PREFACE BY THE
CHAIRMAN OF THE MANAGING BOARD

BAWAG P.S.K. delivers strong positive pre-tax operating profit of EUR 46 million, despite the challenging economic environment

Byron HaynesBAWAG P.S.K. recorded a significant improvement in overall operating performance with a pre-tax profit of EUR 46 million in 2009 compared to a loss of EUR 615 million for 2008. This improved operating performance was despite the very challenging economic environment with the full-year impact of the global financial crisis resulting in low interest rates, weak asset demand from customers, strong competition for customer deposits and rising risk costs.

Throughout the year the Bank continued to focus successfully on executing its key priorities including:

  • Investing and developing our core Austrian retail and commercial customer franchises to build further sustainable profitability over the medium term;
  • Continuing to build the liquidity position of the Bank and redeploy to support households, small and medium enterprises and commercial customers and companies;
  • Strengthening the capital position of the Bank;
  • Improving productivity and stringent cost optimisation with a focus on non-personnel costs; and
  • Pro-active risk management in response to the challenging market environment.

Successful development and growth of our core Austrian retail and commercial franchises

BAWAG P.S.K. launched several initiatives in 2009 in support of our Austrian retail and commercial customer franchises. In particular through our "Unternehmen Österreich" initiative the Bank confirmed its continued commitment in supporting the Austrian economy, providing tailor-made savings and investment products with a clear Austrian focus. In addition, BAWAG P.S.K. also started an initiative offering attractive financing to municipalities using the slogan "BAWAG P.S.K. Kommunalmilliarde" ("BAWAG P.S.K. Billion for Municipalities") which was taken up with huge interest by the public sector market. In this way, the Bank intends to increase support for investments of Austrian federal states, cities and municipalities in infrastructure projects.

Retail customer franchises

The Bank's retail businesses through its three distribution channels - BAWAG, PSK BANK and easybank - focused in 2009 on providing products and advisory services meeting the changing needs of our customers in response to the global financial crisis. In particular:

  • The Bank was successful in renewing savings of EUR 5.1 billion following the maturity of capital savings books (Kapitalsparbücher) by providing customers with attractive value for money product alternatives;
  • Sales of securities to private customers increased significantly by EUR 550 million to EUR 1,465 million, a 60 per cent increase;
  • BAWAG P.S.K. Wohnbaubank sold bonds in the amount of EUR 348 million and is therefore the market leader regarding new issues in 2009, with a market share of 28 per cent;
  • BAWAG P.S.K.'s direct bank easybank increased its balance sheet total by 84 per cent to EUR 1.5 billion, and the number of accounts increased by 45,000 to 290,000;
  • BAWAG P.S.K. Invest increased its funds under management by EUR 517 million, a 17 per cent increase; and
  • The Bank's alternative and mobile distribution channels also developed strongly through the introduction of the "Vorteilswelt" ("World of benefits") comprising customers with a "Betriebsservice card" or a "VÖS card" (Savings Clubs Association card).

Commercial customer franchises

BAWAG P.S.K. commercial businesses developed well in 2009 with our dedicated industry specialists and regionally focused account managers providing our customers with specialised products supporting their banking needs. In particular:
  • New commercial loans amounted to EUR 3.9 billion, a 10 per cent increase compared to 2008 and higher than the overall market despite the weak demand;
  • Lead manager for six new corporate bonds issuances in Austria and participating as a member of the syndicate in 60 per cent of all new issuances;
  • One of the market leaders in providing financing to the public sector with new volumes in 2009 of more than EUR 1 billion, an increase of 100 per cent compared to 2008;
  • Continued support of the social housing sector with an 11 per cent market share; and
  • BAWAG P.S.K leasing grew its market share in Austria by 2.3 percentage points to over 7 per cent with new business volumes in excess of EUR 400 million.

BAWAG P.S.K. continued investment in our employees and the community

The Bank continues to focus on investing in our people, systems and processes to deliver outstanding service to our customers and other stakeholders, which has resulted in improvement in operational performance and continued financial strength.

Several important successful initiatives were started in 2009 in support of the development of our employees, such as the EMERGE programme for creating and supporting new talent in the organisation, as well as the Women's Initiative and the Diversity programme. Another key focus was the Leadership Development Initiative, where a revised and enhanced "Management by Objectives"process was introduced across the Bank, reflecting the changes introduced to modernise the Bank over the last two years.

Through these programmes BAWAG P.S.K. succeeded in taking important steps on the way to becoming one of Austria's employers of choice.

