United Kingdom actually went into recession. An eco-nomy that proved comparatively resilient was that of Germany, with growth just short of the 1% mark.
One of the key reasons for Europe’s travails was the high level of uncertainty in the business environment, which made companies quite reluctant to invest. In the southern countries this effect was exacerbated by banks’ reluctance to lend. However, private consump-tion too was subdued in 2012 — the result not just of high unemployment (at 10.7% in the EU-27) but of the in some cases substantial household debt levels in the crisis countries. On the bright side, exports were a positive driving force. Notably in the first half of the year, shipments to Asia and the Americas increased more strongly than imports. Towards the end of 2012, however, new orders for exports slowed, thus signifi-cantly reducing the growth contribution derived from trade with the rest of the world.
The euro area was severely affected by the debt problems in Portugal, Italy, Ireland, Greece and Spain.
Besides the still precarious state of troubled euro member country Greece, it was above all the ailing Spanish banking system that attracted a spate of negative news headlines. In these fivecountries an-other expansion of the austerity programmes was therefore undertaken. In autumn 2012 the calming
of financial market jitters was greatly helped by the coming into force of the European Stability Mechanism (the ESM) and the readiness of the European Central Bank to buy government bonds of stricken eurozone countries. Nonetheless, informed commentators agree that there is no way around a structural shift in the countries at the heart of the crisis. The first signs of an economic recovery in the eurozone are therefore not expected until spring 2013 at the earliest.
The persistent difficulties in the euro area had ripple effects in Central and Southeastern Europe. Although in 2012 the region as a whole grew somewhat more strongly than Western Europe, there was much hetero-geneity between nations. Thus, economic contractions in the year under review occurred in future EU mem-ber Croatia, in crisis-ridden Hungary and in Slovenia with its staggering banking problems. Russia, Poland and the Baltics meanwhile reported relatively solid GDP growth as these countries benefit from more stable domestic demand and/ortheir trade relations are not as exposed to the eurozone.
For 2013, economic researchers are predicting an — albeit moderate — economic recovery for Central and Southern Europe (except Slovenia). Foreign direct in-vestors in Central and Eastern Europe, by contrast, are less optimistic for the future, as demonstrated by
Sources: WIFO, European Commission, OECD
Real GDP growth 2012/2013 in % in selected countries and regions
9
the OeKB CEE Business Climate Index. This indicator of business expectations fell in the fourth quarter of 2012 for the second time in succession, pointing to declining optimism about performance in the next six months. The region’s high potential, however, remains unquestioned: A glance at the investment strategies shows that most direct investors are maintaining their local presence even in difficult economic times.
In Austria, GDP growth in 2012 receded to 0.6%. The economy lost vigour in the second half of the year in particular, due in part to the challenging international environment. Thus, the economic frailty in important European markets like Italy, the Czech Republic and Hungary weighed on exports. The significant rise in exports to non-EU countries only partly offset the drop in intra-EU demand. On balance for 2012, the Austrian Institute of Economic Research (WIFO) predicts slen-der real growth of 0.8% in merchandise exports.
While the investment climate in the year under review was also hurt by the level of uncertainty in Europe, private consumption again had a stabilising effect.
Remarkably, inflation pressure decreased from the prior year and prices in Austria, at average inflation of 2.4%, thus were among the most stable in Europe.
Conditions in the labour market as well compared fa-vourably to the rest of the region. The Austrian unem-ployment rate last year by the Eurostat definition was
4.3%. In 2013 joblessness is expected to rise moder-ately, not least because of the somewhat lacklustre macroeconomic outlook for Austria (with forecast GDP growth of just 1%).
