Group management report Market development 44 Significant events in the reporting period 48 Earnings and financial performance 50 Statement of financial position 55 Research and development 57 Internal control and risk management system 58 Capital, share, voting and control rights 61 Risk management 63 Consolidated non-financial report 63 Outlook 64 Events after the reporting date 65
Consolidated financial statements Statement of comprehensive income 87 Statement of financial position 90 Statement of changes in equity 91 Statement of cash flows 93 Segment reporting 95 Notes 102 Risk report 180 Auditor‘s report 268
1 Deposits at central banks and demand deposits are considered in the calculation of the NPE ratio due to the changed IFRS 9 definition based on EBA guideline (FINREP ANNEX III REV1/FINREP ANNEX V). The comparable period 2017 was adjusted accordingly.
As of January 2017, Raiffeisen Zentralbank AG contributed business is fully included. In this report, Raiffeisen Bank International (RBI) refers to the RBI Group, and RBI AG is used wherever statements refer solely to Raiffeisen Bank International AG.
On 1 January 2018, the new accounting standard for financial instruments (IFRS 9) took effect. In addition to the adoption of IFRS 9, RBI has also changed the presentation of its statement of financial position and parts of the income statement, which is now aligned with the financial reporting standards (FINREP) issued by the European Banking Authority (EBA). With the adoption of the standards, it was also necessary to adjust the figures of the comparable period 2017 and comparable reporting date as at 31 December 2017. The figures for previous periods are only to a limited extent comparable.
Net trading income and fair value result 17 35 (52.4)% 215 16 (30)
Return on equity before tax 16.3% 16.2% 0.1 PP 10.3% 8.5% –
Return on equity after tax 12.7% 12.5% 0.2 PP 6.7% 5.2% –
Return on assets before tax 1.33% 1.23% 0.10 PP 0.79% 0.60% –
NPL coverage ratio (non-banks) 77.6% 67.0% 10.6 PP 75.6% 71.3% 67.5%
Common equity tier 1 ratio (fully loaded) 13.4% 12.7% 0.6 PP 13.6% 11.5% 10.0%
Tier 1 ratio (fully loaded) 14.9% 13.6% 1.3 PP 13.6% 11.5% 10.1%
Total capital ratio (fully loaded) 18.2% 17.8% 0.3 PP 18.9% 16.8% 15.1%
Unlike the very good result, you cannot be satisfied with how your share price performed last year. What were the reasons for the weak performance? Unfortunately, 2018 was a difficult year for many Austrian shares, which was also reflected in the 20 per cent decline in the ATX over the year. To a large extent, the reasons are related to the international environment: the trade disputes between the US and China as well as Europe, the uncertainty surrounding Brexit and the budget dispute between Italy and the EU. The tightening of sanctions against Russia by the US also remains a major factor in our share price performance.
How critical are the sanctions in your view? When we talk with investors and analysts, Russia is normally very high up on the agenda, since it is – and will remain – an important market for RBI. In those discussions, I find it important to clearly distinguish between the administrative and economic impact of the sanctions. The Russian sanctions require greater administrative effort. We accept this, of course, because we certainly do not want to violate the sanctions. From an economic perspective, the impact of the sanctions is small for us. Our Russian subsidiary serves 2.8 million customers in a very large market, while a limited number of private individuals and companies are on the sanctions lists. In my view, this aspect receives too little attention. Last year, we generated a profit after tax of 455 million euros in Russia despite the sanctions and fairly weak Russian economic growth.
How will you use this additional capital? We intend to use the capital to strengthen our market position in strategically relevant markets. This may entail organic growth and potential acquisitions of portfolios or small banks should a suitable opportunity arise and the price be right. In certain CEE countries, a consolidation of the banking sector is underway and we want to play an active role in the process.
What countries are relevant for you at present? The Czech Republic, Slovakia, Serbia and Bulgaria are particularly interesting. However, this does not mean that we do not want to grow in other CEE countries as well. We will need to reevaluate Romania.
What does this mean in practice? We have to work in flexible teams rather than in segregated silos. We want to delegate responsibility instead of thinking in terms of old hierarchies. We want to create small flexible teams instead of huge project groups which can lack focus. We therefore have to change into an agile business. Only then can we be a bank which continuingly impresses our customers with innovative product solutions. And within this framework, we naturally also have to develop concrete products. The commitment demonstrated by our employees has been superb and we are extremely grateful to them for their outstanding and successful work in the past financial year.
Looking ahead, you are therefore optimistic? We are currently in a quite challenging economic and political environment. There is, for example, the recent moderate deterioration in global growth prospects, the ongoing lack of clarity surrounding Brexit and the continuing geopolitical tensions. Naturally, we are not completely immune to these developments. Despite these factors, however, we believe that RBI is well-positioned as a result of the measures already taken to strengthen the capital base, improve the flexibility of our corporate structure, as well as our digitalization strategy. We are therefore very confident that we can continue on our profitable growth path in the future.
The 2018 financial year was extremely successful for RBI. Buoyed by positive economic developments in Austria and strong economic momentum in some core markets, RBI achieved or surpassed its targets for 2018. This success was reflected in the key figures. In addition to a pleasing € 1,270 million result, RBI significantly increased its common equity tier 1 and additional tier 1 (AT1) capitalization while also reducing the non-performing loan ratio from 5.7 per cent to 3.8 per cent. At the same time, RBI improved its operating result by 4 per cent with a comparatively moderate increase of 1.2 per cent in general administrative expenses. This result once again demonstrates RBI’s leading role as a universal bank in CEE and as a corporate and investment bank in Austria.
The sale of Raiffeisen Bank Polska’s core banking operations was completed during the year, marking the conclusion of the transformation program adopted in 2015. Although the sale reduced the net profit for the year, it increased the CET 1 ratio by around 85 basis points. The sale is strategically important for RBI, enabling it to place greater future focus on growth in selected core markets and to expand market positions. RBI commenced this growth process in 2018, which is reflected in increased customer loan volumes. The Management Board and Supervisory Board place strong emphasis in this respect on sustainable and steady growth combined with prudent and proactive risk management.
However, 2018 was again shaped by challenging geopolitical developments and the resulting market concerns. In particular, the tightening of US sanctions against Russia triggered uncertainty among many investors, which had a negative impact on RBI’s share price despite the good consolidated profit. In addition, shortly before the end of 2018, a collection of fiscal measures were passed by decree in expedited proceedings in Romania, which included inter alia a new banking tax. These political developments are constantly monitored by the Management Board and the Supervisory Board and on the basis of joint consultation, factored into the Group’s business and risk steering.
Bettina Selden resigned from the Supervisory Board with effect from the end of the Annual General Meeting on 21 June 2018 on health grounds. In August, we were deeply saddened to receive the tragic news of her death. The Supervisory Board is extremely grateful for her longstanding personal commitment and valuable contribution to RBI.
In the 2018 financial year, the members of the Supervisory Board and its Committees held meetings as detailed in the below table. This demonstrates a high level of attendance for both the Supervisory Board members and the Committees.
As part of its responsibilities, the Supervisory Board regularly and comprehensively monitored the business performance and risk developments at RBI and its principal subsidiaries. Based on the reports on risks arising from banking business, the Supervisory Board held discussions with the Management Board on the adequacy of capital and liquidity and also on the direction of the Group’s business and risk strategies. The Supervisory Board attached great importance to the aforementioned implementation of the Group-wide digitalization program, including in particular robust and effective IT risk management. In addition, the Management Board provided the Supervisory Board with regular and detailed reports on relevant matters concerning performance in the respective business areas.
In 2018 the Supervisory Board focused extensively on the sale of Raiffeisen Bank Polska’s core banking operations. It discussed the strategic considerations at several meetings and in April 2018 resolved to sell the core banking operations, having considered the economic aspects and their consequences for RBI. Up until its successful completion, the Management Board subsequently provided regular reports on the sale process and on the transfer of Raiffeisen Bank Polska’s remaining business to a Polish branch of RBI.
In the course of its monitoring and advisory activities, the Supervisory Board maintained direct contact with the responsible Management Board members, the auditor and the heads of the internal control functions. It also maintained a continuous exchange of information and views with representatives of the banking supervisory authorities on topical issues.
Based on the reports, the Supervisory Board discussed the effectiveness of the methods and procedures for managing and preventing compliance risks. Particular emphasis was placed on adherence to the Group-wide compliance policies and on the results of the compliance monitoring program, including the measures taken. With regard to geopolitical developments, the Supervisory Board held critical, in-depth discussions on detailed country-specific reports. A focus of these discussions was on the US sanctions against selected Russian private individuals and companies. Together with the Management Board and employees responsible for risk and compliance, the Supervisory Board regularly addressed current developments and their consequences for RBI. The measures adopted by the Management Board to comply with the sanctions and to mitigate the risks which could arise as a result of the continuing tense political situation were discussed by the Supervisory Board and assessed accordingly. In addition, the Management Board provided the Supervisory Board with regular reports on the latest developments concerning the United Kingdom’s departure from the European Union and the potential associated legal and economic implications. Furthermore, the Audit Committee provided the Supervisory Board with quarterly information on Internal Audit’s audit results.
Finally, the Supervisory Board discussed on a well-informed and knowledgeable basis the proposals submitted by the Management Board relating to matters which require Supervisory Board approval in accordance with the Articles of Association and Rules of Procedure. The Supervisory Board made decisions after considering any potential risks. In particular, RBI’s budget and medium-term planning as prepared by the Management Board was discussed in depth and approved by the Supervisory Board.
The members of the Supervisory Board undertook the training and professional development measures required for their Supervisory Board roles independently and received adequate support from RBI for this. In addition, the members of the Supervisory Board were able to undertake regular professional development training in the form of Fit & Proper courses, two of which were offered during the year. The course in March 2018 focused on cyber security, while the September course addressed blockchain and the crypto economy. Both courses included an extensive update on current regulatory developments.
The consolidated financial statements, prepared by the Management Board pursuant to Section 245a of the Austrian Commercial Code (UGB) in accordance with the provisions of the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) mandatorily applicable on the reporting date, and the consolidated management report of RBI AG for the 2018 financial year were audited by KPMG and issued with an unqualified auditor’s report.
Matters discussed by the Personnel Committee included the remuneration of the members of the Management Board and their employment contracts, and the definition of Management Board members’ objectives for 2018. The members of the Personnel Committee also passed a resolution concerning the final allotment of shares under the 2013 SIP tranches.
At its quarterly meetings, the Risk Committee monitored implementation of the risk strategy and discussed risk developments at RBI at length. In this context, portfolio performance was examined on the basis of credit, liquidity, refinancing, country, market and operational risks. The Risk Committee considered the development of non-performing loans and current risk issues in depth. Key matters included the US sanctions against Russia, Brexit, economic developments in individual countries, and current compliance and anti-money laundering issues. Taking the above into account, the Risk Committee advised the Management Board on current and future risk propensity and discussed the adequacy of capitalization and liquidity.
Raiffeisen at a glance Raiffeisen Bank International RBI regards Austria, where it is a leading corporate and investment bank, as well as Central and Eastern Europe (CEE) as its home market. Subsidiary banks cover 13 markets across the region. In addition, the Group includes numerous other financial service providers active in areas such as leasing, asset management and M&A.
1 Change in total assets compared to 31 December 2017 expressed in local currencies varies due to fluctuations in euro exchange rates.
The Raiffeisen Banking Group Austria (RBG) The RBG is the country's largest banking group and has the densest branch network in Austria. In financing, it primarily serves small and mid-sized retail, service, industrial and commercial enterprises as well as the tourism and agriculture sectors.
Together, the 386 Raiffeisen banks with their branches, the regional Raiffeisen banks and specialist companies, make up a comprehensive and extensive banking network. The Raiffeisen banks are universal banks that provide a full range of banking services and are also the owners of their respective regional bank.
In turn, the regional Raiffeisen banks are connected to RBI AG as the central institution of the RBG.
Comparable mutual support structures apply to the members of the regional IPS. The institutional protection schemes hence supplement the RBG system of mutual assistance that comes into effect if a member experiences economic difficulties.
RBI’s strategy Long-term value creation is the primary objective RBI is a leading universal banking group in the CEE region and Austria. Its business activities comprise the corporate customer business, financial services for retail customers in CEE, as well as business with banks and other institutional clients. The challenges facing RBI’s business model will continue to be marked by regulatory requirements, bank-specific taxes, politically motivated market interventions, the persistently low interest rate environment and technological developments, as well as new competitors. In order to successfully meet these challenges, following a transformation program that concluded with the sale of the core Polish banking operations, RBI is again focusing on growth and even more so on digitalization and innovation. RBI will continue to concentrate on the CEE region, which offers structurally higher growth rates than Western Europe and therefore a more attractive level of interest rates and returns. This is complemented by leading specialist institutions in Austria – in particular the building society, asset management and pension fund management businesses – so that RBI benefits at the same time from the stability of its Austrian operations. A balanced, attractive business portfolio is the overall result.
■ RBI is a reliable business partner for corporate and institutional clients that have a link to the target region, and offers financial services of an international standard.
■ RBI distinguishes itself through its strong local presence, customer focus and long-term business relationships.
These are used by RBI as a basis for the provision of services to more than 16 million retail, private banking and small business customers, roughly 100,000 corporate customers (medium-sized businesses, large local companies, international groups and regional authorities) and approximately 10,000 institutional clients (banks, insurance companies, asset managers, governments and public sector organizations). Customers’ needs are always the top priority, and RBI sees itself as their financial advisor. It aims to provide its customers with the right financial services to meet their needs as comprehensively as possible, and in this way build long-term business partnerships. In the process, customers typically take advantage of entire product bundles. The provision of top-quality advisory services and innovative solutions is key to the successful implementation of this strategy.
This generally muted performance was largely driven by concerns about further rate hikes in the US and a possible end to the accommodative monetary policy in Europe. In addition, uncertainties arose around the announcement of trade barriers and protective tariffs on the part of the US, which are widely expected to have a negative impact on international trade and movement of goods. Signs of a global economic slowdown also began mounting at the end of the year.
The weaker performance of banking securities was also driven to a large extent by turbulence surrounding the Turkish lira, as well as a significant widening of Italian government bond spreads, which in turn fueled concerns over a renewed flare-up of the euro crisis. These fears were stirred up time and again by disagreements between Italy and the EU about the Italian draft budget. The difficult Brexit negotiations weighed heavily on financial markets as well.
The RBI share, for its part, suffered particularly from the tightening of US sanctions against selected Russian businesspeople and companies in April 2018 and other actions of this nature taken in the first half of August. These steps fueled fears among many market participants that RBI could itself be affected by secondary sanctions. RBI’s strong financial results and very low risk provisioning were only temporarily able to provide positive impetus to the stock price in this environment.
At the editorial deadline for this report on 27 February 2019, RBI’s stock was priced at € 22.42. The shares therefore posted a gain of 1 per cent compared to 31 December 2018, underperforming the ATX (10 per cent) and the EURO STOXX Banks (11 per cent).
At year-end 2018, the market capitalization was € 7.3 billion. At the editorial deadline, it stood at € 7.4 billion. The number of shares issued remained unchanged at 328,939,621.
RBI EURO STOXX Banks (relative to RBI) ATX (relative to RBI) Index base = € 30.20
Stock data and details Share price as at 31 December 2018 € 22.20
Book value per share as at 31 December 2018 € 32.19
RBI rating Last year, RBI continued to be rated by Moody’s Investors Service and Standard & Poor’s. In order to ensure an accurate assessment, RBI maintains regular contact with rating agency analysts and informs them about current developments in its business.
RBI continued its IR activities in the third quarter with road shows and participation in conferences in Barcelona, Boston, Budapest, London, Madrid and New York. A meeting with debt analysts and the annual meeting with equity analysts took place in London in late September. RBI also participated in one of the largest international bank conferences in London, which was followed by further individual and group presentations. The focus of discussions was on the possible impact of Russian sanctions on the performance of the business and the sale of the core banking operations of the Polish subsidiary. With respect to the latter, questions included how the capital freed up from the sale would be used and whether it would lead to a higher dividend distribution or be invested in further growth.
In the fourth quarter, talks were held with equity and debt investors in Melbourne, Sydney and Singapore as part of a road show in Australia and Asia. RBI also took part in conferences for debt investors in Hong Kong and Taipei. Attendees showed consistently keen interest in the Group’s digitalization strategy. Participation in investor conferences in Budapest, Bucharest, Copenhagen, Frankfurt, Helsinki, Munich, Prague, Stegersbach and Warsaw completed RBI’s extensive IR activities for 2018.
A total of 22 equity analysts and 21 debt analysts (as of 31 December 2018) regularly provide investment recommendations on RBI. Consequently, RBI is the Austrian company with the largest number of analyst teams regularly reporting on it. In 2018, 382 analyst reports on RBI were published.
Contact for equity and debt investors E-mail: ir@rbinternational.com Internet: www.rbinternational.com → Investors Telephone: +43-1-71 707-2089 Fax: +43-1-71 707-2138
C Rule 52a: The number of members on the Supervisory Board (without employee representatives) shall be ten at most. Supervisory Board currently consists of nine core shareholder representatives for RBG and three free float representatives. This higher number of members was based on a resolution passed by the Annual General Meeting on 22 June 2017. It provides the Supervisory Board with additional industry knowledge, more diversity, and further strengthens its ability to exercise its control function.
Martin Grüll 1959 3 January 2005 29 February 2020 1 Effective as of 10 October 2010
This Corporate Governance Report combines the Corporate Governance Report of RBI AG and the consolidated Corporate Governance Report of RBI pursuant to § 267b of the Austrian Commercial Code (UGB) in conjunction with § 251 (3) of the UGB.
RBI attaches great importance to responsible and transparent business management in order to maintain the understanding and confidence of its various stakeholders – not least capital market participants. Hence, RBI is committed to adhering to the Austrian Corporate Governance Code (ACGC or the Code) as laid out in the version dated January 2018. The ACGC is publicly available on the Austrian Working Group for Corporate Governance website (www.corporate-governance.at) and on the RBI website (www.rbinternational.com → Investors → Corporate Governance). RBI does not have any capital market-oriented subsidiaries which are obliged to publish a corporate governance report due to local statutory regulations.
Raiffeisen Bank Polska S.A., Poland, Member (until 3 November 2018) Raiffeisen Bank S.A., Romania, Member AO Raiffeisenbank, Russia, Member Tatra banka, a.s., Slovakia, Member Raiffeisenbank a.s., Czech Republic, Member Raiffeisen Bank Zrt., Hungary, Chariman Raiffeisenbank Austria d.d., Croatia, Chairman
Raiffeisen Centrobank AG, Austria, Member (from 25 April 2018, previously Chairman) AO Raiffeisenbank, Russia, Member Raiffeisen Bank Polska S.A., Poland, Member (until 3 November 2018) Raiffeisen Bank d.d., Bosnia and Herzegovina, Chairman Raiffeisen Bank S.A., Romania, Member Tatra banka, a.s., Slovakia, Member Raiffeisenbank a.s., Czech Republic, Member
Composition of the Supervisory Board As of 31 December 2018, the Supervisory Board comprised: Supervisory Board member Year of birth Original appointment End of term
Erwin Hameseder 1956 8 July 20101 Annual General Meeting 2020 Chairman
■ The exercise of functions within the company or merely exercising the function of a management board member or senior executive by a Supervisory Board member does not, as a rule, lead to the company concerned being regarded as a company in which a Supervisory Board member has a significant financial interest, to the extent that circumstances do not support the presumption that the Supervisory Board member derives a direct personal advantage from doing business with the company.
■ The Supervisory Board member shall not have been an auditor of the company, nor a shareholder or employee of the auditing company in the previous three years.
