, the Corporates Division responded to the changed environment in a flexible manner and achieved a good operating result.
An important factor for this success was the wide range of advisory services for corporate customers which were intensively used by this customer group. For example, WorkingCapitalCheck is an innovative analysis tool which has been offered since August 2008 against the background of the financial market crisis. This tool can be used to analyse and unlock liquidity potential within a company. Some 600 companies throughout Austria have so far used this service, which is offered free of charge. In December 2008, the Corporates Division started to offer "Konjunkturkredit", a new lending product to help companies overcome liquidity shortages experienced in the current economic environment. The bank received about 100 enquiries in this context during the first month in which the new lending product was offered. Both new products have been offered in response to the current difficult conditions and provide additional opportunities for the bank to advise its customers.
Business developments in the Markets & Investment Banking Division were strongly affected by the repercussions of the financial crisis, which came to a head in the second half of 2008. As a result of market dislocation, the Division's results before tax deteriorated significantly in 2008 compared with the previous year, to a net loss of EUR 253 million. The first half of 2007 had seen a very favourable market environment, enabling the Division to achieve a profit before tax of EUR 237 million in 2007.
In the fourth quarter of 2008, the financial market situation deteriorated further. At EUR 283 million, the net trading, hedging and fair value loss in the fourth quarter of 2008 was even larger than in the preceding quarter, giving a net trading, hedging and fair value loss of EUR 662 million for 2008 as a whole. Moreover, the net trading, hedging and fair value result includes a negative performance in Global Credit and Relative Value Arbitrage. Net fees and commissions, at EUR 77 million (2007: EUR 172 million), were significantly lower than in the previous year, mainly on account of market participants' restraint against the background of the financial crisis. Overall, net non-interest income/loss was minus EUR 589 million. Successful interest rate management led to net interest income of EUR 731 million, more than double the figure for the previous year (2007: EUR 330 million). The operating result of the Markets & Investment Banking Division was a loss of EUR 64 million, after an operating profit of EUR 238 million in the previous year.
Bank Austria's CEE Division increased its operating profit compared with the previous year by 53 per cent, to EUR 2.5 billion (2007: EUR 1.6 billion). Return on equity before tax reached 21.3 per cent (2007: 18.9 per cent). Further improvements were achieved in the cost/income ratio, which declined to 47.2 per cent (2007: 51.4 per cent). Due to the increased risk provisions in consequence of the global deterioriation in the economic environment, the risk/earnings ratio increased to 17.5 per cent (2007: 9.8 per cent).
Bank Austria is the hub for UniCredit Group's banking network in Central and Eastern Europe. As sub-holding company for CEE operations Bank Austria manages the largest banking network in the region, with more than 56,000 employees serving 24 million customers in over 2,800 branches.
In 2008, the closing of the acquisition of Ukrsotsbank was finalised and with the last merger in Bosnia and Herzegovina in February the network consolidation was completed. Relying on a distinct branding strategy the banks in CEE are clearly recognisable as members of UniCredit Group and with the further expansion of the network by 433 branches, customers can be served even better. Banking business in Central and Eastern Europe made a major contribution to the good performance in 2008, despite challenging circumstances.
"We have been one of the pioneers in CEE and our commitment to the region remains on a long-term basis. It was a difficult year, but we believe in the great potential and the success of the Central and Eastern European countries. As part of an international banking group, Bank Austria can rely on its country diversification and is able to offer competitive advantages to its customers: a well-known brand to attract customers, access to international markets through our network and economies of scale to smaller banks", says Erich Hampel, CEO of Bank Austria and Chairman for the CEE region of UniCredit Group.
Bank Austria's total assets at 31 December 2008 were EUR 222.2 billion, up by EUR 13 billion of 6.2 per cent on the previous year (31 December 2007: EUR 209.2 billion).
The balance sheet at 31 December 2008 reflects the intended sale of equity interests in companies which have so far been consolidated companies. In accordance with IFRS 5, the balance sheet includes disposal groups classified as held for sale (written down to the lower of carrying amount and fair value less costs to sell) which are shown in the items Non-current assets and disposal groups classified as held for sale and Liabilities included in disposal groups classified as held for sale. The main companies in this context are the investment bank UniCredit CAIB AG and card complete Service Bank AG. As the above-mentioned companies are presented in a separate asset item and liabilities item in the consolidated balance sheet at 31 December 2008, the amounts of some of the other balance sheet items declined significantly, so that a year-on-year comparison does not provide meaningful information. The balance sheet shows decreases of double-digit billion euro amounts especially in financial assets/liabilities held for trading and in loans and receivables with banks as well as deposits from banks. The intended sale of the above-mentioned companies has a lesser impact on loans and receivables with customers and on primary funds, i.e. deposits from customers and debt securities in issue; these items therefore increased strongly from year-end 2007 to 31 December 2008.
