Preface by the Chairman of the Managing Board
The First Half of 2013
Over the last five years, the banking sector in Austria and around the globe has been continuously confronted with challenging economic conditions. The European banking industry has been operating in an environment characterised by low growth, exceptionally low interest rates, excess liquidity, persistently falling asset margins and the ongoing implementation of more stringent regulatory and capital frameworks.
Given the macro-economic and regulatory headwinds, the Bank has taken decisive actions in all of its businesses to position itself to be able to operate more profitably and efficiently in the future despite challenges to the industry. This was undertaken as part of an overall strategic repositioning of the Bank focused on enhancing the customer experience, creating the capacity for future growth and simplifying our business focusing on the assets, liabilities, products, and services that are most valuable to both our customers and our other stakeholders.
BAWAG P.S.K.’s strategy has been focused on four key pillars:
1) Investing in our core Retail franchise as well as our domestic and international Corporate lending operations
2) repositioning the balance sheet to focus on our customers in core markets (Austria, Germany and Western Europe) while de-risking from non-core assets, products and certain geographic locations
3) improving our cost base through accelerating the bank-wide efficiency and productivity programme focused on driving process-product simplification and productivity and
4) significantly strengthening our capital base and maintaining strong liquidity to address the changing regulatory environment while at the same time providing us with sufficient capacity for further growth of our core businesses.
1. Investing in Our Core Businesses
BAWAG P.S.K. consistently invests in its core businesses which support our business model and strategy as well as preparing for the structural changes in the banking sector. Our goal is to provide the products and services which our retail and commercial customers value while also positioning the Bank to benefit from any future positive macroeconomic conditions.
In spite of the challenging macroeconomic environment and intense competition, the Bank is successfully attracting new retail customers with our box concept. This concept combines standard banking products with a simple and easy to understand approach. At the end of 2012, the Bank introduced the “SparBox”, a great addition to our “box product” family which established itself very successfully in the first half of 2013. As of June 2013, customers had already invested EUR 400 million in this new savings vehicle. In addition, the Bank achieved a strong increase of its market share in new consumer loans to 12.7 per cent in the first half 2013 (compared to 8.4 per cent as of 30 June 2012) despite the general downwards trend on the retail market. The Bank is committed to offering our customers clear, fair and intuitive banking products.
In addition to our unique and simplified product offering, the Bank is in the final stages of completing the build-out of our branch initiative. Further, our online and direct banking strategy continues to gain strong results, a very positive response from our customers, and represents strong growth prospects in our multichannel strategy over the coming years. BAWAG P.S.K.’s online banking capability is consistently recognised as a market leader in Austria. Our direct banking subsidiary, easybank, was able to consolidate its position as the main bank for private customers with a significant growth in current accounts, credit cards and deposit business. The balance sheet total increased in the first half of 2013 by EUR 417.7 million or 18.5 per cent.
With 500 branches throughout Austria, 93 per cent of which are already operated together with our partner Österreichische Post AG, as well as our e-banking platform and easybank, BAWAG P.S.K. Group offers attractive banking products throughout Austria at any time.
Complementing our Retail franchise, BAWAG P.S.K. remains a strong partner for our key corporate customers in Austria and internationally. Although the business segment is confronted with high margin pressure, again in 2013, BAWAG P.S.K. has maintained stable operating income for its defined core client business, which the Bank continues to grow and invest in where returns are adequate. New financings continue to fulfil clearly defined economic and risk criteria which have been introduced during 2012. With the established Business Solution Partner concept and a wide range of standard as well as customer tailored financing and service products, BAWAG P.S.K. continues to remain a reliable business partner for its corporate customers.
The Bank’s international business strategy focuses primarily on Germany, the UK and selected areas of the rest of Western Europe. The international platform has been a key driver of earnings growth and diversification and is focused on lending through commercial real estate transactions and with corporations that are within our core regions and primarily focused on the investment grade products. Despite high redemptions over the past twelve months as a result of low interest rates, the corporate portfolio has remained stable, while business volume increased considerably in the International Commercial Real Estate segment.