Up to the Annual General Meeting of 21 June 2018, Bettina Selden, Eva Eberhartinger and Birgit Noggler were free float representatives on the Supervisory Board of RBI AG according to C Rule 54 of the ACGC. Since the Annual General Meeting of 21 June 2018, Eva Eberhartinger, Birgit Noggler and Andrea Gaal have been free float representatives on the Supervisory Board of RBI AG. These members of the Supervisory Board are neither a shareholder with a shareholding of greater than 10 per cent, nor do they represent the interests of such shareholders.
Members of the Supervisory Board had the following additional supervisory board mandates or comparable functions in domestic and foreign stock exchange listed companies from 1 January to 31 December 2018: Erwin Hameseder AGRANA Beteiligungs-Aktiengesellschaft, Austria, Chairman; STRABAG SE, Austria, Deputy Chairman; UNIQA Insurance Group AG, Austria, 2nd Deputy Chairman; Südzucker AG, Germany, 2nd Deputy Chairman Heinrich Schaller voestalpine AG, Austria, Deputy Chairman; AMAG Austria Metall AG, Austria, Deputy Chairman Klaus Buchleitner BayWa AG, Germany, Deputy Chairman; AGRANA Beteiligungs-Aktiengesellschaft, Austria, Deputy Chairman Rudolf Könighofer UNIQA Insurance Group AG, Austria, Member
In addition to their functions as members of RBI AG’s Supervisory Board, supervisory board mandates were also held at the following material subsidiaries: Erwin Hameseder LEIPNIK LUNDENBURGER INVEST Beteiligungs Aktiengesellschaft, Austria, Chairman Klaus Buchleitner LEIPNIK LUNDENBURGER INVEST Beteiligungs Aktiengesellschaft, Austria, Member Rudolf Könighofer Raiffeisen Informatik GmbH, Austria, Member
Susanne Unger 1 January to 21 June 2018 21 June to 31 December 2018
§ 63a (4) of the Austrian Banking Act (BWG) requires one member of the Audit Committee to be a financial expert. This function is fulfilled by Eva Eberhartinger. However, three other members of the Audit Committee have relevant expertise from their positions as senior executives of banks.
The Advisory Council The Advisory Council consists of representatives of RBG and has a purely consultative function for the Management Board of RBI AG. The rights and obligations that the Management Board and Supervisory Board have under the law and the Articles of Association are not curtailed by the Advisory Council’s activities.
As long as the General Meeting passes no resolutions to the contrary in the future, Advisory Council members are paid the following annual remuneration: ■ For the Chairman of the Advisory Council: € 25,000 (excluding VAT)
Depending on the duration of the respective Advisory Council mandate, the annual remuneration for the financial year is allocated on a pro rata basis or in its entirety.
■ The Group Governmental and Public Affairs division was created in order to strengthen the active, structured dialog between RBI, policymakers and the general public.
■ The Plenipotentiary function was re-established as of 1 December 2018. This function is responsible for Group Regulatory Affairs, Legal Services, Group Marketing, Group Sustainability Management and Group Governmental & Public Affairs.
Decision-making authority and activities of the Committees of the Supervisory Board
The Working Committee is responsible for all matters referred to it by the Supervisory Board. It handles general focus reports on individual industries in the corporate customer business and financial institutions area as part of reviewing loan and limit applications. It takes these opportunities to discuss selected customer groups and financial institutions, as well as customer rating downgrades. The Working Committee also looks at developments with respect to the 20 largest groups of connected customers in the corporate customer business in the course of the year and reviews special customer reports prepared in response to current events. The Working Committee discusses and decides on limit applications for companies and financial institutions and confers on limit applications that fall within the Supervisory Board’s decision-making authority as well as reports written for the Supervisory Board, such as the annual report on all significant investments under § 28b of the Austrian Banking Act (BWG), before they are addressed by the entire Supervisory Board.
In addition, the Working Committee considers pending requests and reports on the formation, closure and liquidation of subsidiaries and the acquisition and disposal of equity participations up to the ceiling amount for Supervisory Board responsibility. The Working Committee also discusses and decides on the assumption of new board-level functions by Management Board members and the allocation of duties among the individual members of the Management Board.
The Personnel Committee deals with the remuneration of Management Board members as well as their employment contracts. In particular, it discusses and decides on provisions in the individual Management Board members’ employment contracts and makes changes to the contracts as needed. It is also responsible for approving any acceptance of secondary employment by members of the Management Board.
It sets targets for the Management Board based on applicable rules and regulations and makes any required changes. The Personnel Committee also discusses whether the Management Board has attained its targets and approves bonus allocations on that basis. In addition, it discusses and reviews submitted information that appears to require clawbacks of past bonuses or non-payment of bonuses from existing provisions (“penalty”). The Personnel Committee then decides whether to pay amounts from bonus payments that were deferred as required by law.
The Audit Committee monitors the accounting process. It issues corresponding recommendations or proposals for ensuring reliability and supervises the effectiveness of the company’s internal control, audit and risk management systems.
■ The Retail Banking area was reorganized, with its structure expanded from three to eight specialized divisions. The International Retail Strategy & Products division was split into three divisions: International Business Management & Steering, International Retail Online Banking, and International Retail Lending. International Consumer & Small Business Banking was segmented into two divisions: International Small Business Banking and International Mass Banking, Sales & Distribution. A new division, International Retail CRM, was also established. This reorganization was necessary to support the desired level of growth in the retail business.
■ The Group Asset Management division was part of the Retail Banking & Markets area of the Management Board until the start of 2018. After the Management Board area was split into Retail Banking and Markets & Investment Banking, this division was initially attached to the Markets & Investment Banking area of the Management Board. In the second half of the year, it was then transferred to the Retail Banking area.
■ The new Group Competence Center for Capital Markets Corporate & Retail Sales was set up as a Group function reporting directly to the Markets & Investment Banking area of the Management Board. This new function will capitalize on cross-selling opportunities.
The Remuneration Committee’s responsibilities include, first and foremost, establishing guidelines for the company’s remuneration policies and practices, particularly on the basis of the BWG, as well as relevant sections of the ACGC. In doing so, the long-term interests of shareholders, investors and employees of the company are taken into account, as are the economic interests of maintaining a functioning banking system and the stability of the financial market. The Remuneration Committee issues detailed internal remuneration policies for RBI and makes changes as needed as part of a regular review process. On that basis, the Remuneration Committee then selects the companies within RBI that are subject to the remuneration principles. This selection process is reviewed at regular intervals. The Remuneration Committee is also responsible for approving the proposed list of employees and functions which have a material impact on the risk profile of the Group and/or company. The Remuneration Committee conducts regular reviews of these risk personnel.
In addition, the Remuneration Committee supervises and regularly reviews remuneration policies, remuneration practices and relevant incentive structures to ensure that all related risks are controlled, monitored and limited in accordance with the BWG, as well as with respect to the company’s capitalization and liquidity. To this end, reports from Human Resources, Internal Audit, Compliance and Risk Management are presented to the Remuneration Committee and the associated findings and measures are discussed. The Remuneration Committee further reviews the remuneration of executives responsible for risk management and compliance.
The responsibilities of the Risk Committee include advising the Management Board on current and future risk propensity and risk strategy, monitoring the implementation of this risk strategy with regard to the controlling, monitoring and limitation of risk in accordance with the BWG, as well as the monitoring of capitalization and liquidity. To fulfill these responsibilities, the Risk Committee obtains quarterly reports on issues such as credit, liquidity and market risk, Internal Capital Adequacy Assessment Process (ICAAP) and non-performing loans. The Committee also looks at current risk aspects, including selected country reports in the event of political developments as well as reports on regulatory and digital developments and their repercussions for RBI. In addition, the Risk Committee discusses relevant metrics and tolerances regarding the Group’s risk appetite, with due consideration given to budgeting and strategy.
taking, deputizing arrangements, resolutions passed by circulation in urgent cases, monitoring of courses of action taken, meeting preparations, forwarding of documents) and on the perceptions of the members themselves. The Nomination Committee’s responsibilities also include regularly assessing the structure, size, composition and performance of the Management Board and Supervisory Board, with reports on the bodies’ composition, organizational structures and the results of their work being presented as a basis for any decisions. It also regularly evaluates the knowledge, skills and experience of the individual members of both the Management Board and Supervisory Board and also of the respective governing body as a whole. The evaluation takes place in the Nomination Committee and is based on the self-evaluation of the individual members of the Management Board and Supervisory Board, as well as on individual continuing education reports.
The Working Committee (WC) held eight meetings in the 2018 financial year. The Audit Committee (AC) met three times, the Personnel Committee (PC) twice, the Remuneration Committee (ReC) three times, the Risk Committee (RiC) four times, and the Nomination Committee (NC) four times.
No member of the Supervisory Board was unable to personally attend more than half of the meetings of the Supervisory Board. Supervisory Board members attended the meetings of the Supervisory Board and its committees as shown below in 2018. It should be noted that the composition of the Supervisory Board and its committees changed in the course of the year.
Supervisory Board member SB (7) WC (8) AC (3) PC (2) NC (4) ReC (3) RiC (4) Total (31) Erwin Hameseder 7/7 8/8 3/3 2/2 4/4 3/3 4/4 31
Betriebsökonom Wilfried Hopfner 6/7 n/a n/a n/a n/a n/a n/a 6
Natalie Egger-Grunicke 6/7 n/a n/a n/a n/a n/a n/a 6 n/a – not applicable, as no member in the respective Committee 1) Eva Eberhartinger left the Working Committee effective as of 21 June 2018 2) Andreas Gaal was appointed to the Supervisory Board and all of its Committees on 21 June 2018 3) Bettina Selden left the Supervisory Board and all of its Committees on 21 June 2018
The payment of a bonus is linked to the achievement of annually agreed objectives from various areas based on a balanced scorecard approach. These are weighted financial targets (adjusted to the respective function, e.g. return on risk-adjusted capital, total costs, risk-weighted assets), customer and employee goals, as well as process/efficiency/infrastructure goals and, where necessary, additional objectives. The amount of the bonus is determined based on consolidated profit and the cost/income ratio; the targets to be achieved are based on RBI’s medium-term return on equity target and thus consider a period spanning several years. Payment of bonuses is deferred as set forth in the BWG and implemented according to internal regulations.
Management Board members’ contracts specify a maximum bonus. Similarly, the SIP includes a cap amounting to three times the allocation value. A maximum limit is thus in place for all variable compensation components. The total of all variable compensation components is capped at 100 per cent of the fixed remuneration. This cap applies to the Chairman of the Management Board as well as to all the members and includes all forms of variable remuneration. Other remuneration consists of compensation for boardlevel functions in affiliated companies, payments to pension funds and insurance companies, as well as vacation compensation and benefits.
As required by C Rule 36 of the ACGC, the Supervisory Board of RBI AG conducted a self-evaluation and efficiency review for the 2018 financial year, with outside support provided by KPMG.
RBI uses a simple, transparent remuneration system which reflects the Group’s business strategy and complies with regulatory requirements. The remuneration principles support the company’s long-term objectives, interests and values while at the same time containing measures to avoid conflicts of interest.
Total remuneration consists of both fixed and variable components, with an appropriate ratio between the two. Employees’ fixed income is set at a level that allows them to maintain an adequate standard of living. This aims to provide maximum flexibility in the choice and implementation of the variable remuneration components, including forgoing the granting of variable remuneration entirely. In addition, the total amount of the variable remuneration does not restrict RBI’s ability to improve its capitalization. The basis for all variable remuneration programs is performance, which is measured at Group, company and also individual level.
The last SIP tranche, which was for 2013, matured in 2018. In accordance with the terms and conditions of the program, the number of shares actually transferred was as follows: SIP 2013
Number of Share price value of € 27,12 on Actual number Group of persons shares due allotment date (9 April 2018) of shares transferred
Members of the Management Board of RBI AG 29,170 791,090 24,233
No further contingent shares were allocated as at the reporting date.
The same rules essentially apply for the members of the Management Board as for employees. They provide for a basic contribution to a pension fund by the company and an additional contribution when the employee makes their own contributions in the same amount. Additional individual pension benefits, which are financed by a reinsurance policy, apply to two members of the Management Board.
Furthermore, protection against occupational disability risk is provided by a pension fund and/or on the basis of an individual pension benefit, which is covered by a reinsurance policy. Contracts for Management Board members are limited to the duration of their term in office or a maximum of five years.
In the event of a function or contract termination, one member of the Management Board is entitled to severance payments in accordance with a contractual agreement and six members in accordance with the Company Retirement Plan Act. In principle, the severance payment claims under contractual agreements expire if the Management Board member resigns.
Regulations regarding severance payments, in case of the early termination of Management Board mandates, are essentially based on the principles stipulated by the ACGC. Severance payments do not exceed the maximum limits stipulated in the ACGC (a maximum of two years’ total annual remuneration for early termination without serious cause – except for severance payments made under contractual agreements before 1 January 2010 – and in any case no longer than the remaining term. No severance payment is made in the event of premature termination for serious reasons attributable to the Management Board member).
Supervisory Board remuneration A new remuneration model for the Supervisory Board was adopted at the Annual General Meeting on 21 June 2018. Under the new model, elected Supervisory Board members are paid the following annual remuneration starting in the 2017 financial year as long as the General Meeting does not pass any future resolutions to the contrary: ■ For the Chairman of the Supervisory Board: € 120,000
■ For the Deputy Chairman of the Supervisory Board: € 90,000 each
■ For every other elected member of the Supervisory Board: € 60,000 each
The annual remuneration for the financial year is allocated and paid on a pro rata basis or in its entirety depending on how long the Supervisory Board member has served on the Supervisory Board or committee, and whether he or she chairs the Supervisory Board or committee. In addition, the Annual General Meeting resolved on 21 June 2018 to pay each elected member of the Supervisory Board an additional attendance fee of EUR 1,000 for each meeting they attend.
Based on the newly adopted remuneration model, the members of the Supervisory Board are paid the following remuneration reflecting their time in office and chairman positions held: Supervisory Board member Fixed remuneration in € thousands
A D&O (directors and officers) financial loss and liability insurance policy was maintained with UNIQA Österreich Versicherungen AG for the 2018 financial year for the Supervisory Board, the Management Board and key executives, the cost of which is borne by the company. The policy covers both third party claims (external cover) and also claims of the company itself (internal cover) against the managers. The internal cover also protects the company.
Annual General Meeting The Annual General Meeting for the 2017 financial year was held on 21 June 2018 in Vienna. The Annual General Meeting for the 2018 financial year will take place on 13 June 2019. The convening notice will be published in the Wiener Zeitung’s official journal and in electronic form a minimum of 28 days before the Annual General Meeting.
Prejudice and discrimination have no place in RBI. This is also clearly stated in the Code of Conduct which is valid across the entire Group. RBI instead advocates equality, and in keeping with its corporate identity, it offers equal opportunities for equal performance within the company, regardless of gender or other factors. This begins with staff selection, which must be without prejudice and where the same standards must always be applied.
The composition of the Supervisory Board and Management Board should be structured so that the board members’ geographic origins reflect the diversity of RBI’s markets and its cultural context. With respect to the age structure of the Management Board and Supervisory Board, the board members should preferably not have all been born in the same decade. The aim is for women to fill 35 per cent of the positions within the Supervisory Board, Management Board and Tier 2 management of the RBI Group by no later than 2024.
The number of RBI AG Management Board members increased from five to seven in the first quarter of 2018. The Retail Banking & Markets area of the Management Board, which had been overseen on an interim basis, was divided into separate areas under new management. Furthermore, the term of one Management Board position was also extended. Of the seven Management Board members, currently five are from Austria, one is from Poland, and one is from Ukraine. The percentage of members of nonAustrian origin therefore increased from 0 per cent at the end of 2017 to 29 per cent at the end of 2018. All of the Supervisory Board members are of Austrian origin. Members range in age from 44 to 64 for the Supervisory Board (2017: from 43 to 65) and from 40 to 59 for the Management Board (2017: from 45 to 58). The next section describes the percentage of women in detail.
To further improve the framework conditions for work and career, RBI continuously endeavors to reconcile family responsibilities and day-to-day work schedules as far as possible. Working arrangements such as flexible working hours, part-time and homeoffice working are offered and actively supported in accordance with statutory provisions. Some locations also have company kindergartens with employee-friendly opening hours. Among other things, these aim to facilitate effective management of maternity leave, which should encourage women to return to work. RBI also adopts a positive stance towards paternity leave and considers it an important means of ensuring equality. In order to build on management skills among employees, RBI offers targeted training and continuing education programs, which have proven very popular among male and female employees alike. In 2018, women made up 56 per cent of participants in RBI AG’s basic leadership program and 40 per cent in the Talent Lab for managers.
The Diversity 2020 initiative continued in Austria with a number of programs in 2018. One of the current core issues targeted by the diversity initiative is the empowerment of women. In particular, it aims to increase the number of women in top management positions. RBI is convinced that a lasting impact can only be achieved by directly addressing personnel processes. For this reason, management positions are advertised but not filled until there is at least one qualified female candidate. Potentially suitable candidates are actively invited to apply if needed to meet this goal. If no women apply for the position, it can be filled from the male applicants after a waiting period of one month. Documents needed for interviews or hearings are anonymized in order to ensure objectivity in the selection process. At least one female assessor must be involved in the talent selection process; self-nomination is now an option as well. Subconscious prejudices are a key factor preventing the appointment of women to management positions, among other things. To counter this, executives are offered a specific e-microlearning program to help them identify prejudices that they may hold and learn how to consciously deal with them. In addition, RBI supports arrangements such as part-time management in order to overcome structural barriers. It also sees gender-specific mentoring as an important tool for increasing the representation of women in management positions. An in-house course on the empowerment of women is also available for talented female employees. The course was successfully completed in 2018. Two of the graduates from this course created the RBI Women Forum, a network that aims to connect female managers and talented employees. The forum held its opening event, Our Future Networks, in October 2018.
For RBI AG, the Nomination Committee has set a target of filling 30 per cent of the positions on the Supervisory Board, Management Board and in upper management (Tier 2 and Tier 3 management) with women by 2024. Women held the following proportions of Tier 3 management positions and higher (positions with staff responsibility) at RBI AG, at 31 December 2018: Supervisory Board, 28 per cent (2017: 28 per cent); Management Board, 0 per cent (2017: 0 per cent); Tier 2 management, 19 per cent (2017: 17 per cent); and Tier 3 management, 20 per cent (2017: 19 per cent). Female employees make up 46 per cent (2017: 46 per cent) of the total workforce. RBI AG therefore meets the legal requirement, which took effect in Austria on 1 January 2018, for the share of women on its Supervisory Board. Despite all the measures taken, the percentage of women in top management only slightly increased in 2018 due in part to various reorganizations. For this reason, RBI is conducting a detailed analysis of its personnel structure and recruiting and promotion practices in cooperation with an external organization. Once the analysis has been completed, it will optimize its measures and re-evaluate the attainability of its target.
Transparency The internet, particularly the company website, plays an important role for RBI with regard to open communication with shareholders, their representatives, customers, analysts, employees, and the interested public. Therefore, the website offers regularly updated information and services, including the following: annual and interim reports, company presentations, telephone conference webcasts, ad-hoc releases, press releases, investor relations releases, share price information and stock data, information for debt investors, financial calendar with advance notice of important dates, information on securities transactions of the Management Board and Supervisory Board that are subject to reporting requirements (directors’ dealings), RBI AG’s Articles of Association, the Corporate Governance Report, analysts’ recommendations, as well as an ordering service for written information and registration for the automatic delivery of investor relations news by e-mail.