On the assets side of the balance sheet, loans and receivables with customers were EUR 131.9 billion, up by EUR 16.8 bn or 14.5 per cent on the previous year (31 December 2007: EUR 115.2 billion). Loans and receivables with banks declined by EUR 18 bn or 47.3 per cent to EUR 20 billion (2007: EUR 38 billion). Financial assets held for trading decreased by EUR 14.6 bn or 76.5 per cent to EUR 4.5 billion (2007: EUR 19.1 billion). Illiquid financial assets held for trading in the amount of EUR 2.4 bn were reclassified into loans and receivables with customers as permitted under the amendments to IAS 39.
The liabilities side shows a largely similar picture: deposits from customers rose by 2.1 per cent to EUR 95.2 billion (2007: EUR 93.2 billion) and debt securities in issue increased by 23 per cent to EUR 32.6 billion (2007: EUR 26.5 billion). Primary funds – the sum total of the above two items, representing funding from commercial banking business sources – reached EUR 127.8 bn, exceeding the year-end 2007 figure by EUR 8.1 bn or 7 per cent (2007: EUR 119.7 billion). Deposits from banks declined by 32.3 per cent to EUR 35.5 billion (2007: EUR 52.4 billion). Financial liabilities held for trading decreased to EUR 2.1 bn (2007: EUR 7.4 billion).
Commercial banking business with customers accounts for a growing proportion of the balance sheet total: at the end of 2008, loans and receivables with customers were 59.4 per cent of total assets (year-end 2007: 55.1 per cent). The proportion of primary funds also rose slightly to 57.6 per cent (year-end 2007: 57.2 per cent), mainly on account of the bank's increased efforts in the area of medium-term funding.
Equity amounted to EUR 14.2 bn (2007: EUR 15.3 billion). The decline of EUR 1.1 bn resulted mainly from the dividend paid for 2007 (EUR 832 m) and from the balance of income and expenses recognised in equity (– EUR 241 m).
At the end of 2008, the Tier 1 capital ratio based on credit risk pursuant to Basel II was 7.70 per cent. The Tier 1 capital ratio based on all risks was 6.82 per cent, comfortably above the minimum level required by law.
As a result of business expansion in Central and Eastern Europe, staff numbers in the Bank Austria Group rose to 67,002 (FTE) as at 31 December 2008 (31 December 2007: 54,387 employees). Of this total, 10,943 (FTE) were employed in Austria and 56,059 in CEE countries.
When analysing the income statement, one should note that it reflects one-off effects and consolidation effects. These factors should be taken into account in assessing the bank's operating performance. The adjusted figures include the following one-off and consolidation effects:
Among the one-off effects, goodwill impairments on CEE subsidiaries in the amount of € 1,027 m and a special dividend of € 415 m included in the sub-item dividend income within net interest income are the main factors distorting the picture; the special dividend was distributed in connection with the sale of profit-sharing rights in B&C Holding and is partly offset by a negative effect of € 162.7 m related to this transaction which is reflected in net income from investments (referred to as the "B&C net effect” in the following comments). Operating expenses in 2007 included a € 164 m one-off release of pension provisions which the bank made as a result of the amendment to the Austrian General Social Insurance Act ("ASVG effect").
The acquisition of ATF Bank in Kazakhstan (consolidated as from December 2007) and of Ukrsotsbank (consolidated as from the beginning of 2008) has extended the group of consolidated companies in the CEE network to include large banks. Informations Technologie Austria GmbH (iT Austria) has been accounted for under the proportionate consolidation method in the Corporate Center since the beginning of 2008 (in the previous year, iT Austria was accounted for using the cost method). In the Corporates business segment, the former BA-CA Leasing GmbH was a consolidated company in the first two quarters of 2007; in the middle of 2007 it was transferred to UniCredit Global Leasing – now number one in the European leasing market. Since then, a 32.59% interest in the results of UniCredit Global Leasing has been accounted for under the equity method, which means that income and expense items in this business segment are not directly comparable with the previous year, but the effect on results is less significant. This should be noted when analysing the operating performance of the Corporates Division. As part of the adjustment for the above companies' contributions to the income statement at Bank Austria level, funding costs associated with equity investment management in the Corporate Center are eliminated.
|2||When Bank BPH, the Polish banking subsidiary of Bank Austria (then Bank Austria Creditanstalt), was sold to UniCredit in November 2006, it was agreed that Bank Austria would receive a share of current profits of Bank BPH for the three subsequent years.|
|3||Capital components held in non-consolidated companies are deducted from Tier 1 capital under Basel II and from total capital under Basel I.|
|4||Given the different methods used in accounting for leasing business (consolidation until and including the first half of 2007, since then shareholding interest in UniCredit Global Leasing S.p.A. accounted for under the equity method), a comparison of specific income and expense items with the previous year does not provide meaningful information. For this reason the figures need to be adjusted for this structural effect to assess the operating performance in this business segment.|
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Enquiries: Bank Austria
Martin Halama, Tel. +43 (0)5 05 05 52371;