Bank Austria Posts Net Profit of EUR 660 Million for the First Nine Months

Published: November 11, 2015; 19:15 · (FriedlNews)

UniCredit Bank Austria announced that net profit in the three months to end-September dropped to 172 million euros from 291 million in the previous three months. As reported, the bank plans to terminate up to 14,000 jobs and restructure or exit its retail business in Austria and leasing operations in Italy as it seeks to strengthen its equity.

Bank Austria posts net profit of EUR 660 million for the first nine months / Picture: © UniCredit Bank Austria

Bank Austria’s CEO Willibald Cernko: "The bank’s results for the first nine months reflect various developments. The performance from Austrian customer business clearly shows the challenges which universal banks are currently facing: while we achieved significant volume growth in deposits and loans, this development is not reflected in revenue – on the contrary, operating income is declining on account of the historically low level of interest rates. At the same time we have to absorb increasing burdens resulting from bank levies and other systemic charges, which offset the measures we have taken to enhance efficiency and reduce costs. This is a highly challenging situation indeed, because we cannot earn the cost of capital employed. Moreover, we have to hold increasing amounts of capital to meet regulatory requirements. We are therefore currently evaluating measures to enhance our profitability in a sustainable manner.

- Good operating performance from customer business despite market interest rates which are at a historically low level and persistently weak economic trends
- Lending volume up by 0.9 per cent year-on-year to EUR 117 billion; while total loans in Austrian customer business rise by close to 4 per cent, lending volume in CEE is more or less unchanged on account of exchange rate effects
- Substantial increase of 11.3 per cent to a total of EUR 111 billion in customer deposits in Austria and CEE compared with the first nine months of the previous year; the increase of 14 per cent in CEE is stronger than in Austria, where customer deposits grow by 8.2 per cent1
- Operating costs continue to decline thanks to strict cost management
- Net write-downs of loans up by 42.2 per cent to EUR 757 million
- The increase in the third quarter of 2015 was mainly due to the mandatory conversion, required by law, of CHF loans in Croatia, which had a one-off impact of EUR 205 million
- Total charge for bank levies and other systemic charges up by EUR 48 million to EUR 233 million, a year-on-year increase of 25.7 per cent; this amount is equal to 10.2 per cent of total costs and almost one-quarter of profit before tax
- Net profit amounts to EUR 660 million; the decline of EUR 529 million compared with the same period of the previous year is due to three factors:
- Net interest was lower and Bank Austria no longer received a share of profits of the Markets subdivision of UniCredit’s CIB Division; these were the main reasons why operating income was down by EUR 228 million
- Net write-downs of loans rose by EUR 225 million, mainly on account of the mandatory conversion of foreign currency loans in Croatia
- The item “Total profit or loss after tax from discontinued operations” shows a loss of EUR 158 million, which also reflects the current loss of Ukrsotsbank
- Total capital ratio2 up by 77 basis points on year-end 2014, to 14.2 per cent ; Common Equity Tier 1 capital ratio up by 25 basis points to 10.6 per cent
- Excellent direct-funding ratio underlines the bank’s strong liquidity position
- Loans to customers funded with customer deposits and the bank’s own issues to the extent of 120 per cent

In Central and Eastern Europe, on the other hand, the picture is much more favourable, with sound revenue at a high level. Results in CEE are, however, impacted by two specific factors: first, negative exchange rate effects in Russia, which are weighing on an unchanged strong operating performance in the country; nevertheless, our Russian banking subsidiary’s contribution to profit before tax for the first nine months was EUR 206 million. And second, an arbitrary political decision in Croatia which adds EUR 205 million to the charge for loan loss provisions as a one-off."

Items in the income statement

Net interest continued to be the most important income component, accounting for 58.8 per cent of total operating income. In the first nine month of 2015, net interest was EUR 2,534 million, down by 4.5 per cent on the same period of the previous year (1-9 2014: EUR 2,653 million) on account of the persistently low interest rate environment and despite volume growth.

Dividend income and other income from equity investments amounted EUR 342 million, down by 2.6 per cent (1-9 2014: EUR 351 million). The decline was mainly due to the sale of various equity interests. This item also includes the contribution of EUR 220 million from the joint venture in Turkey.