These and other requirements and rules of conduct are covered by a corporate policy that contains the duties required by law and by the ACGC. The policy also gives due consideration to the European Banking Authority’s (EBA) guidelines on internal governance, the joint European Securities and Markets Authority (ESMA)/EBA guidelines to assess the suitability of members of management bodies and key function holders, the ECB guide to fit and proper assessments and the Basel Committee on Banking Supervision’s corporate governance principles for banks.
Independent consolidated non-financial report (§ 267a of the UGB) as well as disclosures for the parent company according to § 243b of the UGB The company prepared an independent consolidated non-financial report according to § 267a of the UGB for the 2018 financial year for RBI, which also contains the disclosures for the parent company according to § 243b of the UGB. The report was reviewed by the Supervisory Board according to § 96 (1) of the AktG. In addition, KPMG was appointed by the Management Board to audit the consolidated non-financial report and will report its findings to the Supervisory Board at its March 2019 meeting. The Supervisory Board will report on the results of the audit at the Annual General Meeting.
The Annual General Meeting on 22 June 2017 selected KPMG as the external Group auditor and bank auditor for the 2018 financial year. KPMG has confirmed to RBI AG that it has the certification of a quality auditing system. It has also declared that there are no reasons for disqualification or prejudice. The Supervisory Board is informed of the result of the audit by a statutory report regarding the audit of the consolidated financial statements by the auditor, as well as by the report of the Audit Committee. Furthermore, the auditor assesses the effectiveness of the company’s risk management in accordance with the ACGC, based on the documents submitted to the auditor and otherwise available. The resulting report is presented to the Chairman of the Supervisory Board, who is responsible for ensuring the report is addressed in the Audit Committee and presented to the Supervisory Board.
Human Resources Human Resources (HR) plays a pivotal role in the implementation of RBI’s strategy and achievement of its corporate goals. A principal function of HR when planning, organizing and managing personnel resources within the Group, lies in taking both employee needs and corporate interests into consideration. Alongside core HR processes, such as recruitment and talent management, this also involves optimally preparing employees to meet existing and future challenges in the banking sector. Attention focuses here on the increasing regulatory requirements and, in particular, on the ongoing digitalization process; which is being driven by changing customer needs and the development of new technological possibilities, and is becoming increasingly prevalent on both the corporate and individual level. The pace of the transformation is increasing rapidly. RBI is adjusting to these changes by adopting more agile working practices in adaptive organizational structures. Digitalization and increased agility will bring about a lasting transformation, which will also entail changes for employees and human resources management. Consequently, HR activities in the past year have focused on meeting the challenges of growing digitalization and on increasing agility.
Just as the needs and expectations of customers change, so too do those of employees in terms of their company. It is therefore important for HR to think less in terms of functional processes and instead adopt an internal client’s perspective and increase the focus on enabling employees to gain valuable experience within the company. The aim is to create a working environment in which all employees continue to enjoy working in the future and are able to develop and realize their potential.
In the past financial year, RBI has intensively addressed the topic of adaptive organization in order to prepare the bank for a digitalized, innovative working environment. As a result, agile working practices and the associated approaches are now being implemented throughout the company.
Customers are expecting ever faster solutions, and product life cycles are becoming ever shorter. These challenges can only be overcome with a corporate culture in which teams assume responsibility, in which there is a willingness to constantly learn, and in which people work together across internal departments, hierarchies and areas of expertise.
Market development 44 Significant events in the reporting period 48 Earnings and financial performance 50 Comparison of results with the previous year 50 Comparison of results with the previous quarter 53 Statement of financial position 55 Equity 56 Research and development 57 Internal control and risk management system 58 Capital, share, voting and control rights 61 Risk management 63 Corporate Governance 63 Consolidated non-financial report 63 Outlook 64 Events after the reporting date 65
Euro area economy feeling effects of global headwind, interest rates still low GDP growth in the euro area came in at 1.8 per cent for 2018, which was lower than in 2017, mainly due to weaker support from net exports. In contrast, the inflation rate rose significantly up until mid-2018 and for the most part slightly exceeded the European Central Bank’s (ECB) target in the second half of the year. It was only towards the end of the year that inflation started to retreat below the 2 per cent level again. This up-and-down pattern was mainly due to the energy price trend, in turn driven by volatile oil prices.
GDP growth in the Central European (CE) region reached 4.5 per cent in 2018, and again exceeded the 4 per cent level (2017: 4.5 per cent) despite a modest slowdown. At country level, Poland was the top performer with 5.1 per cent GDP growth. Domestic demand was again the main driver of economic growth in the CE region in 2018. Investment spending remained dynamic while private consumption also started to record solid growth rates again in 2018. This was supported by the continued
The US economy got off to a strong start in 2018 with quarter-on-quarter growth of 2.2 per cent (annualized) in the first quarter. It continued to expand at a significantly faster pace thereafter, averaging nearly 4 per cent per quarter (annualized) thanks to sizable tax cuts and a very large government spending package in the summer months. This positive development was thus primarily driven by consumer spending. In contrast, growth in investments weakened noticeably throughout the year. On balance, US economic output increased 2.9 per cent for full-year 2018.
Solid economic growth in CE and SEE despite slowdown, growth in Russia benefits from one-off effects Inflation in the CE region fluctuated around the 2 per cent level since the beginning of 2018, whereas in SEE it continuously climbed to a peak of just over 4 per cent before beginning to ease back slightly. Stronger inflation momentum in Southeastern Europe was largely driven by Romania, where it recently began to moderate again. Inflation rates in the CE region averaged 2.0 per cent and 3.4 per cent in the SEE region. The Czech central bank was the first in Europe to begin the interest rate normalization process, which commenced in August 2017 against the backdrop of a renewed pickup in inflation and a relatively weak Czech koruna / euro exchange rate. While Romania soon followed with liquidity tightening measures, subsequently hiking rates in early 2018, Hungary waited until the third quarter of 2018 to raise the prospect of a similar exit procedure, which it expects to implement in 2019. In contrast, Poland’s monetary policy remained neutral given the country’s muted pace of reflation.
decline in unemployment rates, which even hit all-time lows in some of the region’s countries. The resulting manpower shortage was reflected in appreciably higher wages.
In Southeastern Europe (SEE), GDP growth slowed again to 3.7 per cent during the period under review, following the strong 5.1 per cent increase in 2017. In the region’s smaller markets, however, economic indicators exhibited a positive trend, resulting in stable growth overall. Serbia took the market by complete surprise with its 10-year high of 4.0 per cent, which was mainly driven by private investments with state co-financing and an increase in private consumption. In contrast, Romania, the region’s largest economy, failed to match its exceptional performance from 2017 (7 per cent growth) as both gross fixed capital formation and private consumption expanded at a slower rate than in the previous year. However, it was precisely these components that drove growth in the remaining SEE countries.
Economic conditions in Eastern Europe (EE) continued to improve in 2018. Russia benefited from the recovery in oil prices, though private household demand continued to weaken. Moscow’s cautious monetary and fiscal policy also had a stabilizing effect, albeit without delivering additional growth and investment impetus. GDP growth in Russia benefited from one-off effects, expanding 2.3 per cent and well above the previous year’s level. At the same time, the inflation rate also rose following a record low in the previous year. In addition, the Russian ruble suffered setbacks due to new US sanctions in April and September. The rate cut cycle in Russia already came to a standstill in the first quarter of 2018, as US sanctions prompted Russia’s central bank to exercise greater caution. The second half of the year saw a token rate hike of 0.5 percentage points to 7.75 per cent as a result of uncertainties surrounding possible further sanctions. The Ukrainian economy continued its recovery path, growing 3.3 per cent, somewhat stronger than the previous year’s level. Moreover, financial risks for 2019 have been reduced thanks to renewed cooperation with the International Monetary Fund following a lengthy hiatus towards the end of 2018. The Belarus economy grew 3.0 per cent in 2018, influenced positively by its dominant trading partner Russia.
The sector likewise benefited from continued dynamic real estate lending although macro-prudential regulation has been tightened significantly in this area over the past two years. Supported by low loan loss provisioning in domestic and foreign business, the return on equity of the Austrian banks not only continued to maintain a robust level of nearly 11 per cent on a consolidated basis in 2018, but this was also well above the euro area average. This positive earnings performance was supported in large measure by favorable business developments in the CEE region, notably in the Czech Republic, Russia, Romania, Hungary, Croatia and Slovakia. Adjustments and efficiency enhancement programs of recent years are also having an impact. Given the positive overall market trend, the Austrian banking sector continued to improve its capitalization relative to other Western European banking sectors during the period under review, as also evidenced by the latest stress test results at the European level. However, capital requirements will continue to increase gradually as a result of the introduction both of the systemic risk buffer and of the buffer for Other Systemically Important Institutions, which the Financial Market Stability Board has recommended. The reduction in the bank tax implemented in 2017, should also have a positive impact on the profitability of Austria’s (major) banks in the years ahead.
In the year under review, RBI continued to focus intensively on current and forthcoming regulatory developments.
The Basel Committee is aiming for an implementation date of 1 January 2022. However, there is still no full legal implementation of the standards for the EU, which also means there are no detailed guidelines with respect to the expected implementation date.
The BRRD was transposed into Austrian law by the Bank Recovery and Resolution Act (BaSAG). The review of the original BRRD was negotiated up until the end of 2018 as part of the trilogue process. It must be implemented within two years of its publication – which is expected in Q2 2019 – by an amendment to the BaSAG.
financing and investments, which aim to reorient capital flows towards green and sustainable economic activities from 2022 onwards. The objective is to transition financial sector products, services and activities – including transparency measures and corporate governance – to a framework based on uniform definitions and standards.
The EBA’s Guidelines on Internal Governance were transposed into Austrian law in 2018. The process added new provisions to the Banking Act (§ 39 (6) BWG) which came into effect on 1 January 2019. There are now stronger regulatory compliance requirements for monitoring and ensuring RBI’s adherence to applicable Austrian law. The implementation of these activities at RBI builds on existing methods and tools.
In 2018, the focus of the Joint Supervisory Team included interest rate risk in RBI’s banking book and a review of the internal credit risk models.
Sale of RBI’s Polish subsidiary’s core banking operations to BGZ BNP
In April 2018, RBI signed a contract to sell the core banking operations of Raiffeisen Bank Polska S.A. by way of demerger to Bank BGZ BNP Paribas S.A., a subsidiary of BNP Paribas S.A. (BNP). Following receipt of the regulatory approvals in particular, and eventual demerger, the transaction closed on 31 October 2018.
RBI placed a perpetual AT1 capital issue in an amount of € 500 million and with a value date of 24 January 2018. The issue has a discretionary coupon of 4.5 per cent p.a. until mid-June 2025, after which it will be reset. The AT1 is classified as equity under IAS 32 due to the terms and conditions of the issue. As a result of this issue, together with the € 650 million AT1 capital placed in July 2017, RBI has now completed its planned AT1 issuance program.
Earnings and financial performance In the 2018 financial year, RBI continued to utilize the positive economic developments in Central and Eastern Europe, as well as in Austria, to generate further growth. The operating result improved 8 per cent, or € 162 million, to € 2,250 million, compared to the previous year, mainly due to higher interest income as well as higher fee and commission income. Lending volumes were up 4 per cent year-on-year, despite the deconsolidation of the Polish core banking operations. The continued positive economic environment facilitated a further reduction of non-performing loans in 2018, and many loans were sold at a profit as a result of active risk management on the part of RBI. At € 166 million, impairment losses on financial assets were € 146 million below the previous year, though new impairment losses of € 159 million were recognized in the fourth quarter for the fine-tuning of IFRS 9 models, as well as for expected credit risks arising from specific events which were not fully captured by the risk models.
The loss of € 120 million reported in the other result from the sale of the Polish core banking operations constituted a significant one-off effect. There was also an effect of minus € 64 million from the recycling of accumulated foreign currency differences previously recognized in equity as other comprehensive income.
Net trading income and fair value result 17 35 (19) (52.4)%
The other result amounted to minus € 161 million, compared to a flat result in the previous year. The main driver was the € 120 million loss from the sale of the Polish core banking operations. There was also an effect of minus € 64 million from recycling accumulated foreign currency differences previously recognized under other comprehensive income. This was offset by a higher results contribution from subsidiaries and associates (positive effect of € 21million), mainly due to lower impairment losses on associates.
The tax expense declined € 11 million to € 355 million. The effective tax rate declined 2 percentage points to 20 per cent. This mainly reflected the improved earnings contribution from RBI AG.
Comparison of results with the previous quarter Quarterly results in € million Q4/2017 Q1/2018 Q2/2018 Q3/2018 Q4/2018
Net trading income was down € 7 million quarter-on-quarter to minus € 3 million, predominantly due to losses on assets held for trading as well as negative currency differences. This was offset by lower valuation losses on loans in the mandatorily fair value through profit/loss category.
At € 819 million, general administrative expenses in the fourth quarter were up 12 per cent, or € 85 million, from € 734 million in the previous quarter.
Depreciation of tangible and intangible fixed assets rose € 8 million to € 79 million in the fourth quarter. This was mainly due to an adjustment in relation to the useful life of a building in Hungary, as well as the capitalization of internally produced software in Romania and at head office.
from non-banking business improved € 5 million to € 15 million, due to developments in Slovenia, Belarus, and at Raiffeisen Leasing Austria.
Staff expenses rose € 32 million quarter-on-quarter to € 416 million, primarily due to increases in provisions for retirement benefits, bonus payments and severance payments, mainly at head office and in Russia, as well as the release of provisions for overdue vacations in the third quarter. Growth in the number of staff in the fourth quarter occurred mostly in Russia and at head office.
Other administrative expenses were up € 45 million to € 325 million, driven by a seasonal increase in advertising expenses, mainly in Russia, and due to legal, advisory and consulting expenses incurred at head office for the disposal of the Polish core banking operations.
Statement of financial position In 2018, RBI’s total assets rose by 4 per cent, or € 4,969 million, to € 140,115 million, despite the sale of the Polish core banking operations (€ 9,506 million). Currency movements resulted in a € 661 million reduction; notably the depreciation of the Russian ruble against the euro by 13 per cent, of the Belarusian ruble by 5 per cent, and of the Hungarian forint and the Polish zloty each by 3 per cent, partly offset by the appreciation of the Ukrainian hryvnia by 6 per cent and of the US dollar by 5 per cent.
The decline in securities was largely due to the sale of the Polish core banking operations (down € 3,311 million). This contrasted with a € 990 million increase in Russian government bonds.
Total comprehensive income of € 1,217 million comprises profit after tax of € 1,398 million and other comprehensive income of minus € 181 million. Other comprehensive income was mainly affected by the Russian ruble exchange rate and the sale of the Polish core banking operations. The depreciation of the Russian ruble resulted in a negative contribution of € 223 million from currency translation within the Group, which was partly offset by net income from the hedging of the net investment in Russia (€ 42 million). The sale of the Polish core banking operations resulted in a recycling of the accumulated currency translation differences of € 64 million from equity to the income statement.
Risk-weighted assets (total RWA) increased € 770 million to € 72,672 million as at 31 December 2018. The increase was primarily due to new business and to business developments in Group Corporates & Markets, Russia, Romania, the Czech Republic (due inter alia to the termination of a securitization transaction) and Slovakia. This was offset by the sale of the Polish core banking operations which reduced RWA by € 4,941 million.
After RBI had not paid dividends to shareholders for the 2014 to 2016 financial years in order to strengthen the capital base, the June 2018 Annual General Meeting approved a dividend of € 0.62 per share for 2017. This resulted in a total payment of € 204 million. A further € 79 million was paid to noncontrolling shareholders of Group companies and dividend payments of € 60 million were attributable to the AT1 capital.
Total capital pursuant to the CRR/Austrian Banking Act (BWG) As at 31 December 2018, RBI's common equity tier 1 (CET 1) after deductions amounted to € 9,702 million, representing an increase of € 436 million compared to the end of 2017. The improvement was attributable to the recognition of profit generated in the regulatory capital. CET1 was reduced by the switch to the new IFRS 9 accounting standard on 1 January 2018, FX effects and other deductions. Tier 1 capital after deductions increased by € 1,089 million to € 10,928 million, notably due to the issue of € 500 million of perpetual additional tier 1 capital in January 2018 and to the changes in CET1. In contrast, tier 2 capital declined € 690 million to € 2,363 million due to early repayments and maturing of capital instruments. RBI's total capital amounted to € 13,291 million, representing an increase of € 399 million compared to the end of 2017.
Research and development As a universal bank, RBI's activities also include research and development.
In financial engineering, customized solutions in connection with investments, financing and hedging are developed for customers. Financial engineering encompasses not only structured investment products, but also structured financing in particular, i.e. financing concepts that go beyond the use of standard instruments and are employed in areas such as acquisition or project financing. RBI also develops individual solutions for its customers to hedge a broad spectrum of risks, from interest rate risk and currency risk through to commodity price risk. Besides financial engineering, RBI is also actively working on the further development of integrated product solutions for international clearing, settlement and payment services in the area of cash management.
In May 2018, RBI launched Elevator Ventures, its new corporate venture capital company. With investment capital of € 25 million, the company focuses on strategic direct investments in selected fintechs, co-investments and investments in other venture capital funds. Elevator Ventures thus represents a logical extension of Elevator Lab, as participants can now be offered the prospect of follow-up investments. Growth capital is therefore also available for young enterprises. Investment targets are fintechs that have gained some market experience and need capital to scale up their business models. Furthermore, RBI’s expertise and extensive network in CEE is of particular interest to international fintechs.
The second round of Elevator Lab started in October 2018. From more than 400 applications – a 20 per cent increase from 2017 – eight fintechs were selected to work on pilot projects jointly with RBI. For the first time, eight RBI network banks took part in the selection of the fintechs in regional Elevator Lab Challenges.
In 2018, Tatra banka was the first bank in Slovakia to introduce facial recognition in mobile banking to add to its list of biometric innovations. With its extensive offering of digital and mobile banking products, Tatra banka is one of the leading banks in CEE and regularly brings innovative solutions into the Group. In September 2018, Tatra banka, in collaboration with the HubHub coworking center in Bratislava, opened its own Elevator Lab. The aim is to offer a platform for startups from various sectors to enable them to develop and scale their business ideas jointly with the bank’s experts and IT and data specialists.
The experience gained in head office and the network banks from the various digitalization projects is regularly evaluated and enhanced. The stated goal of RBI’s digitalization strategy is to refine these insights and implement them at other Group network banks.
The network banks in CEE also regularly initiate innovative projects. RBI’s subsidiary bank in Russia, for example, is a pioneer in the implementation of blockchain technology. In September 2018, in cooperation with the Russian central bank and leading state institutions and banks, it initiated the first mortgage certificate transaction on the state masterchain platform.
Internal control and risk management system in relation to the Group accounting process Balanced and comprehensive financial reporting is a priority for RBI and its governing bodies. Compliance with all relevant statutory requirements is of course a basic prerequisite. The Management Board is responsible for establishing and defining a suitable internal control and risk management system that encompasses the entire accounting process while adhering to company requirements. This is embedded in the company-wide framework for the internal control system (ICS).
The consolidated financial statements are prepared in accordance with the relevant Austrian laws, predominantly the Austrian Banking Act (BWG) and Austrian Commercial Code (UGB), which govern the preparation of consolidated annual financial statements. The accounting standards, used to prepare the consolidated financial statements, are the International Financial Reporting Standards (IFRS) as adopted by the EU.
 Regulations for the revision and repeal of directives and instructions.
The consolidated financial statements are prepared by Group Accounting & Reporting, which reports to the Chief Financial Officer. The associated responsibilities are defined for the Group within the framework of a dedicated Group function.
Significant risks relating to the Group accounting process are evaluated and monitored by the Management Board. Complex accounting standards can increase the risk of errors, as can the use of differing valuation standards, particularly in relation to the Group’s principal financial instruments. A difficult business environment can also increase the risk of significant financial reporting errors. For the purpose of preparing the consolidated financial statements, estimates have to be made for asset and liability items for which no market value can be reliably determined. This is particularly relevant for credit business, equity participations and goodwill. Social capital and the valuation of securities are also based on estimates.
