Notes to the Annual Financial Statements
Basic Information
The Group's reports were prepared in accordance with the International Financial Reporting Standards (IFRS).
All reports were made using the Guidelines on Financial Reporting (FINREP) framework required for reporting to Oesterreichische Nationalbank (the Austrian National Bank, OeNB), which conforms to the framework recommended by the Committee of European Banking Supervisors (CEBS) for uniform financial reporting by internationally active banks. This framework clearly depicts the measurement categories stipulated in IAS 39.
The Group consists of 55 entities in Austria and abroad (2009: 57). There were no significant changes in the scope of consolidation in 2010.
Aside from BAWAG P.S.K., the other banks in the Group are easybank, Österreichische Verkehrskreditbank, BAWAG P.S.K. Wohnbaubank, BAWAG P.S.K. Invest, BAWAG Banka d.d. in Slovenia, and BAWAG Malta Bank. Material non-credit institutions are the leasing group, the BAWAG P.S.K. real estate sub-group, the shoe retailer Stiefelkönig and four asset management companies that hold the majority of the structured credit portfolio. BAWAG P.S.K. Versicherung is accounted for using the equity method after a majority stake in the company was sold in 2007. In 2010 Stiefelkönig is reported under the item assets held for sale for the first time.
BAWAG P.S.K. plans to sell further holdings that are not part of its core business. Pursuant to IFRS 5, the assets and liabilities of these subsidiaries that are classified as held for sale are reported under a separate item on the Statement of Financial Position.
Assets
| in millions of Euros | 2010 | 2009 | Change | |
|---|---|---|---|---|
| Cash reserves | 511 | 615 | -104 | -16.9% |
| Financial assets | 10,855 | 14,543 | -3,688 | -25.4% |
Fair value through profit or loss | 2,284 | 2,980 | -696 | -23.4% |
Available for sale | 6,644 | 3,250 | 3,394 | >100% |
Held to maturity | - | 6,560 | -6,650 | - |
Held for trading | 1,927 | 1,753 | 174 | 9.9% |
| Loans and receivables | 26,173 | 24,879 | 1,294 | 5.2% |
Debt instruments | 2,358 | - | 2,358 | - |
Customers | 22,288 | 21,066 | 1,222 | 5.8% |
Credit institutions | 1,527 | 3,813 | -2,286 | -60.0% |
| Hedging derivatives | 55 | 33 | 22 | 66.7% |
| Tangible non-current assets | 219 | 287 | -68 | -23.7% |
| Intangible non-current assets | 229 | 266 | -37 | -13.9% |
| Other assets | 478 | 602 | -124 | -20.6% |
| Assets held for sale | 36 | 36 | - | |
| Total assets | 38,556 | 41,225 | -2,669 | -6.5% |
The Bank's consolidated assets as of 31 December 2010 amounted to EUR 38,556 million, EUR 2,669 million or 6.5 per cent less than at the end of the previous financial year. The Bank reduced its portfolio of low-return investments and selectively entered into positions offering higher returns.
The EUR 104 million (minus 16.9 per cent) reduction in the cash reserve to EUR 511 million is due to a lower minimum reserve held with the OeNB on the reporting date.
The item financial assets recognised at fair value through profit or loss contains the securities and loans for which changes in fair value are recognised in the Profit or Loss Statement. The financial instruments in this category decreased by EUR 696 million or 23.4 per cent to EUR 2,284 million in the financial year primarily as a result of planned redemptions and disposals.
Because of the Bank's changed investment concept, the assets in the category of held-to-maturity financial assets, which totalled EUR 6,560 million at the end of the prior year, were either sold or reclassified as available-for-sale financial assets (further information is presented in the Notes). Overall, the available-for-sale financial assets increased from EUR 3,250 million at the end of 2009 to EUR 6,644 million at the reporting date. In addition to our securities portfolio, which consists primarily of investments in liquid bank, corporate and government bonds, this item also contains the carrying amounts of our non-consolidated equity holdings in the amount of EUR 245 million (2009: EUR 279 million).
Held for trading covers not only the positions in the trading book, but also all positive fair values of derivative financial instruments, including those held to hedge positions in the banking book but for which hedge accounting is not applied. The increase of EUR 174 million (9.9 per cent) to EUR 1,927 million can be attributed primarily to higher values of currency-based derivatives in the trading book. A similar trend was seen for the trading liabilities.