International financial markets
In the world’s financial markets, 2012 was a year of sometimes high volatility. The escalation of the euro crisis, the slowdown in the world economy and world trade, and political tension in the Middle East heightened the global uncertainty and market partici-pants’ general loss of confidence. However, from the middle of 2012, various measures by central banks, especially the ECB, led to a significant easing of the strain in financial markets. The main events that turned the tide included the decision to conduct Out-right Monetary Transactions, the establishment of the European Stability Mechanism, initiatives to strengthen financial stability through a banking union, the reaching of an agreement on the bailout for Greece, and generally the monetary policy easing in the European core markets, the USA, Japan and emerging markets. Heartened by these measures, equity markets rallied vigorously. For the year as a whole, important stock indices such as the S&P 500 and the Euro Stoxx 50 registered gains of 13% to 14%, and the Nikkei 225 even rose by 23%.
National finances in 2012 Public debt (horizontal axis) and budget deficits (vertical axis), in % of GDP
-12
In bond markets, long-term government bond yields tended to fall, with some countries’ instruments reaching record lows. Thus, in July 2012, yields of 10-year US Treasury notes were at their lowest level in over 200 years. In Europe the countries which had been hit hardest by the crisis also saw bond yields de-cline, along with spreads of credit default swaps: Be-tween the end of August and early December, yields of Greece’s long-term sovereign debt instruments fell by more than 800 basis points, while Portugal’s saw a decrease of 184, Spain's declined by 148 and Italy’s eased by 141 basis points.
Austrian financial market
The Austrian equity market experienced significant swings in 2012, as documented by the performance of the ATX. After a strong advance in the first quarter, Austria’s headline blue chip index lost considerable ground in the middle of the year amid the general state of trepidation in financial markets. Only in the second half of the year did equity investors slowly regain their confidence, driving a continual rising trend for the index. At the end of 2012 the ATX stood at 2,401.21 points, a gain of 26.9% for the year. On the other hand, the all-time high around 5,000 marked in summer 2007 remained a distant memory.
In 2012 the Vienna stock exchange struggled with receding turnover and falling liquidity. The year’s average monthly trading volume of EUR 3.0 billion was well below the 2011 figure of EUR 5.0 billion. In equity corporate actions as well, market activity was limited:
2012 brought only three capital increases and no initial public offering. In a striking trend, overall, barely one-fifth of equity deals in Austrian securities now occur on the exchange. To save expenses and by-pass regulations, most transactions are already executed off exchange.
The picture was much more positive in the Austrian bond market, particularly for corporate bonds. In total last year, 29 corporate bonds were placed with a volume of EUR 5.5 billion, further improving on the already strong prior year’s 23 bond issues worth a total of EUR 3.3 billion. As the cost of bank credit has risen with banks' own higher borrowing costs and
more stringent capital and liquidity requirements, companies are increasingly turning to the capital market for funding.
Regarding government bonds, investors continue to see Austrian treasury instruments as a safe haven.
Thanks to comparatively good fundamentals, the yield for the country’s ten-year federal bonds eased in 2012 from 2.9% to 1.75%. As a result the Republic of Austria was able to borrow relatively inexpensively, despite the loss of the top rating from bond rating agency Standard & Poor’s. The favourable conditions are illustrated by the yield spread to the German benchmark 10-year Bund, which in 2012 narrowed from 107 to 43 basis points.
Financial results in 2012
The low rate of Austrian export growth in 2012 was reflected in the volume of funding provided by the OeKB Group. While lending exposure under the Export Financing Scheme decreased markedly as a result of early loan repayments and of lower financing of out-ward foreign direct investment, the balance of loans outstanding from OeKB subsidiary Exportfonds to small and medium-sized businesses was boosted from about EUR 825 million to EUR 1,039 million.
OeEB, the development bank, likewise expanded its total project portfolio, from approximately EUR 290 million to EUR 498 million.
With interest rates having fallen in the course of the year, the income from securities investments (both the Group’s own investment portfolio, and the liquid assets portfolio that supports the Export Financing Scheme) declined to EUR 20.0 million (2011: EUR 25.5 million). The income from unconsolidated inves-tees was almost unchanged at around EUR 1.6 million (2011: EUR 1.7 million).