The consolidated financial statements and management report are reviewed by the Audit Committee of the Supervisory Board and are also presented to the full Supervisory Board for information. The consolidated financial statements are published as part of the Annual Report on the company’s website and in the Wiener Zeitung’s official journal and are then filed in the commercial register.
Internal audits are the third line of defense in the monitoring process. Responsibility for auditing lies with Group Internal Audit and also the respective internal audit departments of the Group units. All internal auditing activities are subject to the Group Audit Standards, which are based on the Austrian Financial Market Authority’s minimum internal auditing requirements and international best practices. Group Internal Audit’s internal rules also apply (notably the Audit Charter). Group Audit regularly and independently verifies compliance with the internal rules within the RBI Group units. The head of Group Internal Audit reports directly to the Management Boards, with additional reporting obligations to the Chairman of the Supervisory Board and members of the Audit Committee of the Supervisory Board.
Capital, share, voting, and control rights The following disclosures satisfy the provisions of § 243a (1) of the Austrian Commercial Code (UGB): (1) As at 31 December 2018, the company’s share capital amounted to € 1,003,265,844.05 and was divided into 328,939,621 voting common bearer shares. As at 31 December 2018, 322,204 of those were own shares, and consequently 328,617,417 shares were outstanding at the reporting date. In comparison with 31 December 2017 (394,942 shares), this was a reduction of 72,738 own shares and was due to the transferring of shares within the framework of the share-based remuneration program. Please see note (30) for further disclosures.
(2) The Articles of Association contain no restrictions concerning voting rights or the transfer of shares. The principle of one share one vote applies and there is only one class of shares. Shares with multiple voting rights are not permissible under § 12 (3) of the Austrian Stock Corporation Act (AktG). The regional Raiffeisen banks and direct and indirect subsidiaries of the regional Raiffeisen banks are parties to a syndicate contract (syndicate agreement) regarding RBI AG. The terms of this syndicate agreement include not only a block voting agreement and preemption rights, but also a prohibition on sales of the RBI shares held by the regional Raiffeisen banks (with few exceptions) for a period of three years (lock-up period) from the effective date of the merger between RZB AG and RBI AG, i.e. from 18 March 2017, if the sale would reduce the regional Raiffeisen banks’ aggregate shareholding in RBI AG (direct and/or indirect) to less than 50 per cent of the share capital plus one share. After the lock-up period expires, the shareholding threshold falls to 40 per cent of the share capital of RBI AG.
(7) Pursuant to § 169 of the Austrian Stock Corporation Act (AktG), the Management Board has been authorized since the Annual General Meeting of 4 June 2014 to increase the share capital with the approval of the Supervisory Board – in one or more tranches – by up to € 446,793,032.95 through issuing up to 146,489,519 new voting common bearer shares in exchange for contributions in cash and/or in kind (including by way of the right of indirect subscription by a bank pursuant to § 153 (6) of the AktG) by 25 August 2019 at the latest and to fix the offering price and terms of the issue with the approval of the Supervisory
Board. The Management Board is further authorized to exclude shareholders’ subscription rights with the approval of the Supervisory Board (i) if the capital increase is carried out in exchange for contributions in kind, or (ii) if the capital increase is carried out in exchange for contributions in cash and the shares issued under the exclusion of subscription rights do not exceed 10 per cent of the company’s share capital (exclusion of subscription rights).
The Annual General Meeting of 21 June 2018 also authorized the Management Board, under the provisions of § 65 (1) 7 of the AktG, to purchase own shares for the purpose of securities trading, which may also be conducted off-market, during a period of 30 months from the date of the resolution (i.e. until 20 December 2020), provided that the trading portfolio of shares purchased for this purpose does not at the end of any given day exceed 5 per cent of the company's respective share capital. The consideration for each share to be acquired must not be less than half the closing price at the Vienna Stock Exchange on the last day of trading preceding the acquisition and must not exceed twice the closing price at the Vienna Stock Exchange on the last day of trading preceding the acquisition. This authorization may be exercised in full or in part or also in several partial amounts by the company, by a subsidiary (§ 189a 7 UGB) or by third parties acting for the account of the company or a subsidiary.
 The company’s refinancing agreements and agreements concerning third-party financing for subsidiaries, which are guaranteed by the company, stipulate that the lenders can demand early repayment of the financing in the event of a change in control.
The Annual General Meeting held on 21 June 2018 authorized the Management Board pursuant to § 65 (1) 8, § 65 (1a) and § 65 (1b) of the AktG to purchase own shares and to retire them if appropriate without requiring any further prior resolutions to be passed by the Annual General Meeting. Own shares, whether already purchased or to be purchased, may not collectively exceed 10 per cent of the company’s share capital. The authorization to purchase own shares expires 30 months after the date of the Annual General Meeting resolution, i.e. until 20 December 2020. The acquisition price for repurchasing the shares may be no lower than € 1 per share and no higher than 10 per cent above the average unweighted closing price over the 10 trading days prior to exercising this authorization. The authorization may be exercised in full or in part or also in several partial amounts, for one or more purposes – with the exception of securities trading – by the company, by a subsidiary (§ 189a 7 of the UGB) or by third parties for the account of the company or a subsidiary.
Consolidated non-financial report Pursuant to the Sustainability and Diversity Improvement Act (NaDiVeG), the consolidated non-financial statement, which has to be prepared in accordance with § 267a of the Austrian Commercial Code (UGB), is issued as an independent non-financial report (Sustainability Report). The report containing detailed information on sustainability management developments, will be published online – at www.rbinternational.com → About us → Sustainability Management – and also contains the disclosure for the parent company in accordance with § 243b of the UGB.
Southeastern Europe In Southeastern Europe (SEE), economic growth is expected to again slow to a low level. As in 2018, this is being driven by economic developments in Romania, where the GDP makes up the largest contribution to the region. GDP growth of 2.5 per cent is expected in Romania (following 4.1 per cent in 2018). In the remaining SEE countries, economic activity is expected to remain relatively stable or slightly decline; with a slowdown to 2.8 per cent from 3.7 per cent in 2018. Economic activity is expected to be driven primarily by domestic demand. An increase in wages should have a positive impact on spending on the part of private households. Similarly, investment activity is expected to remain at high levels, albeit heavily dependent on progress made in the utilization of EU funds and implementation of major infrastructure projects. All in all, the expected economic slowdown in the EU is also likely to curb the region’s economic growth in 2019 and 2020.
Even though the economic peak in Austria has already passed, economic momentum should continue to remain over the average euro area rate, despite slowing down and increased external risks. Following 2.7 per cent in 2018, GDP growth is expected to expand at the low rate of from to 1.3 per cent in 2019. Domestic demand is anticipated to be the main driver while foreign trade should increasingly feel the effects of global headwinds. Thanks to the continuation of good labor market conditions, private consumption also looks set to achieve solid growth rates in 2019. Although investment activity should weaken, it is expected to also support economic growth in 2019.
should also be in the high single-digit percentage range in 2019, while some regional central banks in CE and SEE are expected to cautiously normalize monetary policy. It is anticipated that tightened macroprudential regulations will curb mortgage and consumer loan growth, notably in the Czech Republic, Slovakia and Romania, but conversely also maintain the sustainable return potential of these markets. Thanks to the adjustments carried out in recent years – e.g. reducing foreign currency loans and NPL portfolios – there should be no significant negative impact on returns from this side. Likewise, given the still positive overall economic growth and currently stable corporate insolvency situation, a significant increase in risk costs is not anticipated. Also, in Russia, Ukraine and Belarus, the general conditions for the banking sector should develop favorably in 2019 in view of high local interest rate levels and solid macroeconomic parameters. All in all, the return on equity of the CEE banking sector in 2019 should almost reach its 2018 level, even though there is the possibility of a slight rise in risk costs in some regions (starting from low levels ). In Romania, a newly introduced bank tax is expected to have a negative impact on new loan business and the profitability of the Romanian banking sector.
Outlook for RBI AG We will pursue loan growth with an average yearly percentage increase in the mid-single digit area.
We seek to maintain a CET1 ratio of around 13 per cent in the medium term
This results in the following segments:  Central Europe: Czech Republic, Hungary, Poland, Slovakia, and Slovenia  Southeastern Europe: Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Kosovo, Romania, and Serbia  Eastern Europe: Belarus, Russia and Ukraine  Group Corporates & Markets (operating business booked in Austria): Austrian and international corporate customers, Markets,
Financial Institutions & Sovereigns, business with the Raiffeisen Banking Group (RBG) and specialized financial institution subsidiaries, e.g. Raiffeisen Centrobank AG, Kathrein Privatbank Aktiengesellschaft, Raiffeisen Leasing Group, Raiffeisen Factor Bank AG, Raiffeisen Bausparkasse Österreich Gesellschaft mbH and Raiffeisen Kapitalanlage-Gesellschaft mit beschränkter Haftung
Segmentation principles Segment reporting at RBI is based on the current organizational structure pursuant to IFRS 8. A cash generating unit within the Group is a country. The Group’s markets are thereby consolidated into regional segments comprising countries with comparable economic profiles and similar long-term economic growth expectations.
Central Europe in € million 2018 2017 Change Q4/2018 Q3/2018 Change
Net gains/losses from hedge accounting (10) 3 – 3 0 –
Impairment losses on financial assets (122) (59) 106.0% (82) (28) 196.5%
Profit after tax in the Central Europe segment fell € 73 million year-on-year to € 346 million. This was mainly the result of a € 67 million decline in profit in Poland due to the sale of the Polish core banking operations. In Hungary, profit declined € 40 million as a result of higher net releases of loan loss provisions due to sales of non-performing loans in the previous year and the deconsolidation of a real estate fund. In contrast, the Czech Republic reported an increase in profit after tax of € 22 million, which was mainly attributable to higher net interest income.
Net interest income increased 2 per cent year-on-year, or € 15 million, to € 965 million. This mainly reflected the positive performance in the Czech Republic, where higher market interest rates and increased customer loan volumes in particular led to a rise of € 58 million in net interest income. In Slovakia, net interest income was up € 15 million on higher customer loan volumes. In contrast, net interest income in Poland fell € 54 million, largely as a result of the sale of the Polish core banking operations. In Hungary, lower interest rates led to a € 4 million decrease in net interest income. The segment’s net interest margin improved 14 basis points to 2.27 per cent due to the positive trend in the Czech Republic.
Net fee and commission income was down € 8 million year-on-year to € 549 million. The decline was attributable to the sale of the Polish core banking operations. In Slovakia, in contrast, net fee and commission income increased € 6 million to € 163 million, mainly driven by improved margins in the custody business. Hungary and the Czech Republic also both reported increases of € 4 million, primarily due to higher income from clearing, settlement and payment services and the guarantee business.
The Central Europe segment’s other result decreased € 5 million to minus € 8 million, largely due to an impairment of goodwill arising from the first-time consolidation of a Hungarian real estate company.
Net gains from hedge accounting declined € 13 million year-on-year. The sale of the Polish core banking operations led to the termination of the existing portfolio cash flow hedges in the second quarter of 2018, which were for hedging cash flow fluctuations from foreign currency loans and deposits in local currency by means of foreign currency interest rate swaps. The termination had a neutral effect on capital, but resulted in the reclassification through profit and loss of the cash flow hedge reserve of minus € 13 million recognized in other comprehensive income in previous periods.
The number of business outlets in the segment decreased 235 to 396 due to the sale of the Polish core banking operations, while the average number of employees declined 842 to 12,720 as a result of the sale. The cost/income ratio decreased marginally by 0.2 percentage points to 56.3 per cent.
In the reporting period, impairment losses on financial assets increased € 63 million to € 122 million. The largest change was reported in Hungary, where net releases of loan loss provisions were down € 28 million year-on-year to € 24 million. In the corresponding period of the previous year, successful collection activity and increased mortgage loan collateral valuations resulted in a significantly higher net release. In Slovakia, risk costs were € 26 million, markedly above the very low level of € 4 million in the same period of the previous year. The increase was partly due to fine-tuning of the calculations for Stage 3 loan loss provisions in the retail customer business. In the Czech Republic, impairment losses increased € 12 million to € 33 million, with the increase occurring in both the retail and the corporate customer businesses. Poland reported the highest impairment losses of € 89 million in the reporting year (increase of € 2 million). The high level resulted from individual corporate customer defaults and adjustments to the LGD ratio and collateral values for Stage 3 loan loss provisions.
The segment's income taxes decreased € 10 million to € 101 million. The decline in taxes was mostly attributable to the Czech Republic (down € 18 million), where a higher tax expense was reported due to income tax from prior periods in the same period of the previous year. In contrast, the tax expense was € 4 million higher in Hungary and € 3 million higher in Slovakia in the reporting period. The tax rate was 23 per cent, 2 percentage points higher than in the previous year. The increase was attributable to non-deductible expenses in Poland.
Employees as at reporting date (full-time equivalents) 196 3,871 3,995 3,867
Net trading income and fair value result 2 31 11 3
Employees as at reporting date (full-time equivalents) 3,402 3,325 2,089 1,993
Net fee and commission income 421 401 5.0% 107 113 (4.7)%
Net trading income and fair value result 31 21 45.1% 6 9 (37.4)%
Net interest income rose 11 per cent year-on-year, or € 83 million, to € 814 million. The strongest growth was seen in Romania with an increase of € 73 million. Higher market interest rates resulted in a significantly higher interest margin (up 59 basis points). In addition, growth in lending to households and non-financial corporations also contributed to the rise. In Kosovo, net interest income was up € 5 million as a result of higher interest income on loans to non-financial corporations. In Serbia, net interest income was up € 4 million, which mainly reflected currency effects. The increase of € 2 million in net interest income in Bulgaria was mainly driven by volumes. Croatia reported a decline of € 1 million due to lower interest rates. In Albania, net interest income was also down € 1 million due to lower volumes. The improvement of 16 basis points in the segment’s net interest margin to 3.60 per cent was primarily attributable to the positive interest rate environment in Romania.
The segment’s other net operating income declined € 8 million to € 22 million. While Serbia reported an increase of € 8 million, mainly arising from the derecognition of financial assets and liabilities, Croatia reported a decrease of € 12 million primarily due to a reduction in the operating lease portfolio. In addition, Albania reported a decrease of € 5 million, while there was a gain from successful litigation in the same period of the previous year.
Levies and expenses from special governmental measures were up € 17 million year-on-year to € 11 million. While no additional expenses for special governmental measures were reported in 2018, provisions of € 21 million in connection with the Walkaway Law in Romania were released in the previous year. The contributions to the resolution fund, which have to be recognized in full at the start of the year, fell € 4 million to € 11 million – mainly as a result of a lower contribution in Romania.
In the reporting period, impairment losses on financial assets of € 61 million were recognized in the segment compared to € 113 million booked in the corresponding period of the previous year.
Income taxes increased € 16 million year-on-year to € 73 million, primarily due to the improvement in profit, mainly in Romania. The tax rate remained constant at 14 per cent.
Net trading income and fair value result (2) (2) 0 0 4 3
Impairment losses on financial assets 5 3 (5) (9) 0 9
Return on equity before tax 14.5% 17.5% 17.8% 16.8% 16.7% 17.5%
Provisioning ratio (average loans to customers) (0.73)% (0.50)% 0.38% 0.78% 0.00% (0.41)%
Employees as at reporting date (full-time equivalents) 1,226 1,229 1,358 1,277 2,589 2,576
Net trading income and fair value result (1) 4 22 12 8 4
Return on equity before tax 9.1% 6.1% 30.1% 17.5% 13.8% 13.3%
Return on equity after tax 7.5% 4.0% 25.2% 14.6% 12.0% 11.6%
Net gains/losses from hedge accounting 0 0 0 0 0 0
Levies and special governmental measures (3) (3) (3) 13 0 0
Net fee and commission income 466 462 0.8% 132 118 11.3%
The segment’s profit after tax remained virtually unchanged compared to the previous year despite the significant depreciation of Eastern European currencies. Net interest income increased while impairment losses were recognized on financial assets.
As in the previous year, the Eastern Europe segment was affected by currency movements in the reporting period. The average exchange rate of the Russian ruble declined 11 per cent year-on-year, while those of the Belarusian ruble and Ukrainian hryvnia were down 9 per cent and 6 per cent respectively. Compared to the start of 2018, the reporting date exchange rate of the Russian ruble was down 13 per cent and that of the Belarusian ruble was down 5 per cent, while the Ukrainian hryvnia appreciated 6 per cent.
Net interest income in Eastern Europe was up 4 per cent, or € 39 million, year-on-year to € 1,022 million. Ukraine reported the strongest growth with a rise of € 32 million, due to higher interest rates and an increase in lending to non-financial corporations. Despite the depreciation of the Russian ruble, net interest income in Russia was up € 24 million, largely as a result of lower interest expenses for customer deposits. In contrast, net interest income in Belarus fell € 16 million year-on-year due to lower market interest rates and currency movements. Despite the positive developments in Ukraine, the segment’s net interest margin declined 18 basis points year-on-year to 6.50 per cent due to lower margins in Belarus.
Net fee and commission income was up 1 per cent, or € 4 million, to € 466 million. In Russia, net fee and commission income increased € 8 million to € 324 million due to higher volumes in clearing, settlement and payment services and in the credit card business. In contrast, Belarus reported a currency-related reduction of € 3 million to € 49 million.
Net trading income and fair value result declined from € 53 million in the same period of the previous year to € 34 million. Russia posted a decline of € 25 million, which primarily reflected a lower valuation result from derivatives, while Ukraine reported mainly currency-related growth of € 4 million.
General administrative expenses were up 5 per cent year-on-year, or € 30 million, to € 631 million, with the underlying increase partially absorbed by currency depreciation. The average headcount rose 2 per cent from 18,024 to 18,445, mainly due to Russia (increase of 675 to 8,636 employees). Staff expenses rose 6 per cent, or € 18 million, to € 327 million, as a result of salary increases in Russia and Ukraine. Other administrative expenses were up 9 per cent, or € 19 million, to € 239 million. In Russia, other administrative expenses increased 12 per cent as a result of higher advertising expenses, an increase in deposit insurance fees and higher IT expenses for developing new IT applications. The 7 per cent rise in Ukraine mainly reflected higher office space and IT expenses. Depreciation declined 9 per cent, or € 7 million, to € 65 million, which was primarily attributable to an adjustment to the useful life of software in Russia. The cost/income ratio rose from 40.9 to 41.3 per cent.
Net trading income and fair value result 6 4 21 46 7 3
Impairment losses on financial assets 5 0 (57) (50) 20 55
Return on equity after tax 20.8% 20.3% 29.2% 27.1% 66.3% 86.0%
Provisioning ratio (average loans to customers) (0.72)% (0.03)% 0.72% 0.63% (1.47)% (5.12)%
Employees as at reporting date (full-time equivalents) 1,829 1,906 8,998 8,229 7,923 7,997
Net gains/losses from hedge accounting 0 (1) – 0 0 (30.8)%
Impairment losses on financial assets 62 (137) – (22) 6 –
The Group Corporates & Markets segment comprises RBI’s operating business booked in Austria. The contributions to profit come from the corporate customer and markets business of head office, with further significant contributions from the Austrian specialized financial institution subsidiaries. The following table shows the profit contributions by sub-segment: in € million 2018 2017 Change Q4/2018 Q3/2018 Change
Net fee and commission income increased 20 per cent, or € 63 million, to € 371 million. Higher fee and commission income was primarily from clearing, settlement and payment services and the institutional investor business, as well as from structured issues of own bonds. Fee and commission income increased at Raiffeisen Bausparkasse due to a change in reporting connected with brokerage expenses. The rise was also attributable to a change in the allocation of fees, commissions and interest due to the aforementioned system adjustments in connection with the adoption of IFRS 9.