The item loans and receivables contains the loans to customers and credit institutions that are recognised at amortised cost. The net increase of EUR 1,294 million is related to EUR 2,358 million in debt instruments and EUR 1,222 million in loans and advances to customers. In contrast, loans and advances to credit institutions fell by EUR 2,286 million.
The increase in the carrying amounts of debt instruments reported in this item to EUR 2,358 million can be mainly (EUR 1,897 million) attributed to the transfer of not traded securities from the category of available-for-sale financial assets to loans and receivables. The remaining increase resulted from the purchase of securities in 2010.
The receivables from customers include an encouraging increase in loans to commercial customers in 2010, boosting the item by EUR 1,222 million or 5.8 per cent to EUR 22,288 million.
Receivables from credit institutions fell from EUR 3,813 million in 2009 to EUR 1,527 million at the end of 2010. This contraction can be attributed above all to short-term deposits at other banks, which were reduced because of the low returns they offered.
Tangible non-current assets totalled EUR 219 million on 31 December 2010, down from EUR 287 million at the end of 2009. This can be attributed to depreciation and the sale of properties.
Liabilities
| in millions of Euros | 2010 | 2009 | Change | |
|---|---|---|---|---|
| Financial liabilities | 35,194 | 38,054 | -2,860 | -7.5% |
Fair value through profit or loss | 4,900 | 6,371 | -1,471 | -23.1% |
Customers | 117 | 435 | -318 | -73.1% |
Issued securities | 4,783 | 5,936 | -1,153 | -19.4% |
Held for trading | 2,271 | 2,198 | 73 | 3.3% |
At amortised cost | 28,023 | 29,485 | -1,462 | -5.0% |
Customers | 21,733 | 22,674 | -941 | -4.2% |
Credit institutions | 2,205 | 3,468 | -1,263 | -36.4% |
Issued securities | 4,085 | 3,343 | 742 | 22.2% |
| Hedging derivatives | 40 | 60 | -20 | -33.3% |
| Provisions | 436 | 441 | -5 | -1.1% |
| Other obligations | 462 | 378 | 84 | 22.2% |
| Obligations in disposal groups held for sale | 38 | - | 38 | - |
| Equity | 2,016 | 1,919 | 97 | 5.1% |
| Minorities | 370 | 373 | -3 | -0.8% |
| Total equity and liabilities | 38,556 | 41,225 | -2,669 | -6.5% |
The item fair value through profit or loss under financial liabilities comprises the Bank's issued securities and deposits that are reported at fair value and that are not assigned to the category held for trading. These liabilities totalled EUR 4,900 million on 31 December 2010, EUR 1,471 million or 23.1 per cent less than at the end of the prior year. This decline is primarily due to the redemption of securities issued by BAWAG P.S.K. Investment products whose interest depends not only on the general interest rate level but also on other factors such as the inflation rate or the development of specific indexes decreased by EUR 318 million to EUR 117 million. Because these products are hedged against the relevant risks using derivative financial instruments, they are recognised at fair value through profit or loss to ensure that they are reported properly. No new products are being issued in this category.
The held-for-trading financial liabilities rose by EUR 73 million or 3.3 per cent to EUR 2,271 million in 2010. This increase can especially be attributed to higher valuations of the currency-based derivatives in the trading book. A similar trend was seen for the fair values of the trading assets.
Payables to customers fell by EUR 941 million or 4.2 per cent to EUR 21,733 million. The rather conservative conditions being offered by BAWAG P.S.K. over the past months as well as the shift of some investments in securities and other bank deposits resulted in a EUR 1,219 million decrease in savings deposits, which was partially offset by a EUR 477 million increase in savings through savings card accounts. Together with the investment products measured at their fair values mentioned above, deposits totalled EUR 13,001 million as at 31 December 2010, or one third of the Bank's consolidated assets. Other deposits (including savings card accounts) grew satisfactorily by EUR 278 million to reach EUR 8,732 million.
Payables to credit institutions fell by EUR 1,263 million or 36.4 per cent to EUR 2,205 million.
The issued securities recognised at amortised cost increased due to successful new issues in the amount of EUR 2 billion. Net of scheduled redemptions, issued securities increased by EUR 742 million and came to EUR 4,085 million at the end of the reporting period.
The Bank's provisions were down by EUR 5 million to EUR 436 million on 31 December 2010.
IFRS equity increased by EUR 97 million (+5.1 per cent) to EUR 2,016 million resulting from crediting total comprehensive income in 2010 of EUR 123 million and crediting the coupon paid for participation capital for 2009 of EUR 25.6 million. Non-controlling interests remained virtually unchanged at EUR 370 million.