Net fees and commissions continued to develop favourably, increasing by EUR 42 million or 4.1 per cent to EUR 1,064 million compared with the same period of the previous year (1-9 2014: EUR 1,022 million). Particularly strong growth was seen in Austrian customer business, with net fees and commissions increasing by 8.8 per cent to EUR 536 million.

Net trading, hedging and fair value income was EUR 308 million, down by 23 per cent on the same period of the previous year (1-9 2014: EUR 400 million). The decrease was mainly due to the fact that Bank Austria’s participation in profits of the Markets subdivision of UniCredit’s CIB Division, to which Bank Austria was entitled under the terms of the sale of CAIB, ended.

Total operating income amounted to EUR 4,309 million, down by 5 per cent on the first nine months of the previous year (1-9 2014: EUR 4,537 million). This was mainly due to the persistently low interest rate environment, which resulted in a significantly narrower interest margin, and to the expiry of Bank Austria’s participation in profits of the Markets subdivision of UniCredit’s CIB Division.

Operating costs were reduced by 1.6 per cent to EUR 2,278 million (1-9 2014: EUR 2,314 million), thanks to strict cost management and further efficiency enhancement.

At EUR 2,031 million, operating profit was down by 8.6 per cent on the same period of the previous year (1-9 2014: EUR 2,223 million). The decline was due to two effects on the revenue side as mentioned above: first, lower net interest as a result of the historically low level of interest rates; and second, the expiry of Bank Austria’s participation in profits of the Markets subdivision of UniCredit’s CIB Division, which led to lower net trading income.

Net write-downs of loans and provisions for guarantees and commitments in the first nine months of 2015 were EUR 757 million, up by 42.2 per cent on the same period of the previous year (1-9 2014: EUR 532 million). The significant increase in the third quarter of 2015 was mainly due to the mandatory conversion, required by law, of CHF loans in Croatia, which had a negative impact of EUR 205 million as a one-off. This is the main reason why net write-downs of loans in CEE rose by 60.1 per cent to EUR 753 million (1-9 2014: EUR 470 million. Without the mandatory conversion, net write-downs of loans in CEE would have increased by only 16.6 per cent, driven by developments in Russia. Additions to loan loss provisions significantly improved the coverage ratios, measured against the volume of impaired loans, in the bank as a whole and in CEE, where it was increased especially in business relating to Ukraine and Russia but also in the Czech Republic and Romania. A very favourable trend was seen in Austria, where increased recoveries on loans previously written down and the higher quality of the loan portfolio led to a decrease of 93.3 per cent in the provisioning charge, to EUR 4 million compared to the same period of the previous year (1-9 2014: EUR 62 million). Overall, the cost of risk (net write-downs of loans measured against the average volume of loans to customers) increased from 62 basis points in the first nine months of 2014 to 87 basis points in the first nine months of 2015. The coverage ratio was improved by 123 basis points to currently 55.8 per cent.

Net operating profit for the first nine months of 2015 was EUR 1,274 million, down by 24.7 per cent on the previous year (1-9 2014: EUR 1,691 million). The decline reflects lower operating income in the market environment described above, as well as the higher provisioning charge in connection with the mandatory conversion of CHF loans in Croatia as a one-off.

While cost growth in the business divisions was contained through strict cost management, cost-cutting efforts were offset by further increases in bank levies and other systemic charges (contributions to resolution funds and deposit guarantee schemes), which are shown on a combined basis in the line "Systemic charges" within non-operating items of the income statement.

The balance of non-operating items in the income statement between net operating profit and profit before tax for the first nine months of 2015 was a charge of EUR 287 million, up by 9 per cent on the same period of the previous year (1-9 2014: a charge of EUR 263 million). Among the non-operating items, bank levies and other systemic charges were again the most significant factor burdening the income statement. They rose to EUR 233 million (1-9 2014: EUR 185 million).

Within the item "Systemic charges", the total charge in Austria amounted to EUR 126 million, of which EUR 99 million (1-9 2014: EUR 93 million) related to the bank levy and EUR 26 million related to contributions to the deposit guarantee scheme and the bank resolution fund. In CEE, the total charge was EUR 107 million, of which bank levies (in Hungary and Slovakia) accounted for EUR 32 million and other systemic charges totalled EUR 75 million. Contributions to the bank resolution funds in Hungary and Croatia amounted to EUR 8 million and the contribution to the local bank resolution fund in Romania was EUR 3 million. Contributions to deposit guarantee schemes in CEE countries, on a pro-rata basis for the first nine months of the year, totalled EUR 64 million.