Net trading income and fair value result declined € 59 million year-on-year to € 22 million. Valuation losses on derivatives and on loans carried at fair value, from currency translation and from securities trading were partly offset by increases in banknote trading.
General administrative expenses of € 647 million and the cost/income ratio of 59.1 per cent were almost unchanged compared with the previous year.
Net releases of loan loss provisions amounted to € 62 million in the reporting period, compared to impairment charges of € 137 million in the previous year due to the default of several large corporate customers. The positive result derived especially from reversals of impairment charges and the sale of some large corporate customer non-performing loans, as well as the reversal of an impairment loss relating to an Icelandic bank (€ 25 million) after the termination of litigation. The sale of € 248 million of non-performing loans led to a gain of € 40 million.
Income tax expense increased € 47 million to € 95 million, mainly due to higher profit.
Corporate Center in € million 2018 2017 Change Q4/2018 Q3/2018 Change
Net fee and commission income (9) (8) 1.8% (1) (7) (87.0)%
Levies and special governmental measures (52) (58) (10.0)% 1 1 32.1%
This segment essentially comprises net income from the Group head office’s governance functions and other Group units. Therefore, its results are generally more volatile. Profit after tax fell € 436 million or 67 per cent, reflecting a reduction of € 358 million in intra-Group dividend income, the loss of € 120 million from the sale of the core banking operations of Raiffeisen Bank Polska, and a negative effect of € 64 million from recycling the accumulated exchange rate differences previously recognized in other comprehensive income.
Net interest income decreased € 29 million year-on-year to minus € 32 million. Higher financing costs were mainly responsible for this negative development.
Net gains from hedge accounting declined € 5 million year-on-year. In 2018, the result from fair value hedge relationships was flat, while in 2017 changes in the market value of hedged positions exceeded those of hedging instruments by € 6 million.
Other net operating income increased € 23 million to € 87 million. The main driver was higher income from intra-Group service charges.
The other result was minus € 160 million in the reporting period compared to a negative result of € 42 million in the corresponding period of the previous year. The main reason for the difference was the loss of € 120 million on the sale of the Polish core banking operations in the reporting period and a negative effect of € 64 million from recycling the accumulated exchange rate differences previously recognized in other comprehensive income. In contrast, impairment charges related to primarily intra-Group interests in subsidiaries were lower. The contribution to the result from associates increased € 30 million due to lower impairments (UNIQA Insurance Group AG) and higher current income (particularly at UNIQA Insurance Group AG and Raiffeisen Informatik GmbH).
The levies and expenses from special governmental measures reported in the segment declined € 6 million to € 52 million. At € 47 million, the expenses for bank levies remained almost unchanged compared to the same period in the previous year. In contrast, the RBI AG contributions to the resolution fund allocated to the segment decreased € 7 million to € 5 million. In accordance with accounting standards, the expenses for bank levies for the entire year were booked in the first quarter. The € 163 million one-off payment which is stipulated by law and spread over four years, € 41 million of which was booked in the reporting period, is allocated to the Corporate Center segment.
Tax income of € 85 million was posted in the reporting period, compared to income of € 34 million in the same period of the previous year.
Statement of comprehensive income 87 Statement of financial position 90 Statement of changes in equity 91 Statement of cash flows 93 Segment reports 95 Notes 102 Risk report 180 Auditor's report 268 Statement of all legal representatives 274
The consolidated financial statements are lodged with the Companies Register in accordance with Austrian disclosure regulations and published in the official journal of the Wiener Zeitung. They were signed by the Management Board on 27 February 2019 and subsequently submitted for the notice of the Supervisory Board.
RBI’s home market consists of Austria, where it does business as a leading commercial and investment bank, as well as Central and Eastern Europe (CEE). As at the balance sheet date, subsidiary banks cover 13 markets in CEE. The Group also contains many other financial service companies specializing in sectors such as leasing, clearing, settlement and payment services and asset management. All told, RBI’s more than 47,000 employees serve 16.1 million clients at more than 2,100 business outlets located mostly in CEE.
Since the company’s shares are traded on a regulated market as defined in Section 1 (2) of the Austrian Stock Market Act (BörseG) (prime market of the Vienna Stock Exchange) and numerous RBI AG issues are listed on a regulated market in the EU, RBI AG is required by Section 59a of the Austrian Banking Act (BWG) to prepare consolidated financial statements in accordance with the International Financial Reporting Standards (IFRSs). The eight regional Raiffeisen banks are core shareholders that collectively hold approximately 58.8 per cent of the shares, with the remaining shares in free float.
As there were no conversion rights or options outstanding, a dilution of earnings per share did not occur. The dividend on additional tier 1 capital is calculated; the effective payment is based on the decision of the Board at the respective payment date.
Share of other comprehensive income from companies valued at equity [19] (7,163) (6,819)
Deferred taxes on items which may be reclassified to profit or loss [21, 28] 1,919 11,417
With the adoption of IFRS 9, liabilities designated at fair value were reclassified as financial liabilities – amortized cost with a carrying amount of € 447,781 thousand. This resulted in a significant decline in fair value changes caused by changes in credit risk on financial liabilities.
Fair value changes due to changes in credit risk of financial liabilities [24] 33,692 (139,643)
Deferred taxes on items which are not reclassified to profit or loss [21, 28] 1,758 (211)
Adaptions to the cash flow hedge reserve [18, 26] 9,435 11,164
Currency developments led to a negative effect of € 230,243 thousand in the financial year (2017: minus € 70,048 thousand). The 13 per cent depreciation of the Russian ruble produced a reduction of € 222,768 thousand. The 3 per cent depreciation of the Hungarian forint resulted in a decrease of € 22,933 thousand. The 3 per cent depreciation of the Polish zloty led to a decline of € 45,170 thousand. However, due to the disposal of Group assets in connection with the sale of the Polish core banking operations, the accumulated negative exchange differences of € 63,650 thousand were reclassified to the income statement.
Cash flow hedging has been applied in addition to fair value hedging at four Group units to hedge against interest rate risk. In the financial year, this led to a positive result of € 9,435 thousand (2017: € 11,164 thousand). The sale of the Polish core banking operations resulted in the termination of the existing portfolio cash flow hedges in the second quarter of 2018. These hedged cash flow fluctuations from foreign currency loans and deposits in local currency by means of foreign currency interest rate swaps. The termination had a neutral effect on capital but resulted in the reclassification through profit and loss of the cash flow hedge reserve of minus € 13,417 thousand recognized in other comprehensive income in previous periods. No gains/losses were reclassified to the income statement in the previous year.
More details on the changeover are available in the notes in the section entitled, principles underlying the consolidated financial statements, under IFRS 9 transition.
RBI placed another issue of perpetual additional tier 1 capital (AT1) with a volume of € 500,000 thousand on 24 January 2018. According to IAS 32, the additional tier 1 capital is classified as equity due to the terms of issue. Taking into account the issuance costs and the discount, this increased equity by € 496,296 thousand. The change in treasury shares is reported under own shares.
in € thousand Deferred taxes At equity Fair value option Total
Items that may be reclassified subsequently to profit or loss 0 (8,498) (6,042) 9,515 (87)
Items that may be reclassified subsequently to profit or loss 0 (236,766) 42,988 7,685 (27,989)
Items that may be reclassified subsequently to profit or loss 11,803 (6,819) 0 (128)
Items that may be reclassified subsequently to profit or loss 1,797 (7,163) 0 (219,448)
Adjustments for the reconciliation of profit/loss after tax to the cash flow from operating activities: Depreciation, amortization, impairment and reversal of impairment of assets [7, 8, 10] 310,816 280,308
Net provisioning for liabilities and charges and impairment losses [6, 10, 27] 147,892 610,481
Changes in assets and liabilities arising from operating activities after corrections for non-cash positions: Financial assets - amortized cost [13] (7,810,946) (7,208,038)
Financial assets - fair value through other comprehensive income [14, 31] (1,942,235) (706,315)
Financial assets - designated fair value through profit/loss [16, 31] 1,352,670 (574,955)
Proceeds from sale of: Tangible and intangible fixed assets [20] 124,152 179,804
Cash, cash balances at central banks and other demand deposits as at 31/12 [12] 22,557,484 16,905,455
Cash and cash equivalents comprises the item on the statement of financial position cash, cash balances at central banks and other demand deposits.
The sale of the core banking operations of Raiffeisen Bank Polska S.A. and Raiffeisen-Leasing Liegenschaftsverwaltung Kraußstraße Gesellschaft m.b.H. generated € 749,360 thousand in cash inflows while the deconsolidation of the core banking operations of Raiffeisen Bank Polska S.A. resulted in cash outflows of € 941,564 thousand.
The capital increases from financing activities were the result of RBI AG’s placement of another issue of perpetual additional tier 1 capital (AT1) with a volume of € 500,000 thousand.
In order to achieve the maximum possible transparency and in the interest of clearer lines of reporting, five segments were defined in accordance with the IFRS 8 thresholds. IFRS 8 establishes a 10 per cent threshold for the key figures of operating income, profit after tax and segment assets.
This segment encompasses the most advanced banking markets in Central and Eastern Europe, namely the EU members, Czech Republic, Hungary, Poland, Slovakia and Slovenia. In Poland, RBI operated retail banking and business with high net worth private customers in addition to lending business with corporate customers as well as small and medium-sized enterprises (including factoring) until the sale of the Polish core banking operations in the fourth quarter of 2018. RBI is still present with a portfolio of retail foreign currency mortgage loans, but no longer runs new business. In Slovakia, RBI is active in the corporate and retail customer business, leasing, asset management and building society business. In retail business Tatra Banka is pursuing a multibrand strategy. In Slovenia, the Group has one leasing company. The business volume of the Slovenian leasing company has been reduced as scheduled. In the Czech Republic, RBI is engaged in the real estate leasing and building society business in addition to offering traditional banking services to corporate and retail customers. The focus is on broadening relationships with existing affluent customers. In Hungary, the Group provides services to retail and corporate customers via the bank's countrywide network. The focus is based on corporate customers and affluent retail customers.
The Southeastern Europe segment comprises Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Kosovo, Romania and Serbia. In these markets, RBI is represented by banks and leasing companies, as well as own capital management and asset management companies and pension funds in some markets. In Albania and Bulgaria, financial services are offered across all business areas. In Kosovo, RBI also offers a comprehensive product range. In Bosnia and Herzegovina the emphasis is on small and medium -sized enterprises, while also including a wide range of products for retail customers. In Croatia the focus is on large and medium -sized corporate customers and also on retail customers (including pension funds business). In Romania a broad range of financial services is offered via a tightly knit branch network. In Serbia, the market is serviced by a universal bank and leasing companies.
The Group Corporates & Markets segment covers operating business booked in Austria. This primarily comprises financing business with Austrian and international corporate customers serviced from Vienna, Financial Institutions & Sovereigns and business
The segment reporting according to IFRS 8 shows the segment performance on the basis of internal management reporting, supplemented with the reconciliation of the segment results to the consolidated financial statements. In principle, RBI’s management reporting is based on IFRS. Therefore, no differences occur in the recognition and measurement principles between segment reporting and consolidated financial statements.
The governance of each segment is based on key indicators relating to profitability, growth, efficiency, constraints and business mix parameters. The target values of these key indicators are determined according to the specific market environment and adapted when necessary.
Profitability is measured by the return on equity (ROE) and return on risk-adjusted capital (RORAC) based on the internal management systems. The return on equity shows the profitability of a CGU and is calculated as the ratio of profit/loss after deduction of profit/loss attributable to non-controlling interests to average consolidated equity employed. The return on equity reflects the yield of the capital employed of each segment. The calculation of the RORAC incorporates risk-adjusted capital, which reflects the capital necessary in case of possible unexpected losses. In RBI this capital requirement is calculated within the economic capital model for credit, market and operational risk. This ratio shows the yield on the risk-adjusted equity (economic capital), but is not an indicator pursuant to IFRS. Within the different countries and business lines the actual RORAC generated is compared with the respective predetermined minimal value (RORAC hurdle), which reflects appropriate market yield expectations.
The presentation of segment performance is based on the income statement and geared to the reporting structure internally used. Income and expenses are attributed to the country and/or business area in which they are generated. Operating income positions are the net interest income, dividend income, net fee and commission income, net trading income and fair value result, net gains/losses from hedge accounting and other net operating income. Expense items are staff expenses, other administrative expenses, depreciation of intangible and tangible fixed assets, levies and special governmental measures and impairment losses on financial assets. Other result includes impairment or reversal of impairment on and current income from investments in subsidiaries and associates, the result from non-current assets and disposal groups classified as held for sale and deconsolidation. The segment result is shown up to the profit/loss after deduction of non-controlling interests. The segment assets are represented by the total assets and the risk-weighted assets. The liabilities item includes all positions from the liabilities side of the statement of financial position except the equity. The reconciliation includes mainly the amounts resulting from the elimination of intra-group results and consolidation between the segments. This is supplemented with financial ratios conventionally used within the industry to evaluate performance. The values shown in the segment reporting are for the most part taken from the IFRS individual financial statements which are also used for the compilation of the consolidated financial statements. In some units profit center results are taken from the internal management income statement.
Employees as at reporting date (full-time equivalents) 9,692 14,646 18,750 2,879
In Eastern Europe, the profit after tax remained virtually unchanged compared to the previous year despite the significant depreciation of Eastern European currencies. Net interest income increased while impairment losses were recognized on financial assets. As in the previous year, the Eastern Europe segment was affected by currency movements in the reporting period. The average exchange rate of the Russian ruble declined 11 per cent year-on-year, while those of the Belarusian ruble and Ukrainian hryvnia were down 9 per cent and 6 per cent respectively. Compared to the start of 2018, the reporting date exchange rate of the Russian ruble was down 13 per cent and that of the Belarusian ruble was down 5 per cent, while the Ukrainian hryvnia appreciated 6 per cent.
The strong increase in net income in the Group Corporates & Markets segment was mainly due to the positive development in terms of risk costs. Net releases of loan loss provisions of € 62,296 thousand were booked in the reporting period due to reversals of impairment losses and gains realized on the sale of non-performing loans, compared to impairment losses of € 136,827 thousand booked in the same period of the previous year due to defaults of some large corporate customers. The operating result was at the previous year’s level.
Reconciliation comprises consolidation entries required to reconcile the individual segment results to the Group result. The financials of the segments are shown after elimination of intra-segment items. However, the inter-segment items are eliminated in the reconciliation. The main eliminations are dividend payments to head office and inter-segment revenues charged and expenses carried by the head office.
Deferred taxes are not reported separately in the income statement and are disclosed under comprehensive income and in the notes under (11) Income taxes. By contrast, deferred taxes are shown separately in the statement of financial position in the notes under (21) Tax assets and (28) Tax liabilities.
According to IFRS 10, a Group controls an investee if it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. IFRS 10 also provides specific information on the acknowledgement or assessment of potential voting rights, codecision rights or protective rights of third parties and constellations that are characterized by delegated or retained decision-making rights or de facto control. Whether control exists requires a comprehensive assessment (i.e. requiring discretion) of the economic influence of the parent company over the investee. Details are provided in (68) Group composition.
Assessment of which companies are structured entities and what involvement in such companies actually represents an interest, requires judgments to be made. Details are provided in (68) Group composition, in the section structured entities.
IFRS 9 also contains an option, which cannot subsequently be revoked, to recognize subsequent changes in the fair value of an equity investment (which is not held for trading) in other comprehensive income, with only dividend income recognized in profit or loss.
For subsequent measurement of financial assets measured at amortized cost, IFRS 9 provides for three stages which determine the expected amount of losses to be recognized and the recognition of interest. Stage 1 requires, at the time of initial recognition, the recognition of the present value of twelve-month expected credit losses. If there is a significant increase in the credit risk, the loan loss provision must be increased up to the amount of the expected full lifetime loss (Stage 2). When there is an objective indication of impairment, the interest in Stage 3 must be recognized on the basis of the net carrying amount.
IFRS 9 grants accounting options for hedge accounting. In 2018, RBI continues to apply the provisions on hedge accounting pursuant to IAS 39 while, however, taking into account the changes in the disclosures in the notes pursuant to IFRS 7.
Loan syndication fees may be cited as an example of income received directly at the time of performance in accordance with the provisions of IFRS 15, provided that they are clearly to be regarded as service fees from syndicated transactions because of their economic substance, because the arranging company itself does not retain any part of the loan package for itself, or because the lead manager itself is also involved, although the service fee is clearly declared or determinable under the syndication.
A distinction must be made between those cases in which the lead manager itself is involved, the effective interest rate is not riskadequate and the syndication fee is intended to compensate for this excessively low interest rate, as IFRS 9 is applied in these cases.
Amendments to IFRS 2 (Share-based payment; entry into force 1 January 2018)
The amendments deal with individual issues related to the accounting of cash-settled share-based payments. The principal amendment/addition relates to the fact that IFRS 2 now contains provisions which relate to the calculation of the fair value of the obligations resulting from share-based payments. The adoption of these amendments had no impact on RBI's consolidated financial statements.
The amendments concern in detail:  IFRS 1 First-time adoption of International Financial Reporting Standards: Deletion of the remaining temporary relief provisions for first-time adopters.
The adoption of these amendments had no impact on RBI's consolidated financial statements.
In connection with customer loyalty programs (e.g. cash back agreements or credits based on accrued airline miles), the resulting consideration (e.g. credits) is recognized at RBI as a reduction in revenue due to the recognition required by IFRS 15. This represents a change in presentation compared with prior periods within the scope of IAS 18, but had no impact on total comprehensive income.
Amendments to IFRS 4 (Insurance contracts; entry into force 1 January 2018)
The amendments aim to mitigate the consequences resulting from different first-time effective dates for the application of IFRS 9 and the successor standard to IFRS 4, especially for companies whose activities are predominantly connected with insurance. Two optional approaches are being introduced which can be used by insurers if certain requirements are met: the overlay approach and the deferral approach. The application of these amendments had no effect on the consolidated financial statements of RBI.
Amendments to IAS 40 (Classification of investment property under construction; entry into force from 1 January 2018)
This interpretation clarifies the accounting for transactions that include the receipt or payment of considerations in a foreign currency. The application of this interpretation had no impact on the consolidated financial statements of RBI.
The change also made it necessary to adapt the presentation of the comparable period and the comparable reporting date. The following tables show the reconciliation of the categories presented at 31 December 2017 to the new accounting format. The explanatory notes and consequences in relation to IFRS 9 are shown separately for each measurement category in the next chapter and are already based on the adapted figures. The column headings represent the previous items on the statement of financial position, while the line headers reflect the new presentation of the statement of financial position: Assets 31/12/2017 in € thousand
Cash, cash balances at central banks and other demand deposits 13,329,782 3,575,673 0 0 0 0
Financial assets - designated fair value through profit/loss 0 0 12,647 0 0 0
Financial assets - held for trading 0 0 0 0 3,941,757 414,751
Financial assets - held for trading 265,529 0 0 0 0 4,622,037
Financial assets - designated fair value through profit/loss 5,357,381 0 0 0 0 5,370,028
Cash, cash balances at central banks and other demand deposits 16,838,583 4,463,205 0 0 0 0
Financial liabilities - designated fair value through profit/loss 0 751,720 1,373,418 0 0
Investments in subsidiaries and associates 213,924 775,035 0 0 0 988,958
Financial assets - designated fair value through profit/loss 8,473,211 0 0 0 0 8,488,900
The following table shows the reconciliation of the 2017 income statement to the new format. The column headings represent the previous items on the statement of financial position, while the line headers reflect the new presentation of the statement of financial position: in € thousand Net interest income
Impairment losses on financial assets 0 (286,899) 0 0 0 in € thousand
Provisions for loan commitments, financial guarantees and other commitments given 118,615 0 30,070 148,685
The reclassification of € 313,599 thousand relates to subtractions of loans and advances to customers that have contractual cash flows that are not solely payments of principal and interest and thus have to mandatorily be measured at fair value. In addition, debt instruments which are also to be allocated to this measurement category had additions from financial assets – fair value through other comprehensive income (€ 159,526 thousand) and to a lesser extent from other measurement categories where the underlying business model and the structure of the debt instruments necessitated presentation in the category amortized cost.
