PREFACE BY
THE CHAIRMAN OF THE MANAGING BOARD
A Successful "New Start"
The year 2007 was truly momentous for BAWAG P.S.K. On 15 May 2007, the Bank was acquired by a consortium led by Cerberus Capital Management, L.P. The successful sale of the Bank brought to an end a very difficult chapter in the Bank's history. The injection of new capital by the new owner replaced the guarantee given in favour of the Bank from the Republic of Austria and ensured the rescue of the Bank from the crisis that overtook it in 2006.
It is often customary for a Chief Executive's report to end with a tribute to the staff in the company. However, on this occasion I think it is appropriate to start with a comment on the role played by all the colleagues in BAWAG P.S.K. during the past year. Quite simply, they have done an outstanding job in re-building customer confidence and supporting the rescue of the Bank. The fact the Bank is now on such a firm footing is down in no small measure to their commitment and skill. All involved in BAWAG P.S.K. owe them a debt of gratitude for their dedication and hard work. On behalf of the Managing Board I would therefore like to thank all colleagues for their support over the past twelve months.
It is also appropriate at this time to pay tribute to the efforts of all others involved in the rescue of the Bank, particularly the new Managing Board, so ably lead by Ewald Nowotny, who steered the Bank through such turbulent times. The fact that not one euro of public funds was lost in the period is a testimony to the capabilities and skill of all involved. In particular, we should salute the role played by our customers. Their loyalty and commitment ultimately saved the Bank.
The completion of the sale of the Bank undoubtedly marked a turning point. However, much work remained to be done during the year if the business was to regain momentum and start to compete effectively. I am pleased to report the "New" BAWAG P.S.K. ends 2007 in a strong position.
A Successful New Start - Growing Customer Confidence
Customers of BAWAG P.S.K. have shown visible confidence in the Bank following the change of ownership on 15 May 2007. There were good early signs of growth across the customer base:
- Increase in group savings deposits in 2007 by €120 million
- 94,300 new private current accounts in BAWAG P.S.K. and easybank
- New sales of over €500 million Wohnbaubank bonds
- Sale of more than 10,000 Top-Saving-Cards within 6 months
- 5,700 new accounts from middle market clients
"All numbers up" in the private customer business indicate clearly that the new positioning and re-launch of the brands were successful. Initiatives like the longer opening hours in selected BAWAG branches and new, attractive products such as the soccer savings account (Fußballsparbuch) and the Anlageduett savings product were well received by our customers.
2007 Adjusted Consolidated Profit of €147 Million
Adjusted consolidated profit under IFRS of €147 million constitutes a considerable improvement over 2006 and shows the direction the Bank is heading towards.
Headline profit/loss for 2007 was distorted by the accounting impact of the phase-out of the state guarantee, and the "capital injection for bad loan write-offs" strategy of the new owners. While under IFRS, the one-off impact of the €600 million write-off has to be taken through the profit and loss account, the corresponding capital injection of the same amount has to go directly into the capital account. The stated negative profit figure of €452 million is therefore made up of two elements: a "business-linked" profit of €147 million (called the "Adjusted consolidated profit") and a one-off charge of €600 million for old problem loans related to the release of the government guarantee.
Net interest income was almost unchanged despite a decline in the asset base by 16 per cent. This shows the impact of active portfolio management to improve our margins and risk adjusted returns on capital.
Revenues grew in the retail and middle market businesses by 3.8 per cent and 3.5 per cent respectively, whilst income in the wholesale business fell by 15.3 per cent as a consequence of the actions taken during 2006 and 2007 to reduce unattractive assets.
Even in a year of tremendous changes, costs grew by only 2 per cent. However the cost-income ratio, at 87.7 per cent, remains much too high and has to be addressed if the Bank is to remain competitive.
The results for 2007 also reflect a year of significant portfolio and asset re-structuring activity which will continue into 2008. The numbers contain many one-off gains and charges that reflect principally both the gains and losses on the sale of non-core businesses, and of a review of asset quality. The net gain on disposal of non-core businesses and assets amounted to €287 million. The charge against the balance sheet arising from the review of asset quality amounted to €378 million.
Very Strong Liquidity and Capital Position
The "new" BAWAG P.S.K. was in a strong financial position at year end. The combination of retained earnings, asset disposals, the write-off of problem loans and the €600 million capital injection at the time of the acquisition resulted in the Group's Tier 1 capital ratio rising to 8.5 per cent (2006: 7.6 per cent excluding the impact of the €450 million capital support operation reported as a minority interest in the 2006 balance sheet which was repaid after the successful sale of the Bank). Careful management of liquidity over the year resulted in substantial available surplus liquidity in excess of €4 billion. Such capital and liquidity strength puts BAWAG P.S.K. in a position to take advantage of opportunities that will emerge over the coming months.
