In our home market of Central and Eastern Europe (CEE), Raiffeisen Bank International AG (RBI) is ideally equipped for the future as a universal bank, while also being one of the leading commercial and investment banks in Austria.
Having conquered the challenges of the past several years, we have also repositioned ourselves through the merger of Raiffeisen International with the principal business areas of RZB. Consequently in the morning, at the dawn of a new era for the bank, we are looking forward with confidence.
Survey of key data Raiffeisen Bank International Group 1 Calculated according to the Austrian Banking Act (Bankwesengesetz, BWG). RBI as part of the RZB Group is not subject to the regulations of the BWG. 2 Before the deduction of the compensation for participation capital earnings per share would be € 5.59 (31.12.2009: € 1.38). 3 Proposal to the Annual General Meeting.
Net provisioning for impairment losses (1,194) (46.5)% (2,232) (1,738) (780) (357)
Net fee and commission income 1,491 4.9% 1,421 1,223 1,496 1,250
Loans and advances to banks 21,532 (44.2)% 38,582 10,310 9,038 11,053
Loans and advances to customers 75,657 4.3% 72,566 50,515 57,902 48,880
Return on equity before tax 13.7% 4.2 PP 9.5% 5.7% 22.0% 25.7%
Return on equity after tax 12.5% 6.1 PP 6.4% 4.5% 16.6% 20.2%
Consolidated return on equity 13.0% 5.9 PP 7.1% 3.9% 17.4% 20.1%
Net provisioning ratio (average risk-weighted assets, credit risk) 1.66% (1.2) PP 2.89% 3.19% 1.32% 0.84%
Tier 1 ratio, credit risk 12.2% 0.4 PP 11.8% 14.1% 9.7% 11.4%
Number of shares in million 195.51 0.0% 195.51 154.67 154.67 154.67
Number of employees as of reporting date 59,782 1.0% 59,211 56,530 63,376 58,365
Segments 96 Central Europe 101 Southeastern Europe 104 Russia 106 CIS other 108 Group corporates 110 Group markets 112 Corporate center 114
Business divisions 116 Corporate customers 117 Retail customers 118 Financial institutions & public sector 120 Capital markets & treasury 121 Participations & other 123
EUROPE: France: Paris; Germany: Frankfurt/Main; Italy: Milan; Russia: Moscow; Sweden: Stockholm; Spain: Madrid; UK: London; ASIA And AMERICA: China: Beijing, Hong Kong, Xiamen; India: Mumbai; Kazakhstan: Almaty; Korea: Seoul; Singapore: Singapore; USA: New York; Vietnam: Ho Chi Minh City.
2010 was also the year in which our home market in Central and Eastern Europe showed the first signs of improvement after the outflow of liquidity at year-end 2008 and the resulting economic downturn. The sharp declines in growth in 2009 were replaced in CEE (and Austria as well) by a return to real growth in economic performance. Overall, the focus of economic concern shifted to the peripheral countries in the eurozone, and specifically Greece and Ireland. Both countries caused serious upheaval in the financial markets, ultimately leading to broad-based rescue packages. In addition to the growing stabilization in CEE, economists expect that these markets will return to a higher level of growth than in the eurozone. We expect economic growth in CEE to be around 2 percentage points higher than in the Western European economies. The driver for this trend is the continuing high potential for catch-up in the region, which should re-emerge in the long term as Europe’s growth zone. Despite the merger and resulting expansion of our area of activity, CEE will continue to be the central focus of our strategy.
The confidence shown by our customers and shareholders has enabled us to adapt well to the new conditions that emerged from the financial and economic crisis. Without the strong support of our shareholders – both RZB and our institutional and private investors – the merger and the associated reorientation would not have been possible. I would particularly like to thank our employees at the Vienna head office of RBI, who have worked tirelessly in the past few months on implementing the merger, and who have enthusiastically brought the project to a successful conclusion. Naturally, I am also grateful to all of the around 57,000 employees in the network banks who are working intensively on offering first-class service and innovative products to our customers worldwide.
Credit Services Information Technology lending & Cards Operations & Productivity Management Premium & Private Banking Retail CRM Sales, distribution & Services SME Banking Transaction Services
Corporate Customers Corporate Sales Management & development Group Products network Corporate Customers & Support
Subject to the suspensive condition of entering the merger in the commercial register and with effect from the time this entry was made on 10 October 2010 and their resigning their Supervisory Board posts, Patrick Butler, Karl Sevelda and Johann Strobl were appointed as members of the Management Board. Karl Sevelda was appointed Deputy Chairman.
In accordance with the decision by the Works Council on 10 October 2010, Martin Prater, Peter Anzeletti-Reikl, Rudolf Kortenhof, Sabine Chadt and Helge Rechberger were delegated to the Supervisory Board.
The Management Board fully and promptly informed the Supervisory Board, in particular in all matters of the company’s strategic realignment so that the Supervisory Board was able to fulfill its supervisory duties conscientiously and take all its decisions in a carefully reasoned way. This also enabled it to discuss the status of the strategy implementation with the Management Board at regular intervals.
During the period under review there were four Supervisory Board meetings. All members of the Supervisory Board attended more than half of the meetings. In all the meetings the Supervisory Board performed the tasks incumbent upon it by law and pursuant to the Austrian Corporate Governance Code.
The Operations Committee dealt primarily with the appointment of executive members in the Group, regulations governing holdings in affiliated companies and business transactions requiring its approval.