Additions from financial assets - designated fair value through profit/loss – 1,187 0 – (40) 40
Additions from financial assets - fair value through other comprehensive income – 0 0 – – 3,390
Additions from financial assets - held to maturity – 15,929 23 – 0 23
Additions from financial assets - designated fair value through profit/loss – 78,335 0 – – –
Additions from financial assets - held to maturity – 20,394 583 – 583 –
Additions from financial assets - loans and receivables – 301,529 6,694 – 6,694 –
Because of cancellations of equity instruments and debt instruments designated at fair value under IAS 39, subtractions from financial assets – designated fair value through profit/loss which were required or voluntary pursuant to IFRS 9 had to be reversed. Essentially, debt instruments of € 752,329 thousand and equity instruments of € 101,339 thousand were reclassified from financial assets – designated fair value through profit/loss. The resulting discretionary or required reclassifications in the form of additions and subtractions from the former IAS 39 measurement categories are shown in the table below.
Required subtractions to financial assets - fair value through other comprehensive income – (385,404) 0 – – –
Elected subtractions to financial assets - fair value through other comprehensive income – (136,281) 0 – – –
Elected subtractions to financial assets - amortized cost – (77,018) 0 – – –
Additions to financial assets – held for trading amounting to € 13,257 thousand are made largely from financial assets which, according to IAS 39 were voluntarily measured as designated at fair value. However, these options are limited under IFRS 9 because a financial asset can only be measured as designated at fair value through profit/loss if doing so prevents or significantly reduces a measurement or recognition inconsistency – i.e. an accounting mismatch. Where this condition was not met, the Group was, in many cases, required to reclassify equities and debt instruments under financial assets held for trading.
Additions from financial assets - designated fair value through profit/loss 0 13,257 0 0 – –
Subtractions to financial assets - amortized cost 0 (58,845) 0 0 – –
As of 31 December 2018, the fair value was € 434,253 thousand. If the reclassification had not been applied, this would have resulted in a valuation result of minus € 11,272 thousand. For financial liabilities reclassified from financial liabilities – designated fair value through profit/loss to financial liabilities – amortized cost, the weighted effective interest rate at the time of reclassification was 5.00 per cent. The interest expenses recognized amounted to € 26,436 thousand.
Additions from financial liabilities - amortized cost – 10,891 104 – (104) 0
Remeasurements due to the change from a historic-oriented risk assessment model pursuant to IAS 39 (incurred loss model) to a future-oriented model in accordance with IFRS 9 (expected loss model) were necessary for financial assets measured at amortized cost or at fair value through other comprehensive income, and also for impairment losses for loan commitments off the statement of financial position and financial guarantees.
In addition, the increase in impairments in the remeasurements column includes effects not affecting equity resulting from the firsttime adoption of IFRS 9. This is due on the one hand to a reduction in impairments for loans that were retrospectively identified upon transition to IFRS 9 as purchased or originated credit-impaired financial assets (POCI), and on the other hand to an increase in impairments for receivables that have already defaulted, which relate to interest receivables that were deferred off the statement of financial position until 31 December 2017 and will be recognized as part of the gross carrying amount from 1 January 2018.
A financial liability can be irrevocably designated as at fair value through profit or loss if doing so prevents or significantly reduces a measurement or recognition inconsistency – i.e. an accounting mismatch. These inconsistencies arise from measuring assets or liabilities, or recognizing the gains and losses on them, on a different basis. If a financial liability contains one or more embedded derivatives (structured financial liabilities), then according to IFRS 9, the entire financial liability may, at the time of initial recognition, be irrevocably classified as designated at fair value through profit/loss, if certain conditions are met. Reclassifications amounting to minus € 447,781 thousand and remeasurements (minus € 69,938 thousand) of financial liabilities – designated fair value through profit/loss to the measurement category financial liabilities – amortized cost had to be reversed due to cancellations of deposits and debt instruments previously designated at fair value.
The reclassifications column relates to changes in impairment losses due to differences in the scope of IFRS 9 compared to IAS 39. The decrease in impairment losses of € 20,168 thousand due to reclassifications is on the one hand due to reversals of impairment on loans and receivables (€ 23,353 thousand) which have to be measured at fair value in accordance with IFRS 9 and on the other hand due to reclassifications of debt instruments of the available for sale category that are measured at fair value through other comprehensive income according to IFRS 9.
Financial assets - fair value through other comprehensive income – 3,037 672 3,710 hereof loans and advances – 0 0 0
Off-balance sheet items 118,615 – 30,070 148,685 hereof loan commitments given 26,621 – 27,129 53,750 hereof financial guarantees given 84,210 – (331) 83,879 hereof other commitments given 7,784 – 3,271 11,055
In the case of one subsidiary headquartered outside the euro area, the US dollar was the reporting currency for measurement purposes given the economic substance of the underlying transactions, as both the transactions and the financing were undertaken in US dollars. In the case of two subsidiaries headquartered in the euro area, the Russian ruble was the reporting currency for measurement purposes given the economic substance of the underlying transactions.
The increase in net interest income of € 136,910 thousand is largely volume-driven; the Group’s average interest-bearing assets grew 3 per cent. The rise in net interest income was primarily the result of increases in Romania (increase of € 73,174 thousand due to higher interest rates and larger volumes), the Czech Republic (increase of € 57,773 thousand due in large part to higher market interest rates and larger customer loan volumes), and in Ukraine (increase of € 31,864 thousand due to higher interest rates and larger volumes of loans to non-financial corporations). The positive development of net interest income in Russia was offset by the depreciation of the Russian ruble. In Poland, net interest income decreased € 54,330 thousand due primarily to the sale of the Polish core banking operations.
Interest income calculated using the effective interest method amounts to € 4,083,370 thousand (2017: € 3,876,525 thousand). Net interest income includes interest income of € 623,918 thousand (2017: € 555,049 thousand) from mark-to-market financial assets, and interest expenses of € 444,322 thousand (2017: € 376,276 thousand) from market-to-market financial liabilities.
Investments in subsidiaries and associates include dividend income from subsidiaries not fully consolidated and associates not valued at equity. The increase shown in this item is generated predominantly from dividend income from subsidiaries not fully consolidated (primarily real estate companies and insurance brokers).
Net gains/losses on non-trading financial assets - mandatorily fair value through profit or loss (16,925) –
Net gains/losses from hedge accounting changed year-on-year from minus € 15,530 thousand to minus € 11,182 thousand, mainly due to the results in Poland, at head office and in Russia.
The net gains from exchange differences of € 265,694 thousand (2017: losses of € 141,085 thousand) were primarily attributable to exchange rate developments in Russia and positions in US dollars and Swiss francs held at head office. These results were offset by opposite valuations of the foreign exchange derivatives that are held in the derivatives position for economic hedge purposes.
Net gains/losses on debt securities held for trading decreased € 17,606 thousand to minus € 5,643 thousand. This mainly reflected valuation losses at head office, which were partly offset by valuation gains in Russia. The deposits held for trading were primarily affected by losses on spot transactions in Russia. The losses were incurred in connection with the hedging of foreign currency transactions with customers; corresponding commission income is included in net fee and commission income. Opposite valuations or realized net gains/losses of the foreign exchange derivatives that are used in this connection and held for economic hedge purposes are included in the derivatives position.
Fair value changes of the hedged items attributable to the hedged risk 11,478 74,634
Net rental income from investment property incl. operating lease (real estate) 57,092 78,716
Expenses for other long-term employee benefits excl. deferred bonus program (6,367) (1,878)
The increase of € 33,335 thousand to € 56,524 thousand derived mainly from the adjustment applied to mortality tables and to the salary base at head office. The effect of adjusting the mortality tables, which amounted to a decrease of € 27,047 thousand (2017: € 6,252 thousand), is included in other comprehensive income under remeasurements of defined benefit plans.
Members of the Management Board are subject in principle to the same regulations as apply to employees. These regulations provide for a basic contribution to a pension fund from the company and an additional contribution if the employee pays own contributions of the same amount. Two members of the Management Board additionally have individual retirement benefits, which are funded by a reinsurance policy.
Moreover, protection against the risk of occupational disability is offered in the form of a pension fund and/or by individual pension agreements secured through reinsurance. The Management Board members’ contracts either run for the duration of their term of office or are limited to a maximum of five years. In the event of early termination of a Management Board member’s contract without good cause, the severance payment is limited to a maximum of two years’ total annual remuneration (except for one member of the Management Board covered by previous contractual arrangements).
Legal, advisory and consulting expenses include audit fees in relation to RBI AG and its subsidiaries which comprise expenses for the audit of financial statements amounting to € 5,928 thousand (2017: € 5,986 thousand) and tax advisory as well as other additional consulting services amounting to € 2,095 thousand (2017: € 2,464 thousand). Thereof, € 2,392 thousand (2017: € 2,820 thousand) relates to the Group auditor for the audit of the financial statements and € 921 thousand (2017: € 1,085 thousand) accounts for the other consulting services.
Net income from non-current assets and disposal groups classified as held for sale 1,819 5,215
In the reporting period, impairment on investments in subsidiaries and associates valued at equity amounted to € 33,360 thousand, thus representing a decrease of € 18,220 thousand compared to previous year. The decrease was largely due to lower impairment on investments in associates valued at equity, mainly due to UNIQA Insurance Group AG and Slovakian building society.
During the initial consolidation of a Hungarian real estate company, the resulting goodwill of € 7,943 thousand was fully impaired. Impairment on other non-financial assets amounting to € 12,854 thousand was significantly lower in the reporting period and was mainly attributable to real estate in Ukraine and Russia. In the previous year, impairment amounted to € 28,664 thousand, thereof € 24,906 thousand was booked for buildings in the portfolio of Raiffeisen Immobilienfonds (2018: € 2,929 thousand ).
Current income from investments in subsidiaries and associates mainly resulted from the associates valued at equity UNIQA Insurance Group AG, LEIPNIK-LUNDENBURGER INVEST Beteiligungs AG, Raiffeisen Informatik GmbH and card complete Service Bank AG.
In the reporting period, 14 subsidiaries mainly operating in leasing business were excluded from the consolidated group due to immateriality; three subsidiaries were sold.
RBPL: Core banking operations of Raiffeisen Bank Polska S.A., Warsaw (PL) SAMPRO: DAV-PROPERTY Kft., Budapest (HU)
In 2018 there were no charges from banking business due to governmental measures while in the previous year provisions of € 21,356 thousand had been released in connection with the so-called Walkaway Law in Romania.
The contributions to the resolution fund, which requires to be booked entirely at the beginning of the year, declined € 10,527 thousand to € 54,123 thousand due to lower contributions in Romania, at RBI AG, in Poland and in Slovakia, while the Czech Republic reported an increase here.
Impairment losses on financial assets declined by a total of 47 per cent, or € 146,454 thousand, to € 165,677 thousand compared to 2017. The biggest improvements occurred at head office (reduction of € 190,332 thousand), in Romania (reduction of € 34,741 thousand), and Croatia (reduction of € 28,905 thousand). Net releases of loan loss provisions were € 35,095 thousand lower in Ukraine and € 28,161 thousand lower in Hungary than in the previous year, due primarily to higher sales of nonperforming loans in the previous year. In addition, a favorable court decision in connection with insolvency proceedings relating to a bank in Iceland resulted in the reversal of € 25,000 thousand with respect to liabilities off the statement of financial position.
In the fourth quarter of 2018, impairment losses on financial assets increased € 105,413 thousand as a result of fine-tuning of IFRS 9 models. Moreover, an additional impairment loss of € 53,853 thousand resulted from the recognition of provisions for expected credit risks arising from extraordinary events that are not reflected in the model (mainly future sanctions relating to Russia ).
Other changes include unrecognized deferred taxes of minus € 45,875 thousand from deconsolidation effects in connection with the sale of the Polish core banking operations and of minus € 14,859 thousand from the hedge of net investments. They were not capitalized because there was no utilization based on the current mid-term tax planning.
The tax expense reduced mainly due to the rise in RBI Group tax allocation against non-consolidated Group members (increase of € 6,548 thousand) and a reduction of € 11,875 thousand in withholding tax at head office due to lower dividend income. In addition, in the previous period a one-off effect of € 16,831 thousand from the payment of taxes from previous periods was recorded in the Czech Republic. This was countered by a € 16,434 thousand increase in the tax expense due to higher profits in Romania.
The following reconciliation shows the relationship between profit/loss before tax and the effective tax burden: Profit/loss before tax 1,753,331 1,612,063
Tax decrease because of tax-exempted income from equity participations and other income 94,406 191,996
(12) Cash, cash balances at central banks and other demand deposits
(13) Financial assets - amortized cost 2018 2017 in € thousand Gross carrying amount Accumulated impairment Carrying amount Carrying amount
In the item households, the negative effect from the sale of the core banking operations in Poland was more than offset by growth primarily in Slovakia and in the Czech Republic. In non-financial corporations, the reduction from the sale was largely offset by increases, mainly at head office and in Romania. Loans and advances to other financial corporations increased mainly due to an increase in short-term loans and advances at head office.
(14) Financial assets - fair value through other comprehensive income 2018 2017 in € thousand Gross carrying amount Accumulated impairment Carrying amount Carrying amount
The item equity instruments in financial assets – fair value through other comprehensive income comprised the following items: Visa Inc., San Francisco (US), Series C-Shares 36,797 36,579
Medicur - Holding limited company, Vienna (AT), company shares 19,977 19,575
Valida Pension AG, Vienna (AT) Investment fund - PID2 (AT0000767622) 19,940 19,976
The dividends paid on equity instruments – fair value through other comprehensive income amounted to € 14,398 thousand (2017: € 18,575 thousand).
The steep decrease in financial assets – designated fair value through profit/loss was based on changed allocation decisions at head office as at 1 January 2018 and the maturity of several bonds in Romania and Russia.
Positive fair values of derivatives in micro fair value hedge 357,837 373,755
Positive fair values of derivatives in micro cash flow hedge 2,347 1,264
Positive fair values of derivatives in net investment hedge 16,616 0
Because of their minor importance in giving a view of the Group’s assets, financial and earnings position, 312 subsidiaries (2017: 345) were not included in the consolidated financial statements. They are recognized at cost.
2018 Carrying amount 2018 Carrying amount card complete Service Bank AG, Vienna (AT) 25.0% 25,523 19,041
Posojilnica Bank eGen, Klagenfurt (AT)1 61.5% 10,326 0 1 The share of the voting rights amounts to 49 per cent.
Financial information on associates is as follows: 2018 in € thousand CCSB EMCOM LLI1 NTB OEHT OeKB
Profit/loss after tax from discontinued operations 0 0 0 0 0 0
Group's interest in net assets of investee as at 1/1 19,041 0 146,557 7,509 10,154 63,117
Total comprehensive income attributable to the Group 14,113 7,281 11,468 1,493 818 3,986
Group's interest in net assets of investee as at 31/12 25,523 6,747 150,907 9,003 10,502 64,435 1 Consolidated financial statements: Profit and equity is after deduction of non-controlling interests. CCSB: card complete Service Bank AG, Vienna (AT) EMCOM: EMCOM Beteiligungs GmbH, Vienna (AT) LLI: LEIPNIK-LUNDENBURGER INVEST Beteiligungs AG, Vienna (AT) NTB: NOTARTREUHANDBANK AG, Vienna (AT) OEHT: Österreichische Hotel- und Tourismusbank GmbH, Vienna (AT) OeKB: Oesterreichische Kontrollbank AG, Vienna (AT)
Group's interest in net assets of investee as at 1/1 14,503 76,494 0 33,869 341,534
Land and buildings used by the group for own purpose 571,227 584,896
The reduction in other land and buildings (investment property) was mainly due to the reclassification of the disposal group of Raiffeisen Immobilienfonds, Vienna, pursuant to IFRS 5 in the amount of € 49,848 thousand to other assets. The fair value of other land and buildings (investment property) was € 333,603 thousand (2017: € 429,646 thousand).
Other land and buildings (investment property) 497,509 (5,940) (4,035) 10,457 (62,875) (57,692) 377,424
Office furniture, equipment and other tangible fixed assets 973,008 (58,836) (17,835) 119,552 (97,400) 668 919,157
Changes in the consolidated group in the financial year mainly resulted from the sale of the Polish core banking operations.
Individual investments in excess of € 10,000 thousand occurred in Kosovo (head office building of the bank) in the financial year and in Bulgaria (building) in the previous year.
Land and buildings used by the group for own purpose (434,529) 449 (34,299) 571,227
Land and buildings used by the group for own purpose 755,076 265,805 (19,608) 27,772 (28,979) (160) 999,906
Office furniture, equipment and other tangible fixed assets 970,362 14,817 (17,199) 96,137 (98,557) 7,448 973,008
Write-ups, amortization, depreciation, impairment Carrying amount in € thousand Cumulative hereof write-ups hereof depreciation/
Land and buildings used by the group for own purpose (415,010) 219 (37,176) 584,896
Accumulated impairment1 0 0 (543,867) (543,867) 1 Calculated with average exchange rates RBCZ: Raiffeisenbank a.s., Prague (CZ) RKAG: Raiffeisen Kapitalanlage-Gesellschaft m.b.H., Vienna (AT)
At the end of each financial year, goodwill is reviewed by comparing the recoverable value of each cash generating unit for which goodwill is recognized with its carrying value. The carrying amount value is equal to net assets including goodwill and other intangible assets which are recognized within the framework of business combinations. In line with IAS 36, impairment tests for goodwill are carried out during the year if a reason for impairment occurs.
The Group generally identifies the recoverable amount of cash generating units on the basis of the "value-in-use" concept using a dividend discount model. The dividend discount model reflects the characteristics of the banking business including the regulatory framework. The present value of estimated future dividends that can be distributed to shareholders after taking into account relevant regulatory capital requirements represents the recoverable value.
Growth rates in phase I and II 2.0% 1.8% 1.6% 0.2%
registered multiplied by the beta factor for the indebted company. The values for the risk-free interest rate and the market risk premium are defined using accessible external market data sources. The risk measure beta factor is derived from a peer group of financial institutions operating in Western and Eastern Europe. The above-mentioned interest rate parameters represent market assessments; therefore they are not stable and could in the event of a change affect the discount rates.
The assumptions are based on internal as well as external sources. Macroeconomic assumptions of the research department were compared with external data sources and the 5-year plan, presented to the Management Board and approved by the Supervisory Board.
RKAG RKAG is one of the leading Austrian fund enterprises with a managed consolidated volume of € 32.3 billion as at year-end 2018 and a market share of 18.4 per cent. RKAG has been active internationally for years and is a wellknown player in numerous European countries.
Group companies use brands to differentiate their services from those of the competition. According to IFRS 3, brands of acquired companies have been recognized separately under the item intangible fixed assets. Brands have an indeterminable useful life and are therefore not subject to scheduled amortization. Brands are tested annually in the course of the impairment test for goodwill per cash generating unit and additionally whenever indications of impairment arise. Brand rights are only recognized for Raiffeisen Bank Aval JSC, Kiev.