BAWAG P.S.K. is also undertaking significant efforts in order to live up to its social responsibility. In 2009, the Bank became a member of the UN Global Compact. Projects and initiatives included the introduction of a current account, the "New Chance Account", which is a basic account for all customers regardless of their credit standing. This account supports people who otherwise would have no access to the most important banking services. In addition, the Bank has evaluated the compliance with human rights in all areas of its business through which further initiatives were triggered.

BAWAG P.S.K.'s sponsoring activities focus on the areas of the arts, education and social issues with the target to support innovation and sustainability. In 2009, BAWAG P.S.K. was awarded the "maecenas" art sponsoring prize for the best art sponsoring project by a large corporation. 

Strong and improved liquidity position

The Bank's overall liquidity position has improved by 39 per cent to EUR 8.6 billion in December 2009 compared to year-end 2008 of EUR 6.2 billion. The Bank has continued to focus on strong pro-active management of its cash and unutilised collateral resources, helping steer the Bank through the global financial crisis. This strong liquidity position allows the Bank to continue to support our Austrian retail and commercial customers as well as the Austrian banking system as a whole in line with the Bank's overall strategy. 

Capital position strengthened to meet the new regulatory requirements 

During the year the capital position of the Bank has been strengthened against the background of the new regulatory requirements for financial institutions in response to the global financial crisis.

In the second half of the year, BAWAG P.S.K. successfully raised EUR 80 million Tier II capital and increased Tier I capital by EUR 550 million participation capital issued to the Republic of Austria. A further strengthening of the capital base was achieved by a EUR 205 million contribution received from the shareholders. In addition, the Republic of Austria provided an asset guarantee of EUR 400 million covering certain assets on the Bank's balance sheet. This guarantee expires on 30 June 2014.

The agreements with the Republic of Austria on the subscription of EUR 550 million participation capital and the issuance of an asset guarantee in the amount of EUR 400 million were concluded following EU Commission preliminary approval. Final EU Commission approval is expected before 30 June 2010.

Year-end 2009 the capital ratios of the Bank have significantly improved with a Group Tier I ratio of 10.0 per cent (year-end 2008: 6.6 per cent) and an own funds ratio of 13.6 per cent (year-end 2008: 9.8 per cent).

Pro-active risk management helps mitigate loan loss provisions and impairments

Throughout 2009 the Bank further strengthened and invested in its risk management capabilities and infrastructure including enhanced risk-based pricing tools, new behavioural scorecards for mortgages, one-stop credit and overdrafts and new early and late stage collections processes and capabilities. This improved risk capability has helped to reduce the overall risk costs of the Bank in 2009 despite the worsening global economic environment. In particular, the Bank has been pro-active in reducing the embedded risks in the structured credit portfolio.

De-risking of the legacy structured credit portfolio

In the period from 2003 to 2005, BAWAG P.S.K. built a sizeable investment in products collectively known as "structured credit". During 2009, the Bank executed significant actions in further de-risking the structured credit portfolio. These actions included the sale of certain securities and the restructuring of assets as well as adjusting the hedging strategy. Additionally, those investments which matured in 2009, were fully redeemed at par.


These actions led to a significant reduction in the book value of EUR 590 million and underlying risk of the structured credit portfolio. As of 31 December 2009 the book value of the structured credit portfolio was EUR 1.16 billion compared to a book value of EUR 1.75 billion as of 31 December 2008. The total cost of the risk mitigation actions charged to the profit and loss account for 2009 amounted to EUR 128 million (2008: EUR 145 million).

The Bank will continue to mitigate risk in this legacy structured credit portfolio where possible. However, the Bank does not expect significant defaults in the structured credit portfolio going forward, although BAWAG P.S.K. might continue to be impacted by valuation changes.

2009 financial results satisfactory in light of the global economic crisis - significantly improved compared to 2008

BAWAG P.S.K recorded an operating profit before tax and minority interests of EUR 46 million for 2009 compared to a loss before tax and minority interests of EUR -615 million for 2008.

The key drivers for this significant improvement in the 2009 results were:

Operating income doubled
BAWAG P.S.K. recorded operating income of EUR 888 million for 2009 compared to EUR 404 million for 2008. Net interest income decreased by EUR 88 million to EUR 564 million as the result of significant saving deposit margin compression due to the strong competition for customer deposits. This decrease was more than compensated by net commission income of EUR 155 million, an 8 per cent increase compared to 2008 driven by increased sales of security products and a significantly improved result from financial assets of EUR 139 million.
Operating costs decreased by 15 per cent through improved productivity and stringent cost control

Operating costs for 2009 were EUR 598 million, a EUR 107 million decrease compared to 2008 operating costs of EUR 705 million. This cost reduction has been principally achieved by targeting non-personnel costs through process optimisation and improved productivity.