The reduction in receivables from customers of €3.40 billion or 13.6 per cent to €21.63 billion reflects the redemption of loans to public sector borrowers and two one-off effects: the repayment of loans made by the Bank to its previous owners, and the write-off of €600 million of loans following completion of the acquisition by the new owners in connection with the release of the government guarantee. Business with personal customers and small and medium-sized enterprises developed well.
Customer deposits in total grew over the year, reaching €23.3 billion: savings deposits grew by €120 million, reflecting the new product initiatives and rising customer confidence.
Results from the Review of the Balance Sheet
Following completion of the acquisition of the Bank, the management team undertook a review of the balance sheet, resulting in a charge of €378 million in certain asset classes arising from changes in market valuations.
Within a total securities portfolio of €10.8 billion, BAWAG P.S.K. owns CDO/ABS securities totalling €3.3 billion. Within this portfolio, 99.5 per cent currently is rated externally as investment grade, split 43 per cent AAA, 48 per cent AA, 7 per cent A, 1.7 per cent BBB, and only 0.5 per cent is rated below this level. The geographic split of the portfolio is 50 per cent Europe and UK, 49 per cent USA and 1 per cent Rest of World. 71 per cent of the portfolio is accounted for as "Fair value through profit and loss".
The Bank has no direct exposure to US sub-prime mortgages, although some securities within the CDO/ABS portfolio do contain such assets. Total indirect exposure to US sub-prime mortgages contained within the aggregate CDO/ABS portfolio amounts to €216 million, with 84 per cent being originated in 2005 and earlier. Actual losses in 2007 on securities including some element of sub-prime amounted to €34 million.
The Bank continues to monitor changes in the market's valuation of the assets, where such a market exists, and compares this against separately carried out fundamental value analysis based on predicted cash flows and underlying credit quality.
The Bank has no exposure to, nor owns, Structured Investment Vehicles ("SIVs") or conduits, and has no credit exposure or standby commitments to such vehicles.
New Strategy Launched - €500 Million Profit Goal in 2012
Following completion of the acquisition by the new owners, a new strategy has been devised to guide the Bank over the coming years, and implementation has already commenced. The new strategy aims to deliver €500 million of profits in five years - a benchmark for our intended market position.
The new strategy has three major components:
- Increasing profitability and returns within the core Austrian Bank
- Launching a range of new businesses outside of Austria
- Seeking to use the Bank's capital and liquidity strength to take advantage of acquisition opportunities that may arise that will accelerate the Bank's growth, particularly within the personal banking markets.
A total of €250 million will be invested in re-engineering and re-building the core Austrian retail, commercial and large corporate banking franchise. The core customer proposition will be based on a combination of excellent service and focused product development. Significant increases in productivity will be achieved, driven by investments in marketing, process re-engineering, improved risk management, sales force education and product development. Costs will be managed very tightly.
The Bank will launch a series of new business ventures, targeting specific market segments that are growing rapidly and where BAWAG P.S.K. can acquire or build market leadership through the deployment of strong capabilities.
At the centre of our new strategy is a deep commitment to invest in our employees. BAWAG P.S.K. is lucky to have such a skilled, dedicated and competent workforce. We will seek to modernise the Bank and ensure we remain an attractive place to work for talented individuals. We will continue to invest in new systems, education, and appropriate compensation systems to support our colleagues in delivering excellent service to our customers and good returns to our shareholders.
Changes in the Managing Board
The year 2007 saw a number of changes in the Managing Board. I would like to take this opportunity to thank the departing members Ewald Nowotny, Herbert Legradi and Bardo Akay, and wish them well in their new careers. They have all made a significant contribution to the development of the Bank over the past years and we owe them a debt of gratitude.
Outlook
BAWAG P.S.K. begins the year in a strong position: customer confidence is growing, capital ratios and liquidity are very strong and the Bank is profitable. Significant opportunities exist to improve the productivity of the Bank and it will be important progress is made in implementing the necessary changes.
No bank can be completely immune to the challenges currently being faced across the world's financial markets. The year 2008 will undoubtedly be challenging. The slowdown in the US economy and the decline in the US dollar will have some impact on the European economies, whilst the continued turmoil in the financial markets and the consequent volatility in asset valuations present significant challenges for banks.
The financial strength of the Group, and the earnings momentum currently being delivered, give cause for confidence that BAWAG P.S.K. will prosper in the months ahead.
David Roberts, CEO
Chairman of the Managing Board
Vienna, April 2008