Profit before tax for the first nine months of 2015 was EUR 987 million, down by 30.9 per cent on the previous year (1-9 2014: EUR 1,428 million). The decline reflects the costs associated with the mandatory conversion of CHF loans in Croatia as a one-off and the combined impact of weak economic growth, the low level of interest rates and significantly higher systemic charges. Total profit or loss after tax from discontinued operations was a loss of EUR 158 million, reflecting the negative impact from Ukrsotsbank’s loss of EUR 218 million, which was not offset by income from the sale of real estate.

After deduction of non-controlling interests, net profit attributable to the owners of the parent company was EUR 660 million, down by 44.5 per cent on the same period of the previous year (1-9 2014: EUR 1,190 million).

The following key financial data have been calculated on the basis of the above-mentioned results:

- The cost/income ratio was 52.9 per cent (1-9 2014: 51 per cent).
- The risk/earnings ratio (net write-downs of loans as a percentage of net interest income) was 26.3 per cent (1-9 2014: 17.7 per cent).
- The total capital ratio4 (based on all risks) was 14.2 per cent (year-end 2014: 13.4 per cent).
- The Common Equity Tier 1 capital ratio3 (based on all risks) was 10.6 per cent (year-end 2014: 10.3 per cent).

Results of the Divisions

Bank Austria reports its results in four Divisions: Retail & Corporates, Corporate & Investment Banking (CIB), Private Banking, and Central Eastern Europe (CEE). The bank also shows results for the Corporate Center.

The Retail & Corporates Division’s profit before tax for the first nine months of 2015 was EUR 224 million, down by 3.6 per cent compared with the previous year (1-9 2014: EUR 233 million). Operating income declined by 3.4 per cent, reflecting the persistently low level of interest rates, although the Division recorded volume growth in deposits and loans. The charge for bank levies and other systemic charges in the Retail & Corporates Division alone totalled EUR 50 million, an increase of 38.9 per cent over the same period of the previous year (1-9 2014: EUR 36 million). A strong improvement in asset quality in retail banking and a net release of loan loss provisions in the Corporates subsegment had a positive effect on net write-downs of loans and provisions for guarantees and commitments in the Retail & Corporates Division, which were down by a substantial 89.7 per cent compared with the first nine months of the previous year. The cost/income ratio was 74.5 per cent (1-9 2014: 70.8 per cent).

The Private Banking Division achieved an increase of 5 per cent in its profit before tax for the first nine months of 2015, which rose to EUR 35 million (1-9 2014: EUR 33 million). Against the background of persistently low interest rates, Private Banking thus benefited from its strength in asset management while continuing on its growth path. Operating income rose by 5.8 per cent, mainly driven by fee income from asset management business. The cost/income ratio was 70.1 per cent (1-9 2014: 70.7 per cent).

Revenue generated by the Corporate & Investment Banking (CIB) Division in a challenging market environment showed a favourable development in the past quarters. Operating income in the first nine months of 2015 was EUR 334 million, up by EUR 4 million or 1.2 per cent on the same period of the previous year. However, two effects had a negative impact: first, costs rose by 6.1 per cent, mainly in connection with IT development costs. Second, the net release of loan loss provisions (EUR 1 million) was lower than for the same period of the previous year (EUR 8 million). Overall, these effects and the charge for the bank levy and other systemic charges (totalling EUR 24 million) are reflected in profit before tax, which amounted to EUR 154 million, down by 9.4 per cent on the figure for the same period of the previous year. The cost/income ratio remained low, at 46.7 per cent (1-9 2014: 44.5 per cent).