The carrying value of the brand was € 8,362 thousand (2017: € 7,862 thousand) and the cumulative impairment loss € 14,867 thousand (2017: € 13,978 thousand).
The brand value of Raiffeisen Bank Aval JSC, Kiev, was determined using the comparable historical cost approach, because neither directly comparable transactions nor a market with observable prices was available at the time of purchase price allocation. Documentation of brand-related marketing expenses in the previous years was taken as the basis for the historical cost approach. In 2018, the impairment test led to no impairment.
Increase in discount rate 3.1 PP 2.8 PP 0.4 PP 1.7 PP
The Group capitalized customer relationship intangibles in relation to Raiffeisen Bank Aval JSC, Kiev, and Raiffeisenbank a.s., Prague, in an amount of € 7,596 thousand (2017: € 12,906 thousand). In 2018 there were no external or internal indications that identified a need for an impairment test.
Deferred tax assets derived from the following items: Financial assets - amortized cost 68,695
In the consolidated financial statements, deferred tax assets are recognized for unused tax loss carry-forwards which amounted to € 20,363 thousand (2017: € 7,150 thousand). The tax loss carry-forwards are mainly without any time limit. The Group did not recognize deferred tax assets from tax loss carry-forwards of € 519,281 thousand (2017: € 574,185 thousand) because from a current point of view there is no prospect of realizing them within a reasonable period of time.
Merchandise inventory and suspense accounts for services rendered not yet charged out included property under construction or not yet sold of Raiffeisen Leasing Group in Austria and Italy of € 129,163 thousand.
The following table provides a breakdown of deposits from banks and customers by product and a breakdown of debt securities issued: Deposits from banks 23,959,843 22,268,407
Other financial liabilities 524,268 515,287 hereof subordinated financial liabilities 2,765,225 3,016,033
In deposits from customers, the disposal of the Polish core banking operations was more than offset by increases in almost all of the Group’s markets (increases at head office of € 3,984,968 thousand, at AO Raiffeisenbank, Moscow, of € 1,678,568 thousand and at Tatra banka, a.s., Bratislava, of € 890,135 thousand). The focus of customers here was on current deposits.
The following table provides a breakdown of deposits from banks and customers by asset classes: Other financial corporations 9,457,538 6,816,596
This increase in deposits from banks and other financial corporations was almost entirely due to higher deposits at head office.
Other debt securities issued 1,495,888 1,891,754 hereof convertible compound financial instruments 10,343 0 hereof non-convertible 1,485,545 1,891,754 hereof subordinated financial liabilities 385,576 771,944
The reduction in financial liabilities – designated fair value through profit/loss compared to year-end 2017 was largely due to a decrease in debt securities issued. This was attributable to a reclassification as at 1 January 2018 from the measurement category designated fair value through profit/loss (subtraction) to the measurement category amortized cost (addition) at head office.
Other debt securities issued 366,467 354,642 hereof convertible compound financial instruments 366,467 354,642
Negative fair values of derivatives in micro fair value hedge 20,914 28,418
 Another closely related legal action in relation to a disputed amount of € 127,063 thousand was brought in 2016 by a Cypriot plaintiff who had purchased the underlying claim from a shareholder of the above Slovakian customer’s holding company. The legal action has been suspended until a decision on the above case.
Provisions for off-balance-sheet items 176 0 431 (173) 0 (35) 399
Other long-term employee benefits 33,272 (751) 6,585 (604) (392) (1,734) 36,376
Tax provisions, which up to and including 2017 were shown under provisions, are shown under (28) Tax liabilities.
Other commitments and guarantees acc. IAS 37 176 0 431 (173) 0 (35) 399
Due to the change in the presentation of the statement of financial position and the adoption of IFRS 9, preparation of a direct comparison with the previous year would entail disproportionate effort. The following table shows the changes in provisions in the previous year: in € thousand 1/1/2017
The defined benefit obligations developed as follows: Defined benefit obligation 1/1 132,706 42,748
The return on plan assets for 2018 was minus € 1,880 thousand (2017: € 1,847 thousand). The fair value of rights to reimbursement recognized as an asset was € 12,524 thousand as at year-end 2018 (2017: € 14,350 thousand).
The following table shows the actuarial assumptions used to calculate the net defined benefit obligation: in per cent 2018 2017
Longevity at age 65 for current pensioners - females 25.3 23.7
Plan assets comprised the following items: in per cent 2018 2017
The following table shows the longevity assumptions used to calculate the net defined benefit obligation: Longevity at age 65 for current pensioners - males 22.8 21.2
Changes at the reporting date to one of the relevant actuarial assumptions, holding other assumptions constant, would have affected the defined benefit obligation by the amounts shown below: 2018 2017 in € thousand Increase Decrease Increase Decrease
The other termination benefits developed as follows: Defined benefit obligation 1/1 82,988 58,544
The following table shows the actuarial assumptions used to calculate the other termination benefits: in per cent 2018 2017
Liabilities included in disposal groups classified as held for sale 0 61,946
The decrease in liabilities included in disposal groups classified as held for sale was mainly due to the discontinued IFRS 5 presentation of Raiffeisen Pension Insurance d.d., Zagreb.
Deferred tax liabilities derived from the following items: Financial assets - held for trading 108,272
The Annual General Meeting held on 21 June 2018 authorized the Management Board pursuant to Section 65 (1) item 8, Section 65 (1a) and Section 65 (1b) of the Austrian Stock Corporation Act (AktG) to purchase own shares and to retire them if appropriate without requiring any further resolutions to be passed by the General Meeting. Own shares, whether already purchased or to be purchased, may not collectively exceed 10 per cent of the company’s share capital. The authorization to purchase own shares expires 30 months after the date of the General Meeting resolution, i.e. as of 20 December 2020. The acquisition price for repurchasing the shares may be no lower than € 1.00 per share and no higher than 10 per cent above the average unweighted closing price over the ten trading days prior to exercising this authorization.
On 5 July 2017, RBI AG issued perpetual additional tier 1 capital (AT1) with a nominal value of € 650,000 thousand. The interest rate is 6.125 per cent p.a. until December 2022 and will be reset thereafter. RBI placed another issue of perpetual additional tier 1 capital (AT1) with a volume of € 500,000 thousand on 24 January 2018. The discretionary coupon on this issue is 4.5 per cent p.a. until mid-June 2025, after which it will be reset. Due to the terms and conditions of issue, the additional tier 1 capital is classified as equity under IAS 32. Equity increased € 496,296 thousand after accounting for the issue costs of € 704 thousand and the discount of € 3,000 thousand. Own shares, which have a carrying amount of € 15,499 thousand, were also deducted from the capital.
Raiffeisen Bank Aval JSC, Kiev (UA) 31.8% 114,931 50,081 8,002 58,083
Raiffeisen Bank Aval JSC, Kiev (UA) 31.8% 101,686 47,009 (10,477) 36,532
As at end of 2014, the Ukrainian National Bank launched foreign currency transfer controls. The declared dividend from Ukraine can only be paid in tranches because euro payments are capped at € 7,000 thousand a month.
Members of the management boards of bank subsidiaries affiliated with RBI AG 43,470 1,178,906 34,005
Executives of RBI AG and other affiliated companies 21,640 586,877 14,500
The living loan portfolio is included in the central calculation of fair value. Fair value is calculated monthly and is based on the discounted cash flow method. The expected payment streams are discounted using an appropriate discount rate (e.g. risk-free rate plus premium). The method applied to calculate the discount rate depends on the segment (i.e. retail and non-retail).
In the Group, well-known conventional market valuation techniquesare used to measure OTC derivatives. For example, interest rate swaps, cross currency swaps and forward rate agreements are measured using the customary discounted cash flow model for these products. OTC options, such as foreign exchange options or caps and floors, are based on valuation models which are in line with market standards. In the case of the examples listed, such models would be the Garman-Kohlhagen model, BlackScholes 1972 and Black 1976. Monte Carlo simulations are used to measure complex options.
Credit value adjustments (CVA) are also necessary to determine fair value in order to reflect counterparty risk associated with OTC derivative transactions, especially for contractual partners for whom a credit support annex does not provide protection. This amount represents the respective estimated market value of a security measure which is required to hedge against counterparty credit risk in the Group’s OTC derivative portfolios.
Value as at stock price € 27.12 on allocation day (9 April 2018)
Financial liabilities - designated fair value through profit/loss 0 1,931,076 0 0 2,522,055 0 1 As a result of the changes in the presentation of the statement of financial position, the preparation of a direct prior-year comparison would require undue cost and effort.
default. Direct CDS quotations are used where available. If no CDS quotation is available, RBI’s probability of default is calculated by assigning the own rating to a sector and rating-specific CDS curve.
Liabilities 2018 20171 in € thousand Level I Level II Level III Level I Level II Level III
Level II financial instruments are financial instruments determined using valuation techniques based on observable market data, the fair value of which can be determined from similar financial instruments traded on active markets or valuation techniques whose input parameters are directly or indirectly observable (IFRS 13.81 ff).
The information provided for the current financial year was based on IFRS 9. In contrast, the information for 2017 was provided in accordance with IAS 39. The movements between the periods are therefore only indirectly comparable.
Financial assets - fair value through other comprehensive income 275,746 (43,885) (4,665) 2,586 (21,666)
(0.158572) - 1.10578% over all funding costs (expressed in all currencies)
Non-Retail: Discounted cash flows/Financial option pricing: Hull-White one factor model, Black-
Forward foreign exchange contracts 216 Net present value method Interest rate
The financial instruments in the following table are not managed on a fair value basis and are therefore not measured at fair value in the statement of financial position. For these instruments the fair value is calculated only for the purposes of providing information in the notes, and has no impact on the consolidated statement of financial position or on the consolidated income statement. With the introduction of IFRS 9, the calculation of the fair value of receivables and liabilities not reported at fair value was reclassified and, among other things, input factors are also used in the models which are not observable on the market, but which have a significant influence on the calculated value. A simplified fair value calculation method for retail and non-retail portfolios is applied for all short term transactions (transactions with maturities up to 3 months). The fair value of these short term transactions will be equal to the carrying amount of the product. For the other transactions the methodology as described in the section entitled Fair value of financial instruments reported at fair value is applied.
Other financial liabilities 0 0 510,743 510,743 524,268 (12,243) 1 Affiliated companies which are not fully consolidated due to immateriality are recognized at cost less impairment. Level I Quoted market prices Level II Valuation techniques based on market data Level III Valuation techniques not based on market data
As a result of the change in the presentation of the statement of financial position, the preparation of a direct prior-year comparison would require undue cost and effort.
2017 Carrying in € thousand Level I Level II Level III Fair value amount Difference
The following table was prepared in accordance with Section 51 (13) BWG and shows the nominal amount and provisions for off-balance-sheet liabilities from commitments and financial guarantees under IFRS 9.
 Satisfactory are exposures which require closer monitoring and demonstrate an average to fair capacity to meet financial commitments, with moderate default risk (PD range 1.1735 - 7.3344 per cent).
The following table shows the carrying amounts of the financial assets – amortized cost by rating category and stages: 2018 Stage 1 Stage 2 Stage 3 Total in € thousand 12 month ECL Lifetime ECL Lifetime ECL
The following table shows the gross carrying amount of financial assets – fair value through other comprehensive income, excluding equity instruments, by rating category and stages: 2018 Stage 1 Stage 2 Stage 3 Total in € thousand 12 month ECL Lifetime ECL Lifetime ECL
The following table shows the nominal values of off-balance-sheet commitments by rating category and stages: 2018 Stage 1 Stage 2 Stage 3 Total in € thousand 12 month ECL Lifetime ECL Lifetime ECL
Provisions for off-balance-sheet items under IFRS 9 (36,638) (32,253) (56,860) (125,750)
Financial assets as well as contingent liabilities and commitments subject to impairment
Financial assets - fair value through other comprehensive income 0 6,216,922 0
RBI holds an immaterial amount of repossessed assets on its statement of financial position.
The measurement of expected credit losses reflects an unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes, the time value of the money and reasonable and supportable information that is available without undue cost or effort at the reporting date about past events, current conditions and forecasts of future economic conditions.
The measurement of impairment for expected credit loss on financial assets measured at amortized cost and fair value through other comprehensive income is an area that requires the use of complex models and significant assumptions about future eco-
The estimation of the credit risk for risk management purposes is complex and requires the use of models, as the risk varies with changes in market conditions, expected cash flows and the passage of time. The assessment of the credit risk of a portfolio of assets entails further estimations as to the likelihood of defaults occurring, the associated default ratios and the default correlations between counterparties. RBI measures credit risks using the probability of default (PD), exposure at default (EAD) and loss given default (LGD). This is the predominant approach used for the purposes of measuring expected credit losses under IFRS 9.
nomic conditions and payment behavior. Significant judgements are required in applying the accounting requirements for measuring expected credit losses, inter alia:  Determining criteria for significant increase in credit risk  Choosing appropriate models and assumptions for the measurement of expected credit losses  Establishing the number and relative weightings of forward-looking scenarios for each type of product/market and the associated expected credit losses  Establishing groups of similar financial assets for the purposes of measuring expected credit losses.
Financial instruments in Stage 1 have their expected credit loss measured at an amount equal to the portion of lifetime expected credit losses that result from default events possible within the next twelve months. Instruments in Stages 2 or 3 have their expected credit losses measured based on expected credit losses on a lifetime basis. According to IFRS 9, when measuring expected credit losses it is necessary to consider forward-looking information. Purchased or originated credit-impaired financial assets (POCI) are those financial assets that are credit-impaired on initial recognition. Their expected credit loss is always measured on a lifetime basis (Stage 3).
RBI uses qualitative criteria as a secondary indicator of a significant increase in credit risk for all material portfolios. A movement to Stage 2 takes place when the criteria below are met.
For retail portfolios, if the borrower meets one or more of the following criteria:  Forbearance refers to concessions made to the borrower on the part of the lender for economic or contractual reasons when the borrower is experiencing economic difficulties, but which the lender would not otherwise grant,
A credit obligation is considered to no longer be in default after a probation period of minimum three months (six months after a distressed restructuring in retail), where during the probation period the customer demonstrated good payment discipline and no other indication of unlikeliness to pay was observed.
 Retail mortgages: Stage 3 provision is generated for the majority of group units by calculating the statistically derived best estimate of expected loss which has been adjusted for indirect costs and for four group units by calculating the discounted collateral realization value
Almost all of the provisions under IFRS 9 are measured collectively. Only for non-retail Stage 3 are most of the provisions individually assessed. For expected credit losses provisions modelled on a collective basis a grouping of exposures is performed on the basis of shared credit risk characteristics so that the exposures within each group are similar. Retail exposure characteristics are grouped on country level, accounting classification (households and SMEs), product level (e.g. mortgage, personal loans, overdraft facilities or credit cards), PD rating grades and LGD pools/loan-to-value bands. For each combination of the above characteristics an individual model was developed. Non-retail exposure characteristics are grouped on country and product level and are used as LGD and EAD parameters.
The most significant assumptions used for the expected credit loss estimates at quarter end are shown below. (Source: Raiffeisen Research 15 October 2018)
The weightings assigned to each scenario at quarter end are as follows: 25 per cent optimistic, 50 per cent base and 25 per cent pessimistic scenarios.
In cases where the quantitative models do not capture and translate the forward-looking information into the expected credit loss parameters adjustments are made to reflect the holistic nature of credit risk analysis. These result in additional provisions of € 53.852 thousand as additional Stage 2 provisions. The major part relates to a provision on Russian corporate exposures for covering possible losses related to potential future sanctions. It also includes slightly higher expected defaults on mortgage loans due to government-imposed interest rate clauses for retail customers in the Czech Republic and foreign-currency lending to retail customers due to consumer protection initiatives in Romania.
The table below shows the impact of staging on RBI's accumulated impairment for financial assets by comparing the reported amounts accumulated for all performing assets subject to impairment with the special case where all accumulated impairment is measured based on twelve-month expected losses (Stage 1). As there is no historical data for the use of staging it is currently not possible to estimate what would be a reasonable increase, however we do not expect the percentage of Stage 1 assets to ever reach 100 per cent. This information is provided for illustrative purposes.
RBI‘s credit portfolio is well diversified in terms of type of customer, geographical region and industry. Single name concentrations are also actively managed (based on the concept of groups of connected customers) by limits and regular reporting. As a consequence portfolio granularity is high. The following table shows the financial assets – amortized cost based on the respective counterparties and stages. This reveals the bank’s focus on non-financial corporations and households: 2018 Gross carrying amount Accumulated impairment ECL Coverage Ratio in € thousand Stage 1 Stage 2 Stage 3 Stage 1 Stage 2 Stage 3 Stage 1 Stage 2 Stage 3
The increase in expected credit losses arising from the measurement of the loss allowance moving from twelve-month expected credit losses to lifetime losses was € 182,541 thousand. The decrease in expected credit losses arising from the measurement of the loss allowance moving from lifetime losses to twelve-month expected credit losses was € 52,067 thousand.
2018 Nominal amount Provisions for off-balance-sheet items under IFRS 9 ECL Coverage Ratio in € thousand Stage 1 Stage 2 Stage 3 Stage 1 Stage 2 Stage 3 Stage 1 Stage 2 Stage 3
Stage 1 Stage 2 Stage 3 Total in € thousand 12 month ECL Lifetime ECL Lifetime ECL
Changes due to modifications without derecognition (net) (16) 18 (986) (983)
The position as at 1 January 2018 takes account of the transition effect in the amount of € 268,697 thousand due to the implementation of IFRS 9. The change in the reporting period amounted to € 979,944 thousand. In addition, repayments and sales of non-performing loans in the amount of € 612,598 thousand above all at RBI AG and in Russia, Ukraine and Croatia contributed to the positive development.
The impairments are mainly assignable to stage 3 and result from loans to non-financial corporations and households, primarily in Central and Southeastern Europe.
Changes due to change in credit risk (net) 0 0 (28,569) (28,569)
The following table shows the breakdown by segment of impairments and provisions in accordance with IFRS 9 stages of impairment: 2018 Stage 1 Stage 2 Stage 3 Total in € thousand 12 month ECL Lifetime ECL Lifetime ECL
Loan commitments, financial guarantees and other commitments given 36,638 32,253 56,860 125,750
Due to the implementation of IFRS 9 it is not possible to make a direct comparison with the previous year. The following table shows the development of impairment losses on loans and provisions for off-balance sheet liabilities in the comparable period: in € thousand As at 1/1/2017
The following table shows the breakdown of loan loss provisions by segment as at the reporting date of the previous year: Individual loan loss provisions 2,865,350
The following table shows the overdue claims and bonds in the measurement categories amortized cost and fair value through other comprehensive income: 2018 Carrying amount
Changes in contractual cashflows of financial assets are examined on the basis of qualitative and qualitative criteria to determine whether the modifications are substantial or non-substantial.
The amortized cost prior to the modifications amounted to € 918,662 thousand, of which € 163,687 thousand was caused by financial assets whose impairment was measured for lifetime expected credit losses.
Amounts from global netting agreements Net amount in € thousand of recognized financial assets of recognized financial liabilities set-off of recognized financial assets Financial instruments Cash collateral received
Amounts from global netting agreements Net amount in € thousand of recognized financial liabilities of recognized financial assets set-off of recognized financial liabilities Financial instruments Cash collateral received
Reverse repurchase, securities lending & similar agreements (legally enforceable) 822,991 0 822,991 799,464 0 23,527
The following transactions for all or at least some tranches were executed with external contractual partners, were still active in the reporting year and resulted in a credit risk mitigation which led to a reduction in risk-weighted assets in regulatory reporting. The stated amounts represent the securitized portfolio and the underlying receivables as well as the externally placed tranche at the balance sheet date.