Profit or Loss Statement
Profit or Loss Statement (adjusted for valuation results attributable to non-controlling interests)
| in millions of Euros | 2010 | 2009 | Change | |
|---|---|---|---|---|
| Net interest income | 649.9 | 564.3 | +85.6 |
+15.2% |
| Net fee and commission income | 159.4 | 154.8 | +4.6 | +3.0% |
| Gains and losses on financial assets and liabilities adjusted for non-controlling interests 1) |
155.9 | 138.9 | +17.0 |
+12.2% |
| Other operating income and expenses | -4.4 | 29.9 | -34.3 |
- |
| Operating income |
960.8 |
887.9 | +72.9 |
+8.2% |
| Administrative expenses | -544.5 |
-527.7 | -16.8 |
-3.2% |
| Depreciation and amortisation on tangible and intangible non-current assets |
-73.8 |
-80.4 | +6.6 |
+8.2% |
| Operating expenses | -618.3 |
-608.1 | -10.2 |
-1.7% |
| Operating profit | 342.5 |
279.8 |
+62.7 |
+22.4% |
| Provisions and impairment losses | -199.7 |
-236.7 | +37.0 |
+15.6% |
| Share of the profit or loss of associates accounted for using the equity method |
-4.7 |
-8.0 | +3.3 |
+41.3% |
| Profit before tax adjusted for non- controlling interests 1) |
138.1 | 35.1 | +103.0 |
>+100% |
| Income taxes | -12.7 |
-56.6 | +43.9 |
+77.6% |
| Profit (loss) after tax (without gains and losses on financial assets attributable to non-controlling interests) |
125.4 | -21.5 |
+146.9 |
>+100% |
| Profit (loss) after tax (without gains and losses on financial assets attributable to non-controlling interests) |
125.4 | -21.5 | +146.9 |
>+100% |
|---|---|---|---|---|
| Gains and losses on financial assets attributable to non-controlling interests1) |
11.2 | 186.6 | -175.4 |
-94.0% |
| Profit after tax |
136.6 | 165.1 | -28.5 | -17.3% |
Thereof attributable to non-controlling |
14.8 | 195.1 | -180.3 | -92.4% |
Thereof attributable to owners of the |
121.8 | -30.0 | +151.8 | - |
1) Under IFRS, the item Gains and losses on financial assets and liabilities also includes the valuation of securities whose risk in borne by shareholders of non-controlling interests. These securities are subject to substantial fair value fluctuations. Because of the restructuring of one of these securities in the 2009 financial year, impairment losses from prior years were reversed in the reporting period and valuation gains of EUR 186.6 million were credited to the shareholders of non-controlling interests. In order to improve the comparability of the results, the valuation results attributable to shareholders of non-controlling interests are shown in a separate line. Compared to the Profit or Loss Statement presented in the Consolidated Financial Report according to IFRS, the item Gains and losses on financial assets and liabilities is EUR 11.2 million lower (2009: EUR 186.6 million lower). Accordingly, the item Profit before tax presented above is EUR 11.2 million lower (2009: EUR 186.6 million lower) than the Profit before tax presented in the Consolidated Financial Report according to IFRS.
Net interest income increased by EUR 85.6 million or 15.2 per cent to EUR 649.9 million in 2010 thanks to consistent improvements in the profitability of our business areas. The selective expansion of our international business activities also played a major role in boosting net interest income in the period.
Net commission income increased moderately by 3.0 per cent compared to the prior year, amounting to EUR 159.4 million. Commission expenses in the financial year include payments in the amount of EUR 5.7 million for the guarantee issued by the Republic of Austria for certain assets in the maximum amount of EUR 400 million, which was terminated on 22 June 2010.
The gains and losses on financial assets and liabilities are driven primarily by the valuation of our investments and issued securities and gains from the sale of securities.
The Financial Markets unit achieved a result of EUR 19.2 million in the reporting period by trading in securities and derivatives.
Risk premiums on the capital market declined again in 2010, as in 2009. This led to positive valuation results in the structured credit portfolio of EUR 28.8 million and realised gains from the sale and redemption of securities of the structured credit portfolio in the amount of EUR 10.3 million.
A further EUR 21.2 million in income was generated by the sale of associated companies and subsidiaries.
Investment strategy changes and revised interest rate positioning resulted in the sale of securities and realisation of capital gains in the reporting period. These profits were used to cover expenses from the valuation of issued securities recognised at fair value through profit or loss and other effects of hedging measures and valuations. These measures resulted in a net surplus of approximately EUR 76 million.