In the first nine months of 2015 the CEE Division again achieved a strong operating profit of EUR 1,726 million (1-9 2014: EUR 1,807 million) reflecting positive contributions from across the region and despite methodological changes regarding subholding effects in Q2 2015; adjusted for exchange rate movements, the figure was up by 3.6 per cent compared to the same period of the previous year. Net interest, the trading result and fees and commissions showed a healthy development, whereas operating costs were well contained. Loan loss provisions increased significantly from EUR 470 million to EUR 753 million, mainly driven by the mandatory conversion of CHF loans in Croatia as a one-off. Thus profit before tax decreased to EUR 851 million (1-9 2014: EUR 1,104 million), also reflecting expenses such as those for bank levies, deposit insurance and resolution fund. The cost/income ratio is currently at remarkable 38.4 per cent (1-9 2014: 39.0 per cent).

The CEE Division manages a network of about 2,400 branches (including the Turkish joint venture, which is accounted for using the equity method) in 13 countries in the region with about 47,800 employees. The Group continues to see itself as a long-term investor in this region and will expand its leading market position through sustainable organic growth in the coming years.

In Central and Eastern Europe, the challenging global market environment has further amplified the already significant divergence of countries. Once again, the new EU members in Central Europe (EU-CEE) stand out, with their economies buoyed by the fledgling recovery in the euro area and financial markets safeguarded by strong external positions and prudent policies. While growth was initially led by exports spurred by the recovery in the EU, it has now shifted towards domestic demand. UniCredit´s near-term projections are based on assumptions about a further slight acceleration in the euro area and US growth, commodity prices stabilising in 2016 with moderate upward potential, a “soft landing” in China and a gradual path of Fed rate hikes. The ECB is expected to continue with its QE programme as initially planned. Under these assumptions, the global backdrop for CEE should be positive, with EU-CEE being best positioned to benefit from the favourable global environment.

"In a slowly firming global economic environment Central and Eastern Europe is presenting itself as the best performer amongst emerging markets. Although we need to steadily adjust to diverse regulations and dynamic exchange rates, we are convinced that CEE will remain a growth engine for our banking group," says Carlo Vivaldi, Deputy Chairman of the Management Board and Head of the CEE Division of Bank Austria. "Tensions in Ukraine and international sanctions on Russia are very likely to be effective as the main challenges of our local banks also in the near future. Nevertheless, the customer business of all our local banking subsidiaries has developed well in the first nine months of this year and operating profit has clearly exceeded our expectations. We have won some 1.1 million new customers so far this year and we keep on investing in the digitalisation of our banking activities. "

Statement of financial position

Bank Austria’s total assets as at 30 September 2015 were EUR 194.0 billion6, up by 2.6 per cent or EUR 4.9 billion on the end of the previous year (31 December 2014: EUR 189.1 billion).

On the assets side, loans and receivables with customers at the end of September 2015 were EUR 116.5 billion, up by 2.5 per cent or EUR 2.8 billion (31 December 2014: EUR 113.7 billion). Loans and receivables with banks declined, by 6.2 per cent, to EUR 32.4 billion (31 December 2014: EUR 30.5 billion).

On the liabilities side, deposits from customers rose strongly, by 8.6 per cent to EUR 111.0 billion (31 December 2014: EUR 102.3 billion), reflecting significant increases in Austria and CEE. Debt securities in issue declined by 4 per cent to EUR 28.8 billion (31 December 2014: EUR 30.0 billion) as a result of redemptions. Direct funding – i.e. the sum total of deposits from customers and debt securities in issue – increased by EUR 7.6 billion or 5.7 per cent to EUR 139.8 billion. This gives a loans/direct-funding ratio of 83.3 per cent, which means that customer loans are covered by customer deposits and debt securities in issue to the extent of 120 per cent.

As at 30 September 2015, the leverage ratio to be calculated under Basel 3 was an excellent 5.7 per cent in conformity with Basel 3 transitional rules.

Total regulatory capital7 was EUR 18.6 billion, an increase of EUR 1.1 billion over year-end 2014.

As at 30 September 2015, the total capital ratio8 based on all risks was a sound 14.2 per cent. The Common Equity Tier 1 capital ratio based on all risks was an excellent 10.6 per cent.

Staff numbers in the Bank Austria Group including the employees of UniCredit’s subsidiaries9 in Austria were 57,080 full-time equivalents10 (FTEs) as at 30 September 2015 (30 September 2014: 57,553 FTEs). Of this total, 9,280 FTEs were employed in Austria and 47,800 FTEs in CEE countries.