Loan loss provisions and impairments lower than 2008 despite the worsening economic environment  

Total loan loss provisions and impairments for 2009 were EUR 237 million compared to EUR 281 million for 2008, a 16 per cent reduction. Loan loss provisions of EUR 175 million were in line with the 2008 figure of EUR 166 million, despite the worsening of the global economic environment confirming the overall relatively conservative risk profile of the loan portfolio. Impairments for 2009 were EUR 62 million compared to EUR 115 million for 2008.

Impairments for the structured credit portfolio and participations decreased in 2009 to EUR 62 million from EUR 102 million in 2008, following successful actions in the de-risking of this portfolio.

Balance sheet totals remain unchanged in spite of structural changes

BAWAG P.S.K.'s consolidated assets totalled EUR 41.2 billion as at 31 December 2009, in line with year-end 2008 of EUR 41.6 billion. Changes in the structure of the assets and liabilities were realised as the Bank started to deploy its liquidity in support of our strategy. Loans to customers increased by 2 per cent despite weak market demand to EUR 21.1 billion, while low yielding assets to credit institutions decreased by 16 per cent to EUR 3.8 billion.

On the liability side, customer deposits of EUR 22.7 billion were slightly higher than 2008 even though there was strong competition for customer deposits from other financial institutions. The equity position of the Bank significantly increased by 69 per cent, reflecting the successful raising of capital and strengthening the financial position so that the Bank can continue executing its strategy in supporting the Austrian retail and commercial businesses.

Changes in the Managing Board and Supervisory Board

The most significant change in the Managing Board occurred in August 2009 when the Chairman at that time, David Roberts, had to announce his resignation due to health problems. On behalf of the Bank, I would like to once more thank him for his efforts and his commitment. David Roberts succeeded in helping build the foundation for a strong bank that can weather the difficult economic conditions. I wish him all the best for his future and his health.

In December 2009 Joseph Laughlin announced his retirement from the Managing Board effective at the end of the year. I would like to thank Joseph Laughlin for his strong commitment and dedication to BAWAG P.S.K. in helping to modernise the Bank. Sanjay Sharma, who has been Managing Director of Operations at BAWAG P.S.K. since August 2008, was appointed Chief Operating Officer on 1 January 2010.

In January 2010, Carsten Samusch announced that he will not ask for a renewal of his management contract which expires in May 2010. He has been responsible for Treasury since 2007 and although there will be more opportunities to thank Carsten Samusch, I would also like to express my gratitude and thanks for his efforts and achievements in Treasury, particularly in helping steer the Bank successfully through the global financial crisis.

With regard to the Supervisory Board, three members changed in 2009: In October 2009, Wulf von Schimmelmann resigned from the Supervisory Board of the Bank as well as from the position as Chairman due to time restrictions following obligations in other supervisory boards. I would like to thank Wulf von Schimmelmann for sharing his wisdom and experience with the Managing Board in helping steer the Bank through these difficult economic times. Also during the year Mike Rossi retired and Daniel Wolf resigned from the Supervisory Board due to personal reasons. I would also like to thank them for their contributions and shared experiences in discussions at the Supervisory Board.

Cees Maas, former chief risk officer and chief financial officer as well as vice president of ING Group NV joined the Supervisory Board in July 2009 and was elected as Chairman in October. In December 2009, Scott Parker was appointed as a Supervisory Board member of BAWAG P.S.K. I am looking forward to working with the new Supervisory Board members, both of whom bring a wealth of experience and extensive knowledge on international banking.

The year 2009 was challenging but successful for BAWAG P.S.K., as the Bank steered its way through the global financial crisis while staying focused on executing and realising its key priorities. Going into 2010, BAWAG P.S.K. is well positioned to meet the ongoing economic challenges in the market place with its strong capital and liquidity position. The Bank will continue to focus on servicing its customers, providing value products and being responsive to meet their needs in these difficult economic times, while building sustainable profitability over the medium term.

On behalf of the entire Managing Board, I would like to thank all employees of BAWAG P.S.K. for their outstanding commitment and hard work in the past year. It has not been an easy year, but we were working together towards our common goal: To make BAWAG P.S.K. a strong, Austrian bank, a good place to work and a great place for our customers to do banking business.

Byron Haynes

Byron Haynes
Chairman of the Managing Board and CEO
Vienna, March 2010