The other operating income (expenses) resulted in negative EUR 4.4 million in the reporting year, mainly due to valuation losses from our retail subsidiary. The higher other operating income in the prior period resulted from revenue from the sale of properties and compensation paid to the Bank for legal damages.
Administrative expenses totalled EUR 544.5 million in the reporting period and were up by EUR 16.8 million or 3.2 per cent compared to 2009. This includes restructuring expenses of EUR 25.8 million arising from our efficiency and productivity enhancement programme. Without these restructuring expenses, the personnel and administrative costs were reduced by EUR 9.0 million for the reporting period.
The EUR 6.6 million reduction in depreciation to EUR 73.8 million can mainly be attributed to the sale of properties in the 2009 and 2010 financial years.
Expenses for provisions and impairment losses fell by EUR 37.0 million or 15.6 per cent to EUR 199.7 million in the reporting period. This encouraging trend was mainly the result of a EUR 38.9 million reduction in the provisions required for our loan portfolio to EUR 135.6 million. Impairment losses for equity investments and goodwill came to EUR 50.2 million in the financial year, and were related primarily to interests in credit institutions. Impairment losses on properties in the amount of EUR 12.0 million were recognised because of the ongoing restructuring measures and the planned combination of BAWAG and post office branches. No substantial write-downs were recorded for the structured credit portfolio in 2010.
The result from the associates accounted for using the equity method (minus EUR 4.7 million) primarily contains the proportionate loss of ZEUS Recovery Fund S.A, which is due to the valuation of investments.
By consistently improving the profitability of our business activities and thanks to the process optimisations implemented to date, BAWAG P.S.K. achieved a profit before tax of EUR 138.1 million in 2010, substantially exceeding the profit of EUR 35.1 million recorded in 2009.
The tax expenses in the amount of EUR 12.7 million consist primarily of current taxes. The significant decline in tax expenses compared to the prior financial year is the result of lower expenses for deferred taxes resulting from different measurement approaches according to tax law and IFRS. No additional deferred taxes were capitalised in 2010 for BAWAG P.S.K.'s existing tax loss carryforwards.
The gains and losses on financial assets attributable to non-controlling interests pertain to fair value fluctuations that are borne by shareholders of non-controlling interests. The IFRS Profit or Loss Statement in the Notes shows these fair value fluctuations under the item gains and losses on financial assets and liabilities. In order to improve the comparability of the results, the valuation results attributable to shareholders of non-controlling interests are shown under a separate item in this Profit or Loss Statement.
The result for the year attributable to the owners of the parent company in 2009 in the amount of minus EUR 30.0 million was increased to plus EUR 121.8 million in 2010.
Consolidated own funds of the BAWAG P.S.K. bank group pursuant to the Austrian Banking Act (BWG)
| in millions of Euros | 31.12.2010 | 31.12.2009 |
|---|---|---|
| Share and participation capital | 800 | 800 |
| Reserves (including fund for general banking risks) | 1,118 | 954 |
| Goodwill, minorities and deductions | 307 | 346 |
| Core capital (Tier I) | 2,225 | 2,100 |
| Less shareholdings held for investment purposes | -35 | -51 |
| Core capital (Tier I) after deductions | 2,190 | 2,049 |
| Reserve under § 57 BWG, revaluation reserve | 49 | 85 |
| Supplementary and subordinated debt capital | 593 | 746 |
| Additional items (Tier II) | 642 | 831 |
| Less shareholdings held for investment purposes | -35 | -51 |
| Eligible own funds | 2,797 | 2,829 |
| Tier III | 115 | 67 |
| Own funds | 2,912 | 2,896 |
Own funds are calculated on the basis of the results of the members of the bank group according to Austrian GAAP (UGB) and BWG.
Own funds requirement
| in millions of Euros | 31.12.2010 | 31.12.2009 |
|---|---|---|
| Credit risk | 1,714 | 1,579 |
| Market risk | 115 | 67 |
| Operational risk | 146 | 150 |
| Capital requirements | 1,976 | 1,796 |
This results in a Tier I capital ratio of 9.9 per cent (2009: 10.0 per cent) and an own funds ratio of 12.4 per cent (2009: 13.6 per cent). Both ratios are well above the minimum legal standards, which amount to 4 per cent and 8 per cent, respectively. The Tier I capital ratio based on credit risk (excluding operational risk) amounts to 10.2 per cent (2009: 10.4 per cent).