2. Repositioning our Balance Sheet
As part of the strategic repositioning of the Bank, the decision to dispose of its non-core assets was further intensified in the first half 2013. BAWAG P.S.K. started to withdraw from CEE countries back in 2008, and its last CEE banking subsidiary in Slovenia was merged into BAWAG P.S.K. at the end of 2012. In the past year, BAWAG P.S.K. has further reduced its total CEE exposure by 35 per cent which currently amounts to approximately 3 per cent of the total assets.
The Bank is currently concentrating on the restructuring of its domestic leasing business. BAWAG P.S.K. successfully sold its Polish leasing subsidiary, BAWAG Leasing & Fleet Sp. z o.o., in February 2013, and has also agreed on the sale of its Austrian fleet management subsidiary in early July 2013, subject to regulatory approval. The Bank also has agreed to dispose of our remaining shares in MKB, a Hungarian bank. This sale is subject to regulatory approval by the Hungarian authorities which is expected in the second half of 2013. The Bank will continue to look for opportunities to dispose of non-core assets.
Market valuations in the legacy Structured Credit Book improved significantly during first half year 2013. This allowed the Bank to close and sell certain existing legacy collateralised debt obligation (CDO) positions carrying high capital requirements at favourable results. These actions de-risked the balance sheet credit exposure substantially and lowered capital requirements resulting in a favourable reduction of risk-weighted assets on the Bank’s balance sheet. The Bank will continue to evaluate opportunities to further reduce the remaining legacy Structured Credit Book.
The combination of our actions on the legacy Structured Credit Book and the closing of the proprietary trading activities support BAWAG P.S.K.’s commitment to focus the Bank’s capital primarily in our customer businesses and further reduce our non-core investments.
3. Efficiency and Productivity Programme
Over the last months, Austrian and international banks have announced cost reduction initiatives in response to the prevailing adverse economic conditions and increased regulatory costs. BAWAG P.S.K. instituted an accelerated restructuring programme from the second half of 2012 that is targeted to be finalised by year-end 2013. This program follows on the significant investments the Bank made since 2010 in its branch network, e-banking capabilities and IT systems as well as boosting productivity by introducing measures aimed at enhancing processes and end-to-end capabilities. With the investments in the Bank’s infrastructure, BAWAG P.S.K. is positioned to benefit from the efficiency and productivity programme that is leading to a reduction in the overall cost base in 2013 and, more importantly, significant cost improvements that will materialise in 2014.
The restructuring programme has been challenging for the Bank and its employees, however, the Managing Board of BAWAG P.S.K. is convinced that this decision was critical in order to successfully position the Bank to remain profitable in any challenging economic environment and to continue meeting our customers' needs.
4. Strong Capital and Liquidity Base
The Bank has a strong capital base, thanks in large part to its early and proactive measures as well as anticipation of the upcoming regulatory requirements. In March 2012, the Bank bought back the majority of the hybrid preference shares from the holders of these securities. This capital was replaced by an additional shareholders’ contribution in the amount of EUR 200 million at the end of December 2012. The risk-weighted asset optimisation programme also contributed a further EUR 3.4 billion reduction over the course of 2012 and first half of 2013 related to exiting proprietary trading and deleveraging of non-core assets such as the Structured Credit Book and reducing CEE exposure.
Additionally, the Bank was granted regulatory approval to use the Internal Ratings-Based (“IRB”) Approach for its core business areas of Retail and Corporates. This allows the Bank to use a market standard risk measurement method not only for internal controlling purposes but also as the basis for its capital requirements. By applying the IRB approach, the Bank was able to significantly reduce its risk-weighted assets; thus improving its capital ratios and freeing up additional capital for future investments in our core businesses.