The Group’s net interest income, which included these negative effects and the positive one-time impact of early loan repayments, was EUR 96.2 million (2011:
EUR 94.5 million).
The share of results of equity-accounted investees (joint ventures) grew by EUR 2.2 million to EUR 9.3 million. This was made possible by the replication of the prior year’s outstanding result in the private credit insurance group.
The item “impairment losses on loans and advances and other credit risk provisions” represents the year’s change in individual impairment charges recognised in respect of microcredits extended by OeKB.
The continuing turmoil in capital markets especially during the first part of the year and the resulting lower trading volumes made for a small decline in custody and transaction fees, while the financial data service and notification office benefited from an increase in demand.
The income from fees for the processing of export guarantees on behalf of the Austrian government and for administering the guarantees under the Corporate Liquidity Support Act (ULSG) rose modestly. The net fee and commission income of Oesterreichische Ent-wicklungsbank (OeEB), the development bank, de-clined significantly as a consequence of a greater volume of projects and the resulting guarantee premi-ums paid. In total, the OeKB Group recorded net fee and commission income of EUR 49.6 million in 2012 (2011: EUR 50.1 million).
Administrative expenses increased to EUR 82.4 mil-lion from the prior-year level of EUR 79.9 milmil-lion. Of this increase, about EUR 1.9 million was contributed by a change in the discount rate for the calculation of pension and termination benefits. The increase in other administrative expenses, at 0.8%, was less than the rate of inflation. As the additional office space from the top-floor expansion at the Strauchgasse 1-3 address was taken into use in 2012, depreciation and amortisation of non-current assets increased as pre-viously predicted, by about EUR 0.5 million.
Net other operating income, at EUR 6.2 million, was down somewhat from the prior year’s figure of EUR 6.6 million, as the increase in the stability tax (the new levy on banks) could not be fully offset by higher in-come.
Operating profit was EUR 78.8 million. This repre-sented an improvement of EUR 0.4 million from the prior year’s EUR 78.4 million.
The net gain of EUR 27.8 million on financial instru-ments reflected the volatility in financial markets (2011: net loss of EUR 13.4 million). The net gain of EUR 29.1 million on disposal and valuation of securi-ties was strongly driven by realised gains on bond redemptions and by positive valuation effects for equi-ties and bonds, which, because of the measurement
100% + 6.2%
161.2
Operating income of the OeKB Group compared to 2011 and 2007, EUR million
2012
2007 2008 2009 2010 2011
96.2
of securities at fair value through profit or loss, were recognised directly in the income statement. In mea-suring interests in subsidiaries and other investees in 2012, an impairment charge of EUR 1.2 million (2011:
EUR 4.1 million) was recognised on the investment in the Budapest Stock Exchange. This resulted both from the depreciation of the Hungarian forint against the euro and from reduced income expecta tions in light of the difficult economic and political situation in Hungary.
Profit before tax amounted to EUR 106.6 million (2011: EUR 65.1 million). After income tax and non-controlling interests, profit for the year attributable to shareholders of OeKB was EUR 82.4 million, com-pared to EUR 50.2 million one year earlier.
In 2012 not only did operating profit exceed expecta-tions but the net gain on financial instruments was well above budget.
At 31 December 2012, liquid assets in the form of balances at central banks stood at EUR 124.3 million (2011: EUR 586.2 million).
Loans and advances to banks decreased with the lower lending under the Export Financing Scheme, to EUR 24,549.0 million (2011: EUR 28,736.8 million).
Loans and advances to customers were pushed up from EUR 1,409.7 million to EUR 1,526.6 million,
thanks largely to an increase in these assets at Ex-portfonds. A result of the lower volume of lending to banks was a reduction in debt securities in issue (to EUR 27,281.6 million from the 2011 level of EUR 33,350.4 million).
The change in holdings of other financial instruments from EUR 1,468.1 million to EUR 1,490,2 million in 2012 is explained mostly by the rise in security prices during the financial year.
