Preface by the Chairman of the Managing Board

In the first half of 2011 BAWAG P.S.K. maintained good positive momentum. Operating performance was better than plan and 2010. BAWAG P.S.K.’s significant investment programmes for 2011 were delivered on schedule and within budget during the first half-year, including investment in building sustainable profitability across our businesses, continuation of our investment in the productivity and efficiency programme as well as investment in meeting new regulatory requirements.

BAWAG P.S.K.’s good overall performance has been realised in spite of the continued difficult macroeconomic environment and increased competition in the Austrian banking market. There have been significant degrees of uncertainty and market volatility, particularly resulting from the continuing and escalating EU sovereign debt crisis. The Bank's sovereign exposure to European high-deficit countries is limited due to prudent measures taken in the last years. The Austrian economy has grown strongly as trade exports in particular have recovered. Competition in the Austrian banking market further increased, resulting in lower margins. Investment volumes in Austria continue to be at a very low level.

Investment Programmes Supporting Growth

As announced last year, 2011 is a year of investment in BAWAG P.S.K. in order to deliver sustainable growth in the medium term. This investment supports all our businesses and relates to people, processes, IT systems, new products, enhanced service delivery and improved brand recognition through increased advertising.

The Retail and Small Business segment has focussed on execution of the “Filialoffensive” and the extension of our branch network. By the end of July 2011, over 130 new branches were opened and refurbished, providing a wide range of banking services. BAWAG P.S.K. has received good, positive feedback from our customers with this new, unique branch concept.

In parallel, our e-banking capabilities have been significantly improved, both in easybank as well as in BAWAG P.S.K. BAWAG P.S.K.’s new “Kontobox” was also developed and successfully launched, offering a new product concept to our retail customers, combining a current account with a savings account offering an attractive interest rate.

In the Corporate and Financial Markets Business segment, our Business Solution Partner concept was successfully launched, combining the strengths of our Corporate and Financial Markets capabilities and providing holistic solutions to our customers. This has been particularly well received by our customers during the recent, significant market volatility. There has also been a focus on enhancing our product offerings, including investment and launch of our new cash management tool and enhancement of our project finance capabilities.

The International Business segment (International Corporates and International Corporate Real Estate) continues to grow and perform well. Investment has focussed on expanding the business and further increasing our skills and market knowledge in this area.

BAWAG P.S.K. has also continued to invest to increase productivity and efficiency through our end-to-end processes resulting in improvements in our time to market and customer service.  

A number of regulatory projects and investments have also been completed during the period, including preparation of our systems for the capital gains tax introduction and finalising SEPA.

Furthermore, during the first six months, the Bank has launched its new strong bank brand BAWAG P.S.K., combining the strengths of BAWAG and PSK Bank. BAWAG P.S.K.’s brand is now being repositioned under our Intuitive Banking philosophy. During the period, our new advertising campaign “Mitten im Leben” has been launched for our retail customers, supporting this Intuitive Banking brand image. A similar advertising campaign for our Corporate customers, Financial Markets customers and small business customers – “Mitten im Business” – will be launched in the second half of the year.

Sustainably Improved Operating Performance

Our continued focus on the needs of our customers has delivered good, sustainable results in the first six months of the year which were better than plan.

• Underlying revenues of EUR 411.8 million (comprising net interest income of EUR 322.4 million and net commission income of EUR 89.4 million) were increased compared to the first half of 2010 by 5 per cent (EUR 393.7 million). This growth has been achieved despite intense market competition on underlying volumes and lower margins. The total operating revenues for the first half of 2011 amounted to EUR 479.5 million.
• The Bank’s tight cost management continues to show satisfactory results. Despite the significant investment made in the first half of 2011, total operating expenses (without Bank Levy) of EUR 309.2 million are in line with the costs in the first half of the previous year.
• The cost-income ratio remained stable since December 2010 at 64.5 per cent.
• Provisions and impairment losses amounted to EUR 78.9 million, which is 28 per cent lower than the amount for the first half of the previous year (EUR 110.3 million). The decrease in loan loss provisions and defaults, despite the difficult economic environment, shows the continued relatively conservative risk profile of the Bank’s loan portfolio.
• Profit before tax (without bank levy) for the first half of 2011 of EUR 91.6 million compares very favourably with the profit before tax for the full year 2010 of EUR 138.1 million.
• Net profit for the first half of 2011 of EUR 78.5 million (including a bank levy charge of EUR 10.2 million) also compares favourably with the net profit for the full year 2010 of EUR 121.8 million (no bank levy charges were made in 2010).

Strengthened Capital and Liquidity

During the first six months of 2011, BAWAG P.S.K. has continued to focus on further strengthening its capital and liquidity position, despite making significant investments in support of our businesses. Our capital position has been strengthened through disciplined capital management and realisation of risk-weighted asset reductions while at the same time enhancing profitability. The Credit Risk Tier 1 ratio of 10.9 per cent has improved from 9.0 per cent in June 2010. The Group Tier 1 ratio (including total risk-weighted assets) of 9.5 per cent has also significantly improved from 8.0 per cent at the half-year 2010.

Total regulatory liquidity of EUR 5.8 billion as at 30 June 2011 remains strong (30 June 2010: EUR 4.6 billion).

During the period up to 30 June 2011, BAWAG P.S.K. participated in the annual stress tests of the Austrian National Bank. These stress tests were similar to the European Banking Authority (EBA) stress tests performed at the same time.

Although the Austrian National Bank stress tests were not published on a single bank result basis, I am pleased to say that BAWAG P.S.K. passed these stress tests comfortably.

BAWAG P.S.K. continues to prepare well for the introduction of Basel III and CRD IV. Measures have been identified and are in execution to meet all requirements. BAWAG P.S.K. continues to more than fulfil the Basel III criteria in 2011 and is confident that it will continue to remain compliant at the time of its introduction in 2013.

Changes in the Managing Board

In April 2011, Stephan Koren announced that he will not be available for an extension of his contract and that he will retire from his positions as Deputy CEO, Chief Risk Officer and Managing Board member of the Bank. As of 1 May, I have taken over the function of Chief Risk Officer. I would like to express my deepest thanks to Stephan Koren for all his efforts. I really appreciate his valuable and significant contributions to the Bank over many years and I would like to wish him all the best for the future.

Outlook

For the second half of 2011, we expect that the Austrian economy will be impacted by the current market turbulences and the accelerated inflation. This might hinder the development of real disposable household income and may lead to a further reduction of the savings rate. Nevertheless, the latest forecasts still believe in a very modest growth of the Austrian economy.

These developments have somewhat impacted business and consumer confidence, which was at a high level in the first half of the year. The Austrian economy will further be subject to external market shocks like the continued sovereign debt crisis.

BAWAG P.S.K. will continue to focus on its Retail and Corporate businesses and the ongoing execution of our investment programmes in support of further growth of our customer franchises.
Finally, I would like to take the opportunity to thank all employees of the Bank for their continued commitment and dedication through which the good performance of the Bank could be realised during the first six months of 2011.

Byron Haynes, CEO
Chairman of the Managing Board
Vienna, August 2011