The consistency check of the Corporate governance report according to Section 243b of the Austrian Commercial Code (UGB) was performed by Univ.Prof.DDr. Waldemar Jud Corporate Governance Forschung CGF GmbH, and its final results yielded no significant grounds for objections.
Following an extensive audit and discussion of the consolidated financial statements and the annual financial statements in the Audit Committee and in the Supervisory Board, the Supervisory Board agreed with the proposed appropriation of profit and approved the annual financial statements of RBI. The annual financial statements have thus been adopted in accordance with Section 96 (4) of the Austrian Stock Corporation Act (AktG).
The Supervisory Board would like to thank greatly the departing members of the Supervisory Board and Management Board for their many successful years of service to the company. The Supervisory Board would also like to thank the Management Board, the Works Council and all employees for their hard work during the merger. In what constituted a challenging financial year they contributed heavily to the merger’s success thanks to their outstanding commitment and dedication.
Strategically repositioned for future growth On 10 October 2010 Raiffeisen International merged with Cembra Beteiligungs AG, to which the principal business areas of Raiffeisen Zentralbank Österreich Aktiengesellschaft (RZB) – the corporate banking business and related participations – had been spun off beforehand. Since then it has been operating under the name Raiffeisen Bank International AG (RBI) and employs around 60,000 staff. It operates as a universal bank in Central and Eastern Europe (CEE), where it has an extensive network of subsidiary banks, leasing companies and numerous specialized financial service providers in 17 markets. Approximately 57,000 employees in around 3,000 business outlets serve around 14 million customers in this region. In Austria RBI is one of the top corporate and investment banks. It is the only Austrian bank to be represented not only in the world's financial centers, but also in the growth markets of Asia with its own business outlets and representative offices.
RBI has been listed on the Vienna Stock Exchange since 25 April 2005 (until 12 October 2010 as Raiffeisen International). It is represented in several leading national and international indices, including the ATX and the EURO STOXX Banks. RZB, which continues to function as the central institution of the Raiffeisen Banking Group Austria (RBG), indirectly held approximately 72.8 per cent of Raiffeisen International's shares until the merger took effect. As compensation for the transfer of Cembra's assets to Raiffeisen International in the merger a grant of new shares was made to Cembra's sole shareholder Raiffeisen International Beteiligungs GmbH, a 100 per cent subholding of RZB, as a result of which RZB's indirect holding in the new bank increased to around 78.5 per cent. The remaining 21.5 per cent of RBI's shares are in free float.
The Raiffeisen model spread quickly, especially in the German-speaking countries. The first Raiffeisen bank in Austria was founded in 1886 in Mühldorf, near the village of Spitz an der Donau. The individual local cooperatives soon started working together and in turn founded regional cooperatives, marking the beginning of the multi-tiered nature of the Raiffeisen organization. This not only helped to strengthen their position in the market, but also enabled better management and risk control. Numerous product and service cooperatives were also founded on the back of increasing specialization and market integration.
As a core company of the RZB Group RBI is a significant component of RBG, which is celebrating “125 Years of Raiffeisen in Austria” in 2011.
1 Change of total assets versus pro forma figures 31 December 2009. Change expressed in local currencies differs due to fluctuating euro exchange rates. 2 Due to the merger an allocation of business outlets and staff to the Group corporates, Group markets and Corporate center segments is not possible at the moment.
On 22 February 2010, Raiffeisen International and RZB announced that a merger of Raiffeisen International with RZB's principal business areas was a possible strategic option. On 19 April 2010, the boards of the two companies announced their decision to present a resolution proposing a merger to the two companies' shareholders. At the Annual General Meetings of RZB and its 100 per cent subsidiary Cembra Beteiligungs AG (Cembra) on 7 July and the Annual General Meeting of Raiffeisen International on 8 July, the shareholders approved the spin-off preceding the merger and the merger itself with the requisite three-quarters majority. The spin-off was recorded in the commercial register on 9 October and the merger on 10 October. The spin-off and the merger were carried out with retrospective effect on the target date 31 December 2009, 12 o'clock p.m. (contractual spin-off- and merger-due-day); the transaction was made effective with the entry into the commercial register. With effect from this registration Raiffeisen International was renamed Raiffeisen Bank International (RBI). The Vienna Stock Exchange changed the share's ticker symbol from RIBH to RBI on 13 October.
The merger brought together Raiffeisen International, which is focused on the markets of Central and Eastern Europe, with RZB's principal business areas. These include the corporate banking business, i.e. significant portions of its banking operations, together with related participations. RZB's activities relating to its function as the central institution of the Raiffeisen Banking Group Austria (RBG), such as liquidity balancing, were excluded from the merger. The benefits of the merger range from unrestrained access to the capital markets to the up-to-date streamlined product range in the Central and Eastern European markets to the ability to allocate resources selectively to the most attractive market opportunities.
RZB received 40.8 million new common shares in RBI through its wholly-owned subsidiary Raiffeisen International Beteiligungs GmbH – together with the shares in Raiffeisen International previously held by Cembra – as compensation for the transfer of assets by Cembra in the merger. The issue of these shares increased RBI's share capital by € 124.6 million to € 596.3 million.
