1 Balance sheet 16
2 Income statement 18
Notes to the company financial statements
1 General information on accounting policies 19
2 Notes to the balance sheet 20
3 Regulatory capital under the Austrian Banking Act 27
4 Notes to the income statement 28
5 Supplementary disclosures 29
Economic environment in 2011
In the first two quarters of 2011 the world economy was still gaining strength, but the second half of the year was defined by upheaval in financial markets and strenuous efforts to find a lasting way out of the prevailing banking, debt and economic crisis.
Growth in world trade and in world industrial production slowed significantly in the final quarter of 2011. The uncertainties in financial markets remained very high and equity markets continued their poor performance. Looming over the future economic trend is the debt crisis, which poses the greatest risk overall.
Global uncertainty and natural disasters in several countries detracted from Asia’s contribution as the world’s recent growth engine. Thus, in China too, the economic indicators towards the end of 2011 pointed down, although gross domestic product in the full year 2011 is expected to have grown by a relatively high 9.5%, albeit with a declining trend that is predicted to see growth in 2012 ease to 8.2%.
Japan registered a mild recession in 2011 as a result of the major earthquake and tsunami. Especially the automobile and electronics manufacturers — the prime movers of Japanese exports — were hard-hit.
The country’s GDP contracted by 1% for the year. In 2012, though, Japan looks set to go from economic underperformer to champion: Thanks to its vast reconstruction programme, coupled with the lack-lustre US and European economies, Japan’s GDP could grow much more rapidly this year than that of any other large industrialised nation.
Japan and the United States — the USA is still the world’s largest economy — have the highest capital requirements in 2012 and must fund maturing govern-ment bonds by issuing new debt. Most economists are cautiously optimistic for the US economy in view of a positive trend in the indicators at the end of the year, with high economic growth and gradually easing unemployment numbers. The election year 2012, however, could paralyse the country politically.
In future as well, the drivers of global growth will continue to be the emerging and developing econo-mies, whose expansion is estimated by the World Bank at an average of more than 6% per year in 2011 and 2012. A stronger recovery of the world economy as a whole is expected for 2013.
In the past two years, some European Union countries experienced a vigorous upswing fuelled by the brisk exports, particularly from Germany to emerging markets. This created the deceptive impression that the financial and economic crisis was overcome and that only the countries of the periphery with high budget deficits and/or high public debt in Southern Europe remained at risk. Then, in the second half of 2011, the government debt crisis spread to the real economy. European economic policymakers are now anxiously trying to find ways to restore the confidence of financial markets in the creditworthiness of coun-tries with high public sector debt and to revitalize economic activity. Despite — or because of — drastic austerity packages in some countries, a double-dip recession cannot be ruled out.
The contrasts between EU countries regarding unem-ployment rates, business sentiment and economic data will grow sharper. The weakness in the periphery countries and the debt crisis are threatening the vigour of existing eurozone growth leaders. Thus, even for Germany, the Austrian Institute of Economic Research (WIFO) in its December estimate predicted a decline in economic growth from 3.1% in 2011 to just 0.5% in 2012. Nevertheless, with the strength and quality of its industrial base, Germany is expected to escape a recession, especially as the internal market grows in importance.
The biggest problem countries in the EU, aside from Italy and Greece, remain Portugal, Ireland and Spain.
If their economies continue to shrink, the impact would be felt by the rest of the eurozone in particular.
The foremost priority is to ensure the stability of the European banking system and rebuild confidence between banks.
Most countries of Central, Eastern and Southeastern Europe, and especially those closely tied to the euro area, are not immune to the recession virus from Western and Southern Europe. The subdued demand in their export sector has not been made up for by domestic demand, which has receded as a result of the government spending cuts and decline in lending.
The current Thomson Reuters & OeKB CEE Business Climate Index clearly shows in the fourth quarter of 2011 that business expectations for this region have fallen substantially. For the first time in the history of the Index, negative opinions exceed positive ones.
Notably the worsened environment in the banking sector is directly reflected in the findings of the survey. Nonetheless, at 3% overall in 2011 for the countries covered by the Index, economic growth is believed to have been far above the EU average.
For 2012, slower growth of 2.4% is forecast. The CEE region remains very heterogeneous in terms of local growth rates: Croatia, for example, recorded feeble growth of 0.5% in 2011, while the Baltics, Turkey and Kazakhstan reached rates in excess of 5%. Unem-ployment continues at relatively high levels, although with wide regional variation.
Austria’s GDP growth of 3.3% in 2011 was well ahead of the EU-27 overall rate of 1.7%. The expectation for Austria in 2012 is for a steep economic downturn and considerable reduction in growth rates.
For the European Central Bank (ECB) and the central banks of the Eurosystem, ensuring continued price stability in 2012 is the prerequisite for a healthy economic trend in Europe; Austrian budget policy too must address this goal with reforms and structural improvements.
In its forecast from December 2011 the WIFO projects a real increase in merchandise exports of 7.5% for 2011, up from September’s full-year forecast of 6.9%. The growth in exports is predicted to see a further halving in 2012, which will cause industrial output to stagnate and, despite another increase in employment, will lead to higher unemployment. On the other hand, the upward pressure on prices should diminish. The inflation rate will decline from 3.3% in 2011 to about 2% in 2012.
International capital markets
The robust economic growth trend of 2010 could not be sustained in 2011 and the global uncertainty returned to international money and capital markets.
The main causes were the debt crises in the USA and Europe, as well as the political unrest that flared up at the beginning of the year in the Middle East and the increase in commodity prices.
Major drivers for financial markets were the support measures for the euro area periphery, the role of the ECB, the planned changes to the supervisory and regulatory environment, the rating downgrades of countries and banks, and the efforts to consolidate government budgets with the resulting drag on economic growth in Europe. These developments could also weigh on growth in emerging markets.
Yields in the major currencies showed a small increase at the start of 2011, followed by a significant decline from April to the end of the year. The money and capital markets, despite the difficult environment, were quite receptive to primary issues. In the second half of 2011, this gave way to a growing risk differen-tiation especially by Asian investors. As a conse-quence, there was a strong rise in bond yield spreads of the best-rated countries — except for Germany — as well as of the government-backed and supranational issuers in the eurozone. The yield spread between Austria and Germany thus widened sharply from the middle of the year on, reaching a historic high in November.
These developments directly affected OeKB as a state-guaranteed issuer. Nonetheless, in 2011 a total of more than EUR 3 billion of long-term debt was successfully placed on the markets.
Financial results in 2011
Austrian export growth in 2011 was not matched by a corresponding rise in the amount of funding provided under OeKB’s Export Financing Scheme. Thus, the EUR 5.0 billion of loans disbursed were exceeded by repayments of EUR 6.1 billion received. The resulting decrease in net export loans outstanding was reflected in net interest income, which amounted to EUR 89.8 million in the year under review (2010:
EUR 90.3 million).
Income from securities and investees, at EUR 6.9 million, was EUR 1.4 million less than the year-earlier result of EUR 8.3 million, owing largely to a reduction in dividends from the investments in private credit insurance companies.
The turmoil in capital markets and the resulting lower trading volumes led to a slight dip in net fee and commission income from the capital market service activities of OeKB. The income from fees for the processing of export guarantees on behalf of the Austrian government and for administering the gua-rantees under the Corporate Liquidity Support Act (ULSG) remained almost steady. In total, OeKB recorded net fee and commission income of EUR 42.3 million in 2011 (2010: EUR 43.2 million).
Net expense from financial operations was signifi-cantly better than in the prior year, which had been marked by a non-recurring effect from the closing of an open USD position.
Other operating income, at EUR 9.3 million, represen-ted mainly service fees and staff costs (for seconded staff) charged to subsidiaries.
Total operating income was thus EUR 148.3 million (2010: EUR 149.1 million).
Within administrative expenses of EUR 71.2 million, cost reductions were achieved year-on-year both in staff costs and in other administrative expenses.
Depreciation and amortization of non-current assets were also down in 2011. This trend will be reversed in 2012 as the additional office space from the top-floor expansion of the Strauchgasse 1-3 address is taken into use.
Operating expenses totalled EUR 76.5 million, which was EUR 1.4 million below the prior-year level of EUR 77.9 million.
As a result of the effects cited above, operating profit rose by 0.9% in 2011 to EUR 71.8 million.
The net loss on disposal and valuation of loans and advances and securities was EUR 8.6 million. It was strongly driven by the erosion in prices of euro area government bonds (particularly for Greece and Cyprus), which was recognised directly in the income statement because of the conservative measurement of non-current assets at the lower of cost or market value.
In measuring interests in subsidiaries and other inves-tees in 2011, an impairment charge of EUR 4.1 million was recognised on the investment in the Budapest Stock Exchange. This resulted both from the deprecia-tion of the Hungarian forint against the euro and from reduced income expectations in light of the difficult economic and political situation in Hungary.
Profit before tax amounted to EUR 59.1 million (2010: EUR 57.5 million). After income tax, profit for the year was virtually unchanged from the prior year, at EUR 44.9 million.
In view of the coming more stringent regulatory capital requirements under Basel III, OeKB again transferred EUR 24.6 million to reserves in 2011 (2010: EUR 24.5 million) to strengthen the capital base. As in the prior year, the reported profit available for distribution was EUR 20.3 million.
To conclude the review of the income statement, it can be said that profitability in 2011 exceeded expectations: In addition to the cost reductions achieved, the decrease in income from the Export Financing Scheme was less pronounced than had been expected at the beginning of the year.