BAWAG P.S.K. redeemed a portion of the participation capital issued in 2009 with a nominal value of EUR 50 million in the first half of 2013. Further redemptions of participation capital are already being planned for in the future.
As a result of the various capital measures, the Bank is pleased to report as of 30 June 2013 a core equity Tier I ratio (“CET I”; breakdown according to CET 1, RWAs Basel 2.5) of 12.3 per cent (31 December 2012: 11.0 per cent), a Tier I capital ratio of 13.1 per cent (31 December 2012: 11.7 per cent) and an own funds ratio of 15.1 per cent (31 December 2012: 13.8 per cent). Since 31 December 2011, the CET I ratio has improved by 4.5 percentage points.
Additionally, our liquidity position continues to be a source of strength for the Bank. The total surplus liquidity situation remains solid and strong at EUR 6.0 billion as of 30 June 2013 having allowed the Bank to fully pay back the ECB funding received under the long-term refinancing operations programme (LTRO) during the first half of 2013 at the first available opportunity.
5. Operating Performance of BAWAG P.S.K.
BAWAG P.S.K. has delivered satisfactory results for the first half year 2013 as
- investments in the core businesses have been successfully implemented;
- our capital position has been further strengthened;
- the Bank has a very strong liquidity position and structure;
- the result of the efficiency and productivity programme is ahead of schedule and has largely been delivered; and
- our operating results are significantly better than in the first half 2012.
The overall profit before tax and bank levy (before restructuring costs) is EUR 120.3 million. This compares to EUR 82.4 million of the first half year 2012, a 46 per cent increase.
- Total operating income for the first half of 2013 amounts to EUR 474.4 million compared to EUR 461.6 million for the first half of 2012.
- Core revenues (comprising net interest income of EUR 259.5 million and net commission income of EUR 98.1 million) amount to EUR 357.6 million for the first half of 2013.
- The Bank’s efficiency and productivity programme continues to deliver satisfactory results with total operating expenses (without restructuring and sundry personnel provisions) of EUR 288.9 million, a reduction of EUR 13.5 million; a 4.5 per cent reduction compared to the first half of 2012.
- The cost-income ratio (excluding the restructuring and sundry personnel provisions) has further improved to 60.9 per cent compared to 65.5 per cent for the first half of 2012.
- Provisions and impairment losses amount to EUR 63.8 million, which is 17.7 per cent lower than the amount in the first half of the previous year (EUR 77.5 million). This includes a conservative provisioning of our exposure to the construction industry.
- Net profit (excluding minorities) for the first half of 2013 of EUR 93.8 million (including additional restructuring and sundry personnel provisions of EUR 11.4 million) compares favourably with the net profit for the first six months of 2012 of EUR 96.6 million (including additional restructuring and sundry personnel provisions of EUR 3.5 million).
- Net profit without restructuring and sundry personnel provisions of EUR 105.2 million for the first half 2013 is 5 per cent higher compared to EUR 100.1 million for first half 2012.
Many of the initiatives mentioned above are still works in progress, and additional efforts have to be made. Clearly, the Bank’s focus remains on the high quality of service provided to our customers and the strengthening of our capital base in order to meet upcoming requirements that may be imposed by the ECB under the Single Supervisory Mechanism, which is expected to be implemented next year. With regard to the legal case that is currently pending with the Commercial Court of Vienna, the Bank is well prepared for the upcoming court proceedings with its strong legal position remaining unchanged.
For the second half 2013, BAWAG P.S.K. will continue to follow its business strategy: offering attractive, fair and innovative products to our customers through a modern multi-channel capability, improving productivity and efficiency by enhancing end-to-end processes as well as flexible operating models and maximising our capital and liquidity position under the changing regulatory environment.
All our achievements in the past and the fulfilment of our goals for the second half 2013 and beyond would not have been possible without the constant support of our customers and employees, who I would like to thank sincerely.
Byron Haynes m.p.
Chairman of the Managing Board and CEO
Vienna, August 2013