RBI’s Management Board and Supervisory Board RBI's Management Board contains members of both the pre-merger Raiffeisen International and RZB boards and there is therefore a high degree of continuity in terms of its composition and personnel. Herbert Stepic remains Chairman. Karl Sevelda, responsible for Corporate Banking, was appointed Deputy Chairman following the merger. Martin Grüll remains Chief Financial Officer and Johann Strobl was appointed Chief Risk Officer. Aris Bogdaneris and Patrick Butler also continue to exercise their previous board responsibilities in Retail banking and Markets respectively. Peter Lennkh is responsible for Network management.
new segments With the merger between Raiffeisen International and RZB’s principal business areas what were previously the four segments of Raiffeisen International – Central Europe, Southeastern Europe, Russia and CIS other – increased to seven. The three new segments joining these four existing segments are as follows: Group corporates, Group markets and Corporate center.
In the Central Europe, Southeastern Europe, Russia and CIS other segments the emphasis is on retail and corporate banking. Mass market and premium retail strategies are developed on a country-specific basis. The merger has combined the strength of RZB in product development with the distribution capabilities of the Raiffeisen International network.
The benefits of the merger in detail Even before the merger Raiffeisen International was able as a listed company to raise equity capital by issuing shares. The merger has now given it the same access to the debt capital markets that RZB has enjoyed for many years. This enables RBI to raise debt via bank-specific instruments, e.g. those traded on the interbank market. RBI has benefited from RZB's proven expertise in developing state-of-the-art financing and capital market products. Since the merger it has been able to offer its corporate customers in Central and Eastern Europe even more up-to-date products that are better tailored to their needs. It has therefore become a fully integrated corporate and retail banking group across the whole of Central and Eastern Europe including Austria, where its customers are among the country’s top 1,000 companies. Merger-related organizational synergies have also produced efficiency gains by rolling together similar functions. A further significant advantage of the new Group structure is the optimization of risk management. The integration of service departments enables RBI to serve all markets that were previously served separately by Raiffeisen International and RZB from a single source. In addition RBI received a banking license as a result of the merger. Raiffeisen International had not previously held one.
All of the above gives RBI the potential to further expand the position as one of the leading banks held by Raiffeisen International in CEE and by RZB in Austria before the merger as a universal bank by combining their product ranges and customer base. Business customers will benefit from the combination of retail products, which is the dominant business in this region and RBI's corporate and investment banking. In keeping with this we are combining management of the around 14 million customers of the subsidiary banks' dense network of business outlets in Central and Eastern Europe with that of Austrian large customers and international corporate customers. With a presence that comprises 15 subsidiary banks, around 3,000 business outlets, numerous representative offices and other financial service providers in 36 countries we are deliberately focusing RBI's resources on the markets with the highest growth potential.
Central Europe Retail and corporate customers in the Czech Republic, Hungary, Poland, Slovakia and Slovenia
Southeastern Europe Retail and corporate customers in Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Kosovo, Moldova, Romania and Serbia
CIS other Retail and corporate customers in Belarus, Kazakhstan and Ukraine
Group markets Customer and proprietary trading on debt and equity capital markets
Corporate center Services performed by Group headquarters such as liquidity and balance sheet structure management
The merger of Raiffeisen International with the principal business areas of RZB will mean 2010 also goes down as a very eventful year in the company's history. What prompted you to take this step? The boards of Raiffeisen International and RZB decided to take this step for two main reasons: First, the merger paved the way for a fully integrated corporate and retail banking group throughout Central and Eastern Europe, including Austria. And second, our present setup puts us in a better position to respond to future regulatory requirements. Both these arguments meant we were able to persuade not only our indirect majority owner, RZB and the Regional Raiffeisen Banks, but also our numerous other investors and shareholders.
Might some people not see this measure as a backward step? Quite the opposite in fact. When we floated Raiffeisen International in 2005, our focus was on pushing forward with our expansion in the rapidly growing CEE region. That situation changed with the financial crisis. Growth collapsed dramatically in certain areas, radically altering the parameters in the process: Instead of growth and profit, the focus was suddenly on robust equity cover, sufficient liquidity and the risk policy. We soon got to grips with these issues thanks to the measures we adopted early on and improved the situation decisively with the merger. I definitely see the merger as a step forward. As RBI we now have a much wider base, giving shareholders the opportunity to acquire a stake in a worldwide banking group with a clear regional focus.
Will the same importance still be attached to Central and Eastern Europe as before the merger? With 14 million customers and some 3,000 business outlets we are one of the leading banking groups in the region. And for me there is absolutely no doubt whatsoever that CEE will also remain Europe's most important growth region, precisely why we see a strategic focus here. And that is something we've also emphasized with the acquisition of Polbank in Poland. The crisis may well have left deeper scars on the region than in Western Europe, but the growth forecasts for CEE are now far better than for Western Europe. While the analysts from Raiffeisen Research forecast GDP growth of 1.8 per cent in the eurozone for 2011, they predict GDP rising 3.9 per cent for CEE. In 2012, this region's economies are forecast to grow by 4.1 per cent, whereas growth in the eurozone will be just 1.9 per cent. This growth is driven primarily by the pent-up demand that still exists in CEE. However, CEE will not be RBI's sole focus. It boasts a very good position in the Austrian corporate customer segment and can offer its customers additional business opportunities thanks to its presence in the growth regions of Asia and in the world's key financial centers.
Polbank in turn perfectly complements our Raiffeisen Bank Polska with its focus on corporate customers. Together we will be Poland's fourth largest universal bank based on loans to customers and serve around one million customers in more than 400 business outlets. It is therefore one of those very rare opportunities to create a sound base for leveraging growth with a large, attractive market. And we seized on that opportunity.
Last year did you find time to devote to your charity, the H. Stepic CEE Charity? Not as much as I would have liked. Even so, what the charity has accomplished is far beyond my expectations. We have already implemented eleven projects; I am particularly proud of our latest project in Albania. Here we converted a former health center into a daycare facility for the disabled. The new daycare facility offers a new home to 35 mentally handicapped people aged between 8 and 25. The H. Stepic CEE Charity solely promotes development projects for needy children, adolescents and young women in Central and Eastern Europe. We build orphanages, homes for the disabled and daycare facilities, look after street children in Novi Sad and run small-scale projects wherever there is a pressing need for help. I was absolutely delighted when the Austrian Ministry of Finance added us to the list of charities with tax-deductible status late last year. This new status makes us an even more attractive proposition to prospective donors!
RBI’s strategy RBI is a universal bank with a focus on corporate and retail customers in the Central and Eastern European region (CEE) including Austria. RBI also has relationships with selected financial institutions which support its core business and are intended primarily to contribute to net fee and commission income.
In CEE RBI is positioned to benefit from the region’s growth potential, resulting from its process of economic catch-up with Western Europe, via an extensive network of subsidiary banks, leasing companies and a variety of specialized financial service providers comprising around 3,000 business outlets in total. The bank benefits from the strong Raiffeisen brand, which enjoys a high level of recognition not only in Austria but also in CEE.
As RBI believes that the growth potential of the above-mentioned markets is high, it is concentrating on its current activities and is not planning any further geographical expansion.
It is RBI's declared aim, as set out in its corporate responsibility framework, for its commercial activities to be compatible with sustainability. The Group’s main focus is on environmental issues (particularly climate protection) and stable economic development. It believes that combining social and environmental responsibility with commercial focus will secure RBI's success in the long run.
RBI uses a target hierarchy to manage and implement its strategy, which comprises primary and secondary targets based on strategic parameters. All business activities are reviewed regularly for their compatibility with the strategy and objectives.
After the currency and price turbulence in the first half of the year, equity markets had a relatively quiet third quarter. Particularly for bank stocks, this easing was due to the fact that the regulatory proposals of the Basel Committee on Banking Supervision in Basel III were less strict and involved longer transitional phases than initially expected. Another positive signal was the satisfactory performance of most European major banks in the stress tests of the Committee of European Banking Supervisors. Conversely, there was a negative impact (particularly for banks with ties to CEE) from the Hungarian bank levy of 0.45 per cent of total assets, introduced at the end of July and criticized by the IMF and ECB as a constraint on lending and therefore economic growth. There was also a dampening effect from speculation about a possible bank levy in Austria.
In the fourth quarter, most equity markets gained sharply again under the influence of continuing low interest rates, good economic figures and some extraordinarily good corporate figures. While Ireland’s drawings on the European rescue package depressed the euro exchange rate, they had little effect on the steady uptrend in equity markets, and investors quickly returned to daily business. Given the low yields in the bond market and the significant dividend yields, there was a growing move back to equity markets by both institutional and private investors. This led to further advances, so that many equity indices ended 2010 close to their highs for the year.
The introduction of the Hungarian bank levy and fears that the new Basel III regulations might set the bar very high for banks’ equity were the main reasons why Raiffeisen International’s stock opened the third quarter weakly at a price of just under € 30. However, the good performance of majority shareholder RZB in the July stress tests fueled a recovery. The stock price received additional support from the merger resolutions at the Annual General Meetings of RZB and Raiffeisen International on 7 and 8 July respectively, as majority approval of the merger clarified the future corporate structure. The Group’s stock reached its third quarter high in August at € 36.50.
In the fourth quarter, Raiffeisen International stock – now RBI stock, after entry of the merger in the commercial register – continued to gain, helped by the strong third quarter pro forma figures for RBI and the good general market environment.
Over the year 2010, the stock price fluctuated in the range of € 29.01 to € 42.75. The low for the year was € 29.01 on 2 July, the high was € 42.75 on 18 January. Overall, the stock gained 3.8 per cent over the year. During the same period, the benchmark index ATX gained 16.4 per cent while the EURO STOXX Banks index lost 26.9 per cent. RBI stock clearly outperformed the other bank stocks included in the EURO STOXX Banks index.
Price performance since 25 April 2005 compared to ATX and EURO STOXX Banks Index Basis = € 39.50
With effect from the entry of the merger in the commercial register, Raiffeisen International Bank- Holding AG was renamed Raiffeisen Bank International AG (RBI) and was granted an Austrian banking license. The stock has been listed as RBI on the Vienna Stock Exchange since 13 October. The grant of new shares described above meant that the indirect holding of RZB increased in the course of the merger from around 72.8 per cent in Raiffeisen International to around 78.5 per cent in RBI. The free float decreased accordingly from around 27.2 per cent to around 21.5 per cent.
ATX Prime 39 5.4% EURO STOXX 315 <1% EURO STOXX Banks 36 <1% STOXX Europe 600 600 <1% STOXX Europe 600 Banks 600 <1% MSCI World ∼1,500 <1%
Annual General Meeting Merger approved The Annual General Meeting of Raiffeisen International for the financial year 2009 was held on 8 July 2010. As in previous years, it was one of the best-attended in Austria’s recent capital market history, with over 700 participants.
A dividend of € 0.20 per share with dividend rights was authorized for the financial year 2009, paid out to shareholders on 16 July 2010. The total dividend payment was around € 30.7 million.
The shareholders also authorized the capital increase required to carry out the merger. In addition, seven new Supervisory Board members were elected, increasing the number of shareholder representatives on the Supervisory Board to ten, effective from the time of entry of the merger in the commercial register.
Proposed dividend RBI shareholders are cordially invited to attend the Annual General Meeting for the financial year 2010 at the Austria Center Vienna on 8 June 2011. The Management Board will propose a dividend of € 1.05 per share at this Annual General Meeting. If this proposal is approved, the total dividend will be € 204.3 million. The dividend will be paid on 16 June 2011, which will also be the ex-dividend date.
Communications dominated by the merger Communications with analysts and investors in the year under review were clearly dominated by the merger of Raiffeisen International and RZB’s principal business areas. To ensure that the needs of equity investors and also debt investors are met, the Group Investor Relations department added services for current or potential bondholders to its shareholder services. Information for rating agencies was also integrated into the function of Group Investor Relations. Since the merger, the department has also acted as the Information Distribution Office for all capital market communications for the entire Group.
In addition to telephone conferences on the quarterly figures – occasionally with more than 400 participants – there were
Financial calender 2011 9 March Start of Quiet Period 8 April Annual Report 2010, Analyst Conference, Conference Call 11 April RBI Investor Presentation, London 12 May Start Quiet Period 26 May First Quarter Report, Conference Call 8 June Annual General Meeting 16 June Ex-Dividend and Dividend Payment Day 11 August Start of Quiet Period 25 August Semi-Annual Report, Conference Call 10 November Start of Quiet Period 24 November Third Quarter Report, Conference Call
RBI places great importance on responsible and transparent business management, in order to build and maintain a relationship of trust with its various stakeholders, including capital market participants in particular. To this end it undertakes to adhere to the Austrian Corporate Governance Codex (ACGC) as amended in January 2010. The ACGC can be freely downloaded from the website of the Austrian Working Group for Corporate Governance (www.corporate-governance.at) and from the RBI website (www.rbinternational.com → Investor Relations → Corporate Governance).
Transparency in the matter of corporate governance is of particular importance to RBI. Its corporate governance report is divided into sections following the legal guidelines of Section 243b of the Austrian Commercial Code (UGB), and is based on the structure set forth in Appendix 2 of the ACGC.
The ACGC is organized into L, C and R Rules. L Rules (Legal Requirements) are based on compulsory legal requirements. C Rules (Comply or Explain) should be observed; any deviation must be explained and justified, in order to ensure conduct that complies with the Codex. R Rules (Recommendations) have the character of recommendations; non-compliance does not need to be reported or justified.
RBI deviates from the following C Rules, but achieves conduct in accordance with the Codex through the following explanations and justifications: C Rule 31: RBI deviates from C Rule 31 of the ACGC, which provides for publication of the remuneration, both fixed and performance-based, paid to individual members of the Management Board during the year 2010. Publication of remuneration by RBI is made for the Management Board as a whole. Individual remuneration amounts are not published for reasons of data privacy law and out of consideration for the individual Management Board members’ right to privacy.
The year 2010 was marked by the development and implementation of a new strategic concept. The goal of this concept was to merge the principal business areas of RZB with Raiffeisen International. As a first step, the “corporate customer business “ operating unit, with all its related participations, was spun off from RZB and made into a 100 per cent subsidiary, which immediately afterwards was merged with Raiffeisen International. Since then, Raiffeisen International has been trading under the name Raiffeisen Bank International AG, through the merger acquired an Austrian banking license and remained quoted on the stock exchange as before. The transaction did not comprise the business divisions and participations related to RZB’s role as head bank of the RBG.
One of the most important steps on the way to implementation was the approval of this transaction by the Annual General Meeting of Raiffeisen International, which was granted on 8 July 2010. The final step was the registration of the merger in the commercial register on 10 October 2010, with which RBI officially commenced business.
Through the merger of Raiffeisen International with the principal business areas of RZB, the following important goals should be achieved in the future: ■ As a result of the merger, RBI became a rated and licensed bank and in connection with the existing exchange listing of Raiffeisen International was afforded broader possibilities for accessing the capital and money markets.
■ With a broad network in the CEE markets, the corporate customer business in Austria and the additional business in Asia, RBI covers all the markets previously developed by the RZB Group from a single source.
■ The newly created structure establishes better conditions for the fulfillment of potential Basel III demands.
With regard to continuity of personnel after the merger, the Management Board is composed of the former Board members of Raiffeisen International (Heinz Wiedner left office on 1 December 2010), and three former members of the RZB Management Board.
From 1 January 2010 until the merger entered into effect with its recording in the commercial register on 10 October 2010, the Management Board of Raiffeisen International was composed as follows: Board member Year of birth Original appointment End of term
Erwin Hameseder, 1956 8 July 20101 Regular Annual First Deputy Chairman General Meeting 2015
Hannes Schmid 1953 8 July 20101 Regular Annual General Meeting 2015
Johannes Schuster 1970 8 July 20101 Regular Annual General Meeting 2015
Friedrich Sommer 1948 8 July 20101 Regular Annual General Meeting 2015
From 1 January 2010 until the merger entered into effect with its recording in the commercial register on 10 October 2010, the Supervisory Board was composed as follows: Board member Year of birth Original appointment End of term
In accordance with C Rule 53 of the ACGC, the Supervisory Board of RBI prescribed the following criteria for the independence of the members of the company’s Supervisory Board: ■ The Supervisory Board member shall not in the past five years have been a member of the Management Board or a leading employee of the company or of a subsidiary.
■ Company circumstances and the mere exercise of the function of a Board member or business manager 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 considerable 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.
In accordance with the criteria for the independence of Supervisory Board members, all RBI Supervisory Board members are considered independent.
Stewart D. Gager and Kurt Geiger, as members of the Supervisory Board, are neither shareholders with a share of greater than 10 per cent, nor do they represent the interests of such shareholders. They are therefore “free float representatives” according to C Rule 54 of the ACGC 2010.
Erwin Hameseder First Deputy Chairman First Deputy Chairman First Deputy Chairman
From 1 January 2010 until the merger entered into effect with its recording in the commercial register on 10 October 2010, the Committees were composed as follows: Supervisory Board members Working Committee Audit Committee Personnel Committee
The Management Board of RBI leads the company according to clearly defined goals, plans and guidelines on its own responsibility with a focus on future-oriented business management in line with modern business principles. In this way it constantly pursues the good of the company and considers the interests of shareholders and employees.
The Management Board manages the company’s business in accordance with the law, the articles of association and the Management Board’s rules of procedure. The weekly meetings of the Management Board are convened and led by the Chairman and provide mutual information gathering and decision making in all matters that require the Board’s approval. The rules of procedure of the Supervisory Board and of the Management Board contain information and reporting duties of the Management Board as well as a catalog of measures that require the approval of the Supervisory Board.
Further information on the activities of the Supervisory Board and its committees can be found in the Supervisory Board’s Report.
The performance–based components of the Board’s remuneration normally consist of bonus payments that are linked to the achievement of the company’s goals relating to profit after tax, return on risk-adjusted capital (RORAC) and the cost/income ratio, as well as the achievement of annually agreed personal goals and the value of an allocation of shares under the Share Incentive Program (SIP) (page 192). As in the previous year, the value of the shares allocated in 2010 corresponds to 100 per cent of the performance-based component of the Board’s remuneration. There were no significant changes in the principles of profit sharing compared to the previous year. The previous Management Board of Raiffeisen International was given a commitment for retention bonuses, i.e. bonuses to retain managers in view of the merger, amounting to € 767,672, which is to be paid in 2013. The amount of the payment is linked to the share price of RBI.
It should be noted that the Board’s remuneration figures for 2010 are not directly comparable with those for 2009, because as a result of the merger of Raiffeisen International with the principal business areas of RZB and due to departures during the year, the composition of the Management Board changed.
In 2010 the second tranche of the SIP (2007 tranche) matured. In accordance with the terms and conditions of the program (published in the Wiener Zeitung’s official register on 30 May 2007) the number of shares actually transferred was as follows: SIP 2007 Group of persons number Value at number of shares share price of shares falling due of € 31.91 on actually allotment date transferred 9/3/2010 in €
Members of the Management Board of the company 4,899 156,327 3,971
In order to avoid legal uncertainties and in accordance with the program’s terms and conditions, eligible employees in two countries were given a cash settlement instead of an allotment of shares. In Austria the eligible parties were granted the option of accepting a cash settlement in lieu of half of the matured shares in order to offset the wage tax payable at the time of transfer. Therefore, fewer shares were actually transferred than the number that had matured. The portfolio of own shares was subsequently reduced by the lower number of shares actually transferred.
Managers of the company and other associated companies 73,138 21,449 109,707
Furthermore, protection is in place against occupational disability risk through one pension fund and/or on the basis of an individual pension benefit, which is secured by a reinsurance policy. The contracts for members of the Management Board are concluded for the duration of their term in office or are limited to a maximum of five years.
The Annual General Meeting on 8 July 2010 resolved upon an annual remuneration for the members of the Supervisory Board for the 2009 financial year totaling € 380,000. Attendance fees were not paid.
In 2010, a D&O (directors and officers) pecuniary loss and liability insurance policy was concluded with UNIQA Sachversicherung AG for the Management Board and Supervisory Board.
Annual General Meeting The Annual General Meeting for 2009 was held on 8 July 2010 in the Stadthalle (Municipal Hall) in Vienna. The next Annual General Meeting for the past financial year will take place on 8 June 2011. The convocation will be published a minimum of 28 days before the Annual General Meeting in electronic form and in the Wiener Zeitung’s official register.
The shareholders as owners of the company exercise their right by voting at the General Meeting. The principle of “one share, one vote” applies. Accordingly, there are no restrictions on voting rights; all shareholders have equal rights. Every share confers one vote; registered shares have not been issued. The stockholders may exercise their voting right themselves or by means of an authorized agent. Pursuant to the articles of association, RZB shareholders are granted the right to delegate up to one third of the Supervisory Board members to be elected by the Annual General Meeting. In the event that RZB makes use of its right to delegate, the number of Supervisory Board members to be elected by the Annual General Meeting would be reduced accordingly. Apart from this limitation, shares are subject to the principle of “one share, one vote”.
One example of this is offered by the efforts to reconcile family and career. These include flexible working hours, part–time working models and teleworking, which are offered in nearly every country in accordance with the relevant legal provisions.
The Management Board is committed to consistently promoting the existing initiatives as well as maintaining its openness to new initiatives, in order to further increase the percentage of women in highly qualified positions. At RBI, 13 per cent of Board positions are currently filled by women.
Members of the Supervisory Board must immediately report any potential conflicts of interest to the Chairman of the Supervisory Board. In the event that the Chairman himself should encounter a conflict of interest, he must report this immediately to his Deputy Chairman. Company agreements with members of the Supervisory Board that require the member to perform a service for the company or for a subsidiary outside his duty on the Supervisory Board (Section 228(3) UGB) in exchange for not-insignificant compensation require the approval of the Supervisory Board. This also applies to agreements with companies in which a member of the Supervisory Board has a significant financial interest. Furthermore, related party transactions as defined by Section 28 of the Austrian Banking Act (BWG) require the approval of the Supervisory Board.
The Annual General Meeting selected KPMG Austria GmbH Wirtschaftsprüfungs- und Steuerberatungsgesellschaft, Vienna as its external auditor and bank auditor for 2010. KPMG has confirmed that it has the certification of a quality auditing system. It has also declared to RBI that there are no grounds for disqualification or prejudice. The auditor prepares the statutory audit report and is responsible for exercising its disclosure obligations. The auditor also prepares a management letter to the Management Board, which includes details of weaknesses within the company. The management letter is presented to the Chairman of the Supervisory Board, who sees to it that the management letter is addressed by the Audit Committee and is reported on in the Supervisory Board.
The basis of today’s corporate responsibility (i.e. the social responsibility) of the Raiffeisen family can be found in Friedrich Wilhelm Raiffeisen’s concept of “helping people to help themselves”, embodying a balance of economic, social and environmental needs. RBI builds upon this and is a responsible and reliable partner for clients, investors and staff.
For RBI, corporate responsibility is a central part of its self-image as well as an actively practiced element of the corporate culture. In essence, it is a commitment to social responsibility and environmental sustainability. At the same time, the general aim is a responsible form of corporate action that extends above and beyond individual measures.
Raiffeisen principles The following five principles have been laid down at RBI in order to define and communicate the term “corporate responsibility”: ■ A future always needs a past This principle is dedicated to the company’s own history and tradition. If nothing else, the strength of RBI is based on Raiffeisen ’s excellent reputation and values. It is easy to have trust in a partner with a history of success stretching back over 100 years.
■ The best become better with us This approach emphasizes the interaction between the staff’s commitment to performance and the social involvement of the employer.
■ Our clients’ success defines our own success A successful business is the primary aim of RBI and the basis for responsible dealings with its customers.
■ A strong cultural mix RBI’s commitment to diversity is aimed towards a strong cultural mix. An extensive presence in Central and Eastern Europe produces economic and social benefits and creates new opportunities.
Embedding corporate responsibility into the organization The importance of sustainability in the Raiffeisen Group has been strengthened in 2010. This has been achieved with the further development of strategic and organizational measures in the area of corporate responsibility. Decision-making powers for the agendas in this field continue to rest with the Management Board. However since January 2010, strategic and organizational planning has rested with a newly created team that supports the decision makers in corporate responsibility issues.
In 2010, the so-called Extended Corporate Responsibility Committee (CR Committee) held its meetings on a half-yearly basis. The body is composed of important stakeholder representatives, including owners, non-profit organizations and network banks. The CR Committee has the task of informing the Management Board about current corporately relevant trends from the respective business areas of its members which are of relevance to the company. Consequently, it makes an important contribution to RBI’s commitment to social responsibility in CEE including Austria.
In addition, the Code of Conduct contains provisions for handling market-sensitive information and preventing money laundering, the financing of terrorism, fraud and corruption.
As the rules affecting the reputation of the company as a whole have to be adhered to as uniformly as possible, the Code of Conduct and the key compliance rules are obligatory for the whole Group.
The Code of Conduct can be accessed on the RBI homepage.
The first RZB Group Stakeholder Council As part of its structured sustainability management, the RZB Group has made open dialog one of its goals. In this spirit, on 27 October 2010 it convened a multi-stakeholder dialog with representatives from all key stakeholders for the first time. The result was an active and equitable exchange of opinions.
Help for the earthquake victims of Haiti On 12 January 2010, Haiti was struck by a devastating earthquake. After this, polluted drinking water, catastrophic hygienic conditions and the acute lack of medical supplies threatened the health of the earthquake region’s inhabitants. As a result, the RZB Group set up a donation account with the Austrian Red Cross (ÖRK) and invited all colleagues, including those in CEE, to make a donation to this account. This call for donations raised over € 90,000.
H. Stepic CEE Charity – opportunity for a better life Together with its cooperation partners – including Caritas, Hilfswerk Austria International and ÖRK – the H. Stepic CEE Charity carries out numerous social aid projects in the CEE region.
As a result of the merger, further emphasis was put on structured communication about the new bank. This primarily addressed the differences in corporate culture that had been dealt with in workshops. Further details regarding this can be found in the chapter: Human resources.
Market development Gradual economic recovery After the global economy suffered its worst recession in 2009 since 1945, 2010 was a year of economic recovery. Economic activity picked up all around the world, often supported by massive fiscal and monetary policy moves. After a collapse of 11.0 per cent in the previous year, world trade grew 11.4 per cent in 2010.
In the US, the recession ended in June 2009, as defined by the National Bureau of Economic Research (NBER). In the fourth quarter of 2009 and the first quarter of 2010, the US economy posted an impressive recovery, with annualized GDP growth of 4.4 per cent. However, this momentum proved unsustainable, and in the second and fourth quarters of 2010 growth slowed to an average annualized rate of 2.4 per cent quarter-on-quarter. The biggest problems with the US economy remained the high level of unemployment, which was still 9.0 per cent at the end of 2010, some 3 percentage points above the long-time average, and the ongoing difficult state of the real estate market. Although massive tax incentives brought about a temporary stabilization in the housing market in spring 2010, the slide in construction and prices resumed once this program expired. Given the weak state of economic growth, there was a significant slowdown in consumer prices over the course of the year. For example, US inflation fell from 2.6 per cent year-on-year in January 2010 to just over 1.0 per cent in November. It has lately risen again slightly, due to higher energy and food prices. The core rate – inflation excluding energy and food prices – remained significantly below the US Federal Reserve’s target level, at 1.0 per cent for the year.
Stabilization in CEE While the dependence on exports of the countries of Central and Eastern Europe (CEE) had been a serious problem in the crisis, in some cases producing significant decreases in GDP, it proved an advantage in 2010. The CEE nations benefited from the clear upturn in GDP, particularly in Germany, with the export sector functioning as a significant driver. Even though much of the current growth comes from exports, increasing support can be expected in the course of 2011 from domestic demand, with the first signs of recovery already apparent. Even so, the relative low level of domestic savings means that the CEE states, and particularly those in Southeastern Europe, are dependent on capital imports, primarily from Western Europe. After a sharp decrease during the crisis, capital inflows into CEE – including through the banking sector – are recovering, although they are still significantly below their pre-crisis level.
Poland had already distinguished itself in the crisis by its dynamic economy, and it again outperformed the other Central European EU member states (Czech Republic, Hungary, Slovakia, Slovenia) in 2010. The only nation to top this was Slovakia, which rebounded from a 4.8 per cent decrease in GDP in 2009 to growth of 4.2 per cent in 2010. In contrast to Slovakia, however, Polish growth came mainly from consumption and gross investment in plant and machinery, rather than from exports. While the Czech Republic reported growth of 2.3 per cent year-on-year in 2010, with domestic demand comparatively strong, Hungary (1.2 per cent GDP growth) and Slovenia (0.9 per cent) lagged somewhat behind the average for Central Europe of 3.0 per cent in 2010, following a decrease of 2.0 per cent in 2009.
The sharpest decrease in GDP in the 2009 crisis year was in the Commonwealth of Independent States (CIS), falling 8.2 per cent. In Ukraine, GDP fell significantly by 14.8 per cent, while the Russian economy shrank by 7.9 per cent. However, the increase in commodity prices from an existing high level, strong exports, and positive baseline effects meant that the CIS was able to post a strong recovery in 2010, with economic growth of 4.1 per cent.
Austrian economy growing Austrian GDP, which had peaked in the second quarter of 2008, fell by a total of 5.4 per cent in real terms over four quarters in the course of the economic collapse in 2008/2009. While it has been growing again since the third quarter of 2009, GDP is still 1.4 per cent below its previous high. As a result, Austria will probably not regain the level of real GDP before the crisis until sometime in 2011.
China as Asia’s motor for growth The Asian economy grew 8.0 per cent in 2010, with almost all Asian countries making the transition from public-sector growth stimulus to firming private sector demand. The motor driving growth was China, where expenditure programs and credit expansion fueled domestic demand. Rising retail sales and positive sentiment in the service sector pointed to firming consumer demand, and GDP grew 10.3 per cent in real terms in 2010. This vigorous growth also benefited countries exporting commodities and capital goods. However, the restrictive monetary policy and measures to cool the real estate market can be expected to result in a slight decrease in the pace of economic growth in Asia in 2011.
Sovereign debt crisis The main topic for the international financial markets in 2010 was the rise in sovereign borrowing by a number of eurozone countries. This started with Greece, which had to admit at the start of the year that the figures for deficits and sovereign debt it had been reporting to Brussels were significantly understated. This was followed by growing doubt in financial markets that Greece was in any position to service its debt. The risk premium for Greek sovereigns compared with German bonds rose massively, making it increasingly difficult for the country to refinance in the capital markets. Concerns about Greek solvency spilled over to the euro, leading to significant depreciation, particularly against the US dollar and the Swiss franc.
When the situation threatened to get out of hand at the end of April and start of May, the EU and IMF intervened. First, Greece was given a credit line of € 110 billion, which meant that it does not have to borrow further on the capital markets until the start of 2012. In addition, the European Financial Stability Facility (EFSF) was created to provide a rescue package to assist countries with financing problems in future. The fund has a total volume of € 750 billion, contributed by the eurozone member states and the IMF. However, despite the politicians’ hopes, this step did not bring lasting calm to the markets. By November, Ireland had become the second country to run into difficulties. In this case, it was the collapse of the banking system that brought the nation to the brink of insolvency. The financial injections required to save domestic banks sent the country’s budget deficit for 2010 soaring to an enormous 32 per cent of GDP. After suffering a massive deterioration in refinancing terms, Ireland requested assistance from the EFSF at the end of November. It is due to receive € 85 billion in aid up to 2013.
Global currencies The euro exchange rate in 2010 was dominated by the eurozone debt crisis. After starting the year at around USD 1.45, the euro rapidly lost ground as a result of the Greek situation, only stabilizing when the EU and IMