Bancherul - BANCI / ENGLISH / Österreichische Volksbanken-AG (VBAG) Preliminary Result 2011

The intensifying sovereign debt crisis and the resulting revaluation of participations as well as the developments in Romania and Hungary affect the results of Österreichische Volksbanken-AG (VBAG) in 2011.The result before taxes was euro -891 million for the reporting period and the consolidated result (after taxes and non-controlling interests) totalled euro -959 million, said Volksbank in a statement.

On 27 February 2012, stabilisation measures were resolved with the owners of VBAG and the Republic of Austria, which include the recapitalisation of VBAG through the Volksbanks and the Austrian government, as well as the merger of Investkredit with VBAG. The merged institute is then to perform the role of the central organisation of the association of Volksbanks pursuant to section 30a of the Austrian Banking Act. The capital reduction and subsequent capital increase are to be approved at the Annual General Meeting of 26 April 2012 and will increase equity for the single entity and own funds in accordance with the Austrian Banking Act with retroactive effect from 31 December 2011. The measures can only be reported in the consolidated financial statements pursuant to IFRS once they take full legal effect.

VBAG Group’s own funds amounted to euro 3.3 billion as at 31 December 2011. The consolidated results include CEE banks (which were sold to Sberbank, closing of the transaction took place on 15 February 2012) as well as Volksbank Romania. Therefore CEE banks and Volksbank Romania are included in the calculation of own funds as of 31 December 2011.. Moreover, the retroactive corporate actions (capital reduction and capital increase) are also included in the calculation. The tier I ratio (ratio of core capital to the assessment base for credit risk) reached 10% (31 December 2010: 10.3%). The tier I ratio in relation to total risk was 8.8% (31 December 2010: 9.4%). The equity ratio in relation to total risk stood at 12.7% (31 December 2010: 12.8%). Eligible own funds exceed regulatory requirements by more than euro 1.2 billion.

If the sale of VBI would have been closed as of 31 December 2011, the capital ratios would increase significantly. The tier I ratio (ratio of core capital to the assessment base for credit risk) would then be 13.1%. The tier I ratio in relation to total risk would stand at 11.3% and the equity ratio in relation to total risk at 16.3%. Eligible own funds would exceed regulatory requirements by more than euro 1.6 billion.

Total assets decreased significantly

As at 31 December 2011, total assets amounted to euro 41.1 billion (including VBI) , which represents a decrease of euro 5.4 billion or 11.6% against the previous year. Of this amount, euro 1.7 billion relates to the sale of Europolis Group and euro 4.8 billion to the deconsolidation of VB RO. For VBI, the assets of a disposal group amounted to euro 8.8 billion as of the end of 2011. If this amount would be deducted, total assets as of year-end would stand at euro 32.3 billion, representing a decrease by euro 14.2 billion or 30.5 % compared to the previous year.

Debts evidenced by certificates declined by euro 2.4 billion or 15.2% compared with the end of 2010 and amounted to euro 13.5 billion as at 31 December 2011. This is due to scheduled redemptions which were only partly replaced by new issues.

Net interest income (including at-equity valuations) amounted to euro 394 million in the 2011 financial year, down euro 112 million or 22% year-on-year. The decline is a result of the deconsolidation of Volksbank Romaniaon the one hand and of lower interest margins in Central and Eastern European countries on the other hand. The valuation at equity of VB RO for the fourth quarter 2012 is euro -46 million.

Compared with the same period of the previous year, net fee and commission income decreased slightly by euro 7 million or 7% to euro 94 million. Net trading income stood at euro 3 million, reflecting a euro 34 million decline as against the figure reported for the 2010 financial year. The change in net trading income is primarily attributable to the market response to the European sovereign debt crisis.

Decrease of risk provisions continued

Despite the persisting difficult economic environment in some regions of Central and Eastern Europe, risk provisions declined by euro 176 million year-on-year and stood at euro 104 million. The greatest decrease was recorded in the Retail segment, where provisions fell by euro 32 million in the Leasing business area and by euro 113 million at VB RO and in the Corporates segment with a decline of euro 68 million. However, risk provisions had to be increased by euro 22 million in the Real Estate segment and euro 14 million in the Investment Book/Other Operations segment.

Write downs and revaluations

Income from financial investments amounted to euro -441 million for 2011. Due to the measures by the European Union regarding Greece all Greek bonds were written down which affected results by a total amount of euro -160 million. Due to increased volatility in the financial markets, management decided that instruments that were recognized as financial guarantees are to be recorded at market values via P&L. The change in accounting took place retroactively in accordance with IAS 8 and had a negative impact of euro -59 million on the result for 2011 (2010: euro -28 million). Since the negative developments on the financial markets also affect Kommunalkredit’s results considerably, the participation capital assumed in the context of the disposal of Kommunalkredit was impaired by euro -142 million. In addition, the result was also adversely affected by market value declines of investment property assets and by write-downs on investments amounting to euro -76 million in the Real Estate segment.

Human Resources/General administrative expenses

Adjusted for the disposal group and the deconsolidated VB RO, the number of employees in the Group fell by 131 since the end of 2010 to 2,038. General administrative expenses for the 2011 financial year amounted to euro 299 million, a fall of euro 50 million or 14% against the comparative period.

VBAG Individual Financial Statement

Provisions for country risks have a negative impact on results of euro -337 million, impairment on participations impact results with euro -880.5 million. The loss (euro -321.6 million) resulting from the merger of VBAG with Investkredit, with retroactive effect from 31 December 2011, had already been included. The participation in VB Romania was written down in its entirety (euro -299.1 million), as was the participation capital in Kommunalkredit (euro -142.5 million).

With the sale of Volksbank International AG to Sberbank (closing on 15 February 2012), a milestone was successfully passed in VBAG’s reform strategy. The transaction leads to a significant improvement of VBAG Group’s risk, liquidity and equity position.

Due to the matters described above, VBAG reports in the individual financial statement a loss for the year of euro -1,345.1 million. The capital reduction (on share capital and participation capital in the amount of 70% of their nominal value) reduces the loss to arrive at a balance sheet loss for the year of euro -53.5 million. Due to the high losses in 2009 and 2011 it should not be expected that supplementary capital issued by Österreichische Volksbanken-AG will be redeemed at par at final maturity. A determination of the pro rata net loss that will be applied to the respective instrument, as required by the Austrian Banking Act can at the earliest be made on the maturity date of the instrument.

Business performance

The agreement between the Austrian Government and the owners of VBAG laid the foundation for the stabilisation and continued existence of the institution. Investkredit is to be merged with VBAG with retroactive effect from 31 December 2011. The capital reduction, which is also effective retroactively from 31 December 2011, and the subsequent capital increase secure the capital resources necessary for the business strategy to be implemented. The planned joint liability scheme modelled on section 30a of the Austrian Banking Act specifies the new orientation of the then merged company. The new institution will focus on its role as central institution of the association of Volksbanks. Operations outside this area (non-core business) are to be wound down or sold according to their underlying repayment profile. As a result of the planned measures VBAG is well capitalized, according to Basel III requirements as well.