In the 2018 financial year, the ROOF RBCZ 2015 synthetic transaction was terminated due to the originator’s decision to exercise the call option agreed at inception between the involved parties.
The table below shows the carrying amounts of financial assets transferred: 2018 Transferred assets Associated liabilities in € thousand Carrying amount hereof securitizations hereof repurchase agreements Carrying amount hereof securitizations hereof repurchase agreements
Financial assets - held for trading 266,470 0 266,470 266,141 0 266,141
Non-trading financial assets - mandatorily fair value through profit/loss 0 0 0 0 0 0
Financial assets - fair value through other comprehensive income 0 0 0 0 0 0
2017 Transferred assets Associated liabilities in € thousand Carrying amount hereof securitizations hereof repurchase agreements Carrying amount hereof securitizations hereof repurchase agreements
Financial assets - held for trading 251,909 0 251,909 251,909 0 251,909
The table below shows securities and other financial assets accepted as collateral: Securities and other financial assets accepted as collateral which can be sold or repledged 9,138,919 9,931,063 hereof which have been sold or repledged 1,603,132 1,463,047
Financial assets - held for trading 517,605 390,835 489,113 1,410,899 1,085,157
Financial liabilities - held for trading 133,755 641,450 800,200 2,362,179 1,164,251
Cash, cash balances at central banks and other demand deposits 16,894,740 475 10,239 0 0
Non-trading financial assets - mandatorily fair value through profit/loss 0 0 0 0 0
Financial liabilities - designated fair value through profit/loss 10,000 193,673 316,348 1,533,462 455,139
RBI applies various types of hedge accounting with the aim of reducing interest rate risk and volatility in the income statement. Depending on the risk to be hedged, both fair value and cash flow hedge accounting are used. Both types may be modeled at the micro level and in portfolios. A further type of hedge accounting hedges the net investment risk against fluctuations in the rate of the Russian ruble.
2018 Nominal amount Maturity Carrying amount in € thousand Up to 3 months
More than 3 months, up to 1 year 1 year, up to 5 years
The following table shows details of the underlying transactions for fair value hedges: 2018 Carrying amount of the hedged items Accumulated amount of fair value adjustments of the hedged items Changes in fair value of the hedged items1 in € thousand Assets Liabilities Assets Liabilities 1 Fair value changes in the underlying transactions which were used to calculate ineffectiveness.
Risk report Active risk management is a core competency of the RBI Group. In order to effectively identify, measure, and manage risks the Group continues to develop its comprehensive risk management system. Risk management is an integral part of overall bank management. In particular, in addition to legal and regulatory requirements, it takes into account the nature, scale, and complexity of the Group’s business activities and the resulting risks. The risk report describes the principles and organization of risk management and describes current risk exposure in all material risk categories.
Risk management functions are performed on different levels in the Group. RBI AG develops and implements the relevant concepts as the parent credit institution and in cooperation with the subsidiaries of the Group. The central risk management units are responsible for the adequate and appropriate implementation of the Group’s risk management processes. In particular, they establish common Group directives and set business-specific standards, tools, and practices for all Group entities.
 Ex ante and ex post control: Risks are consistently measured within the scope of product selling and in risk-adjusted performance measurement. Thereby it is ensured that business in general is conducted only under risk-return considerations and that there are no incentives for taking high risks.
The Problem Loan Committee is the most important committee in the evaluation and decision-making process concerning problem loans. It primarily comprises decision making authorities; its chairman is the Chief Risk Officer (CRO) of RBI. Further members with voting rights are those members of the Management Board responsible for the customer divisions, the Chief Financial Officer (CFO), and the relevant division and departmental managers from risk management and special exposures management (workout).
The Securitization Committee is the decision-making committee for limit requests in relation to securitization positions within the specific decision-making authority framework. It develops proposals for modifications to the securitization strategy for the Management Board. In addition, the Securitization Committee offers a platform for exchanging information regarding securitization positions and market developments.
Moreover, an independent and objective audit, free of potential conflicts of interest, is carried out during the audit of the annual financial statements by the independent auditors. Finally, the Group is continuously supervised by the European Central Bank, the Austrian Financial Market Authority and also by the local supervisor in those countries where the Group is represented by branches or subsidiaries.
Two very important functions in assuring independent oversight are performed by the divisions Audit and Compliance. Independent internal auditing is a legal requirement and a central pillar of the internal control system. Internal Audit periodically assesses all business processes and contributes considerably to securing and improving them. It sends its reports directly to the Management Board of the Group, which discusses them on a regular basis in its board meetings.
The unexpected loss for the one-year risk horizon (economic capital) may not exceed the present level of equity and subordinated liabilities 99.92 per cent as derived from the target rating’s probability of default
Risk of not meeting the regulatory capital requirement pursuant to the CRR
Risk taking capacity (projected earnings plus capital in excess of the regulatory requirement) may not exceed the Group’s value at risk (oneyear risk horizon)
Risk of falling below a sustainable tier 1 ratio throughout an economic cycle
In the target rating perspective, risk is measured on the basis of economic capital, which represents a comparable indicator across all risk types. Economic capital is calculated as the sum of unexpected losses stemming from different Group units and different risk categories (credit, participation, market, liquidity, macroeconomic, and operational risk as well as risk resulting from other tangible fixed assets). In addition, a general buffer is held to cover other risk types not explicitly quantified.
The objective of calculating economic capital is to determine the amount of capital that would be required to service all claims from customers and creditors even in the case of an extremely rare loss event. The Group uses a confidence level of 99.92 per cent to calculate economic capital. The confidence level is derived from the probability of default implied by the target rating. Based on empirical analyses by rating agencies, the selected confidence level corresponds to a rating of Single A.
Economic capital is compared to internal capital, which mainly comprises the Group’s equity and subordinated capital. This type of capital serves as a primary means of risk coverage for servicing claims of senior lenders should the bank incur losses. As at year-end 2018, total utilization of available risk capital (the ratio of economic capital to internal capital) amounted to 46 per cent (2017: 45 per cent).
Risk contribution of individual risk types to economic capital in € thousand 2018 Share 2017 Share
The risk strategy therefore involves calculating risk taking capacity as the total of expected profits, expected credit losses, and surplus capital (taking into account various limits on eligible capital). The figure for risk-taking capacity is compared to the overall value-at-risk (including expected losses), which is calculated using similar techniques as those used under the target rating perspective (albeit using a lower confidence level of 95 per cent). The Group takes this approach to ensure adequate regulatory capitalization (going concern) with the given probability.
Regional allocation of economic capital by Group unit domicile in € thousand 2018 Share 2017 Share
In the non-retail area, each lending transaction runs through the limit application process before a decision is made. This process covers – besides new lending – increases in existing limits, rollovers, overdrafts, and changes in the risk profile of a borrower (e.g. with respect to the financial situation of the borrower, the agreed terms and conditions, or the collateral furnished) compared to the time of the original lending decision. It is also used when setting counterparty limits for trading and new issuance operations as well as other credit limits, and for equity investments subject to credit risk.
The limit application process in the retail division is automated to a great degree due to the high number of applications and relatively low exposure amounts. Limit applications often are assessed and approved in central processing centers based on credit score cards. This process is facilitated by the respective IT systems.
The following table shows the reconciliation of items on the statement of financial position (banking and trading book positions) to the total credit exposure, which is used in portfolio management. It includes both exposures on and off the statement of financial position before the application of credit-conversion factors, and thus represents the total credit exposure. It is not reduced by the effects of credit risk mitigation such as guarantees or physical collateral, effects that are, however, considered in the total assessment of credit risk. The total credit exposure is used – if not explicitly stated otherwise – for referring to exposures in all subsequent tables in the risk report. The reasons for the differences in the values used for internal portfolio management and for external financial accounting are the different scopes of consolidation (regulatory versus accounting rules according to IFRS, i.e. corporate legal basis) and differences in the classification and presentation of exposure volumes.
Financial assets - fair value through other comprehensive income 6,216,922 6,589,446
Non-trading financial assets - mandatorily at fair value through profit / loss 559,782 0
Revocable credit lines 19,057,163 19,799,534 1 Items on the statement of financial position contain only credit risk amounts.
Rating models in the main non-retail asset classes – corporates, banks, and sovereigns – are uniform in all Group units and rank creditworthiness in 27 grades for corporate customers and banks and ten grades for sovereigns. For retail asset classes, country specific scorecards are developed based on uniform Group standards. Software tools are used to produce and validate ratings (e.g. business valuation tools, rating and default databases).
9 Very weak credit standing / doubtful 198,909 0.3% 549,474 0.8%
The total credit exposure to corporate customers rose € 3,155,649 thousand compared to year-end 2017 to € 73,482,137 thousand.
Credit exposures in the rating grades from good credit standing to minimal risk increased € 3,247,819 thousand, corresponding to a share of 51.8 per cent (2017: 49.5 per cent).
The € 1,533,484 thousand increase in rating grade 2 to € 11,133,932 thousand was mainly due to growth in the Austrian and Romanian repo business, although the increase was partially offset by a decline in Great Britain. The decline in the Great Britain was attributable to shifts in individual customer ratings to rating grades 1 and 3. The increase in rating grade 2 resulted additionally from credit financing in Germany, France, Croatia and Slovakia as well as an increase in guarantees issued in Russia (despite the depreciation of the Russian ruble), Croatia, Austria, and Switzerland. Rating grade 3 rose € 2,875,635 thousand to € 11,357,385 thousand, which was attributable to facility financing in the Great Britain, Luxembourg, Austria, Bulgaria, the Czech Republic, Slovakia, Switzerland, and North America (partially due to the appreciation of the US dollar) as well as credit financing in Austria, the Czech Republic, France and Switzerland. An improvement in the rating of two customers from rating grade 4 also contributed to the increase. The € 1,322,552 thousand decrease in rating grade 4 to € 10,402,833 thousand was partially due to deterioration of the rating of a customer in Singapore to rating grade 5. In addition, the Russian bond portfolio declined (partially due to the depreciation of the Russian ruble) as did facility financing in Russia, the Czech Republic, and Switzerland. The aggregate decline in rating grade 4 was partially offset by an increase in credit financing. Rating grade 5 registered an increase of € 1,175,120 thousand to € 15,824,179 thousand, primarily due to credit financing. The decline of € 350,565 thousand to € 198,909 thousand in rating grade 9 was predominantly attributable to credit financing in Croatia and Hungary as well as to guarantees issued and money market transactions in Hungary. Money market transactions were also up in Russia. The reduction of € 886,149 thousand to € 1,637,862 thousand in rating grade 10 was due to write-offs.
6.4 Poor project risk profile – high risk 102,630 1.5% 211,435 2.5%
Credit exposure to project finance declined € 1,241,867 thousand to € 7,050,295 thousand as at 31 December 2018. The € 385,506 thousand increase in rating grade 6.1 to € 5,307,911 thousand was due to an increase in project financing in Hungary, rating shifts from rating grade 2 in Romania, and allocation of a rating to an Austrian customer. The increase in rating grade 6.1 was partially compensated by a decline in project financing in Germany and termination of a securitization position in the
At 89.0 per cent, the rating grades excellent project risk profile – very low risk and good project risk profile – low risk accounted for the majority of the portfolio. This mainly reflected the high level of collateralization in these types of specialized lending transactions.
Credit exposure stood at € 80,532,432 thousand, € 1,913,782 thousand higher than at year-end 2017. Austria recorded an increase of € 995,936 thousand to € 16,898,109 thousand due to repo and money market transactions as well as credit financing. The increase was partially offset by a decline in overdraft facilities and guarantees issued. The increase in Western Europe of € 2,574,102 thousand to € 15,070,375 thousand was due to overdraft facility and credit financing, money market transactions, documentary credits, and guarantees issued. In Southeastern Europe, repo transactions as well as credit and facility financing resulted in an increase of € 1,096,432 thousand to € 12,431,799 thousand. The decline of € 3,771,845 thousand to € 18,491,300 thousand in Central Europe was due to the sale of the core banking operations in Poland.
Retail customers are subdivided into private individuals and small and medium-sized entities (SMEs). For retail customers a two-fold scoring system is used, consisting of the initial and ad-hoc scoring based on customer data and of the behavioral scoring based on account data. The table below shows the Group’s credit exposure to retail customers: in € thousand 2018 Share 2017 Share
Retail customers – small and medium-sized entities 2,781,173 7.3% 3,041,403 8.0%
Credit exposure to retail customers increased € 181,470 thousand compared to year-end 2017 to € 38,049,768 thousand. The decline of € 1,211,209 thousand to € 9,038,313 thousand in rating grade 0.5 resulted primarily from the sale of the core banking operations in Poland. The increase in rating grades 1.0, 1.5, and 2.0 was mainly based on reclassification due to new rating information for building society business in Austria and the Czech Republic, which was not available for year-end 2017.
Retail customers – small and medium-sized entities 1,370,316 687,641 348,580 374,636 2017 Southeastern Group Corporates & in € thousand Central Europe Europe Eastern Europe Markets
Retail customers – small and medium-sized entities 1,560,421 690,715 357,733 432,534
The € 328,414 thousand increase in mortgage loans and the € 139,753 thousand increase in personal loans resulted primarily from the Czech Republic, Russia, Romania, Bulgaria, and Slovakia. The sale of the core banking operations in Poland had a negative impact on growth of mortgage and personal loans and led to a decline in credit cards and overdraft facilities. An increase of € 180,060 thousand was recorded in SME financing, largely due to business in Bulgaria, the Czech Republic, Hungary, Romania, Slovakia, and Ukraine.
The following table provides a breakdown of the total credit exposure by country of risk grouped into regions: in € thousand 2018 Share 2017 Share
The table below shows the total credit exposure to banks (excluding central banks) by products: in € thousand 2018 Share 2017 Share
The increases in loans and advances and money market transactions were attributable to Belgium, Great Britain, Hungary, and Russia (despite the depreciation of the Russian ruble). Those increases were offset by declines in repo transactions in Germany, Canada, and the Great Britain and in derivatives in France and the Great Britain.
The table below shows the total credit exposure to sovereigns (including central banks) by products: in € thousand 2018 Share 2017 Share
Compared to year-end 2017, the credit exposure to sovereigns increased € 2,264,687 thousand to € 36,509,071 thousand. The largest increase, of € 5,203,169 thousand to € 14,655,790 thousand, was in rating grade A2 and was attributable to deposits at the Austrian National Bank. The decline of € 590,026 thousand to € 1,210,429 thousand in rating grade A1 resulted from a decline in holdings of bonds from the Federal Republic of Germany, the Kingdom of the Netherlands, and the United States of America. Rating grade B1 recorded a decrease of € 3,397,065 thousand to € 936,989 thousand due to the sale of the core banking operations in Poland. The € 1,133,310 thousand increase in rating grade B3 to € 6,630,898 thousand resulted mainly from an increase in the bond portfolio held at the Russian Central Bank.
Credit exposure increased € 1,249,187 thousand compared to year-end 2017 to € 8,750,492 thousand. Exposure in Russia increased € 1,457,382 thousand to € 2,220,770 thousand, mainly attributable to Russian Central Bank bonds and money market transactions with the Russian Central Bank. A decrease of € 360,726 thousand to € 2,000,754 thousand was registered in Hungary, mainly due to money market business and credit financing as well as the depreciation of the Hungarian forint.
NPE NPE ratio NPE coverage ratio in € thousand 2018 2017 2018 2017 2018 2017 1 Previous-year figures adjusted due to reclassification of small and medium-sized entities to non-financial corporations
Based on the new IFRS 9 definition, the EBA guidelines (FINREP ANNEX III REV1/FINREP ANNEX V) now include deposits at central banks and demand deposits in the NPE ratio calculation. The previous-year figures were adjusted accordingly.
The crucial aspect in deciding whether a loan is forborne in the non-retail business is the financial situation of a customer at the time the terms or loan conditions are altered. If based on the customer's creditworthiness (taking the internal early warning system into account) it can be assumed, at the point when the loan terms or conditions are altered, that the customer is in financial difficulties and if the modification is assessed as a concession, the loan is designated as forborne. If any such modification is made for a loan previously considered as non-performing, then the loan is assessed as a non-performing exposure (NPE) irrespective of
In the corporate customer business, financial difficulties are measured by means of an internal early warning system which is based on numerous representative and accepted input factors for customer risk classification (e.g. overdue days, rating downgrade, etc.). IFRS 9 requires impairment losses for Stage 1, 2 and 3 to be derived from an expected loss event. Defaults pursuant to Article 178 CRR continue to be main indicators for Stage 3. Forborne exposures are not automatically transferred to the living portfolio after the determined monitoring period. Additionally, an expert opinion must be obtained confirming that the circumstances of the customer concerned have improved.
According to Article 178 CRR, the definition of default and thus a non-performing loan (NPL) is triggered if it can be assumed that a customer is unlikely to fulfill all of its credit obligations to the bank, or if the debtor is overdue at least 90 days on any material credit obligation to the bank. For non-retail customers, twelve different indicators are used to identify a default event. For example, a default event applies if a customer is involved in insolvency or similar proceedings, if it has been necessary to recognize an impairment or a direct write-down on a customer loan, or if credit risk management has judged a customer account receivable to be not wholly recoverable or the Workout Unit is considering a restructuring.
Within the Group, a Group-wide default database is used for collecting and documenting customer defaults. The database also tracks the default triggers, which enables the default probabilities to be calculated and validated.
The following table shows the share of non-performing loans (NPL) in the defined asset classes (excluding items off the statement of financial position): NPL NPL ratio NPL coverage ratio in € thousand 2018 2017 2018 2017 2018 2017 1 Previous-year figures adjusted due to reclassification of small and medium-sized entities to non-financial corporations
The following tables show the changes in non-performing loans in the defined asset classes (excluding items off the statement of financial position): in € thousand As at 1/1/2018 Change in consolidation group Exchange rate Additions Disposals As at 31/12/2018 1 Previous-year figures adjusted due to reclassification of small and medium-sized entities to non-financial corporations in € thousand As at 1/1/2017
Change in consolidation group Exchange rate Additions Disposals As at 31/12/2017 1 Previous-year figures adjusted due to reclassification of small and medium-sized entities to non-financial corporations
The following tables show the share of non-performing loans (NPL) by segment (excluding items off the statement of financial position): 2018 NPL NPL ratio NPL coverage ratio in € thousand 2017 NPL NPL ratio NPL coverage ratio in € thousand
The Eastern Europe segment recorded a decline in non-performing loans of 26.9 per cent, or € 179,659 thousand to € 487,039 thousand, including declines in non-performing loans in Ukraine of € 88,531 thousand and in Russia of € 72,205 thousand. The ratio of non-performing loans to total credit exposure declined 1.4 percentage points to 3.3 percent, and the NPL coverage ratio rose 0.4 percentage points to 79.1 per cent.
Country risk includes transfer and convertibility risk as well as political risk. It arises from cross-border transactions and direct investments in foreign countries. The Group is exposed to country risk due to its business activities in the Central and Eastern European markets, where political and economic risks continue to be seen as relatively significant in some cases. Active country risk management in the Group is based on the country risk policy set by the Management Board. This policy is part of the credit portfolio limit system and sets a strict limitation on cross-border risk exposure to individual countries in order to avoid risk concentrations. The Group’s business units must therefore submit limit applications for the respective countries with regard to all cross-border transactions as part of their day-to-day operations, in addition to complying with customer-specific limits. The absolute limits for individual countries are set using a model that takes the internal rating for the sovereign, the size of the country, and the Group’s own capitalization into account.
As part of the Group’s strategic realignment, the limit structures for concentration risk were reviewed for each customer segment. The regional breakdown of the exposures reflects the broad diversification of credit business in the Group’s markets.
The following table shows the distribution of credit exposures across all asset classes by the country of risk, grouped by regions: in € thousand 2018 Share 2017 Share