At 31 December 2011, liquid assets in the form of balances at central banks stood at EUR 586.2 million (2010: EUR 83.1 million). Correspondingly, the item
“deposits from banks” increased from EUR 180.8 million in 2010 to EUR 670.5 million at the 2011 balance sheet date.
Loans and advances to banks rose (as a result largely of higher time deposits) from EUR 55.1 million in the prior year to EUR 101.7 million at the end of Decem-ber 2011.
The size of OeKB’s investment portfolio eased somewhat in 2011 as, amid the uncertainty in finan-cial markets, not all redemption proceeds were reinvested immediately. The portfolio’s carrying amount at 31 December 2011, determined by conser-vative measurement at the lower of cost or market value, was EUR 439.2 million (2010: EUR 494 million), while the market value was EUR 492.3 million (2010:
EUR 552.8 million).
The liquid assets portfolio used to support the Export Financing Scheme was expanded to a total of EUR 830 million (by nominal value) by adding EUR 155 million of bonds.
The balance sheet amount related to export financing increased in 2011 by EUR 620 million or 2.1%, to EUR 30,832.9 million. Major reasons for this were the increase in loans and advances to banks and the expansion of the liquid assets portfolio. The funds required for this were raised primarily by issuing debt securities.
Total assets at 31 December 2011 amounted to EUR 32,138.5 million (2010: EUR 31,017.1 million).
Financial performance indicators
The cost/income ratio improved to 51.6% from the prior year’s 52.3%, helped mainly by the drop in operating expenses.
Available regulatory capital under section 23 Austrian Banking Act increased in 2011 by EUR 29.9 million to a new total of EUR 483.2 million.
The Tier 1 capital ratio (Tier 1 capital under the Banking Act as a percentage of risk-weighted assets) rose from 104.9% in 2010 to 115.0%.
Return on equity (profit for the year as a percentage of core capital) eased slightly in 2011 from 12.9%
to 12.1% as a result of the higher capital base.
Non-financial performance indicators are presented in section 4, Human resources.
Research and development
In view of OeKB’s business purpose, no research and development is conducted.
Claims for Damages
There are two law suits of investors pending who bought certificates issued by OeKB for registered shares of Meinl European Land Ltd. (“MEL”). The law suit served on 30 July 2010 amongst others on OeKB can be seen as a model and asks for payment of about EUR 2,790,000. The proceedings still try to clarify matters of court competence which do not relate to OeKB. The second law suit for damages is a model law suit directed solely against OeKB claiming for payment of around EUR 48,500. It is based on the grounds that OeKB as issuer of the MEL certificates did not arrange for an ad-hoc notice pursuant to the Stock Exchange Act on the share-buy-back action in spring 2007 undertaken by MEL (nowadays: Atrium).
In the evaluation of OeKB’s general counsel chances of success of this law suit are practically zero, taking in account judgments of the first and second instance in another model law suit based on other legal
Events after the balance sheet date
In the middle of January 2012, as part of the down-grading of nine countries in the eurozone, Standard &
Poor’s also lowered the rating of the Republic of Austria and of Oesterreichische Kontrollbank from AAA to AA+ (negative outlook); the short-term rating remained unchanged at A-1+. The immediate reaction from the capital markets made it clear that the rating downgrade had been widely expected and was already priced in before the event. OeKB continues to have full access to international money markets and reduced access to international capital markets. In connection with the Export Financing Scheme, OeKB places a high priority on liquidity management. It is currently too early to forecast the effects of the government debt crisis on money and capital markets in the coming months.
Outlook for 2012
For the macroeconomy, 2012 will be a difficult year and the uncertainties will continue, albeit with regional differences. This poses a very real challenge for the Austrian export industry. As in the past, in these demanding times OeKB will continue to offer exporters support both through export credits and through guarantees for the financing of business acquisitions and company start-ups. However, because of the expiry profile of the portfolio of export financing contracts — especially as a result of the reduction in financing of direct investments — it appears likely that, depending on the actual course of business, credit disbursements will decrease in 2012 by approximately EUR 2.5 billion from the prior year.
Regarding capital raising in international markets, it remains to be seen how much of an impact the rating downgrade will have on long-term borrowing costs.
The immediate reactions from financial markets showed them to be unfazed; in fact, the five-year CDS spreads for the Republic of Austria have narrowed since the announcement of the new rating.
The uncertainty over the economic and political trajectory in the eurozone will continue to adversely affect activity and security prices in the financial markets. At OeKB this has significance for the Capital Market Services segment, as well as the price perfor-mance of the investment portfolio, access to inter-national markets and the cost of borrowing to fund the Export Financing Scheme.
After their outstanding results in 2011, the two credit insurance subsidiaries also are poised for a difficult 2012 in view of rising insolvency forecasts.
On balance, OeKB is well prepared to meet the challenges ahead and is expecting a sustained good, stable trend in operating income.