As a result of the excellent earnings trend in the pri-vate credit insurance group, interests in equity-accounted investees (joint ventures) increased in 2012 to EUR 64.0 million (2011: EUR 57.9 million).
The decline in value of other assets from EUR 5,629.2 million to EUR 4,913.2 million in 2012 was attribut-able to the reduced positive fair values of derivatives used to hedge interest rate and currency risks in the Export Financing Scheme.
Total assets at 31 December 2012 amounted to EUR 32,767.9 million (2011: EUR 37,978.2 million).
Financial performance indicators
The cost/income ratio inched higher to 51.1% on increased administrative expenses. (2011: 50.5%).
100%
+ 19.8%
+3.1%
82.4
Administrative expenses of the OeKB Group compared to 2011 and 2007, EUR million
2007 2008 2009 2010 2011 2012
55.3
Of which staff costs
In 2012 the Group’s equity was boosted from EUR 599.4 million to EUR 662.0 million.
Available consolidated regulatory capital under section 24 Austrian Banking Act increased in 2012 by EUR 30.7 million to a new total of EUR 521.2 million.
The capital adequacy ratio (regulatory capital resour-ces as a percentage of risk-weighted assets) decrea-sed from 163.8% in 2011 to 149.3% as a result of higher risk-weighted assets.
Return on equity (consolidated profit for the year as a percentage of Tier 1 capital) rose in 2012 from 13.6%
to 20.7% amid the positive impact of the net gain on financial instruments.
Non-financial performance indicators are presented in section 4, Human resources.
Research and development
In view of the nature of the OeKB Group’s business activities (banking and insurance), 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 asks for payment of about EUR 2,790,000 and was dismissed by judgment of 24 January 2013 (appeal still possible). The second law suit for damages is a model law suit 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 grounds and decided in favor of OeKB.
Events after the balance sheet date
There were no reportable events after the balance sheet date.
100%
+ 42.0%
521.2
Regulatory capital of OeKB Group under Austrian Banking Act compared to 2011 and 2007, EUR million
2012
2007 2008 2009 2010 2011
397.4 367.2
284.3
375.8
298.9
422.5
317.0
459.2
342.4
490.5
367.8
Of which Tier 1 capital
+6.3%
Outlook for 2013
For the macroeconomy, 2013 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, be-cause of the expiry profile of the portfolio of export financing contracts — especially as a result of the re-duction in financing of direct investments — it appears likely that, depending on the actual course of busi-ness, credit disbursements will decrease in 2012 by approximately EUR 2.0 billion from the prior year.
For 2013, after outstanding results in 2012 that defied expactations, the two credit insurance sub -sidiaries, OeKB Versicherung AG and PRISMA Kreditversicherungs-AG, too are poised for a difficult 2013 in view of rising insolvency forecasts.
The sentiment in financial markets has brightened dra-matically since the middle of 2012. This improvement was fuelled by market participants’ growing view that a break-up of the eurozone is no longer looming (or at least not imminent). The extraordinary monetary policy measures of the ECB — above all the announce-ment of the programme of Outright Monetary Trans-actions under which the Bank can purchase unlimited quantities of euro area government bonds — induced a very positive mood in bond markets. The risk premi-ums on Austrian treasury instruments contracted, which should further improve conditions for OeKB’s access to the market. In January 2013, Standard &
Poor’s affirmed the rating of AA+ for the Republic of Austria and for OeKB and adjusted the rating outlook to “stable”.
Overall, the companies of the OeKB Group are well prepared to meet the challenges ahead and are expecting a sustained good, stable trend in operating income.
Cost/income ratio of the OeKB Group EUR million
2012
2007 2008 2009 2010 2011
82.4
Administrative expenses Operating income
161.2
■51.1%
68.8 152.3
71.7 162.4
76.9 162.1
80.1
159.4 158.3
79.9
■45.2% ■44.1%
■47.5% ■50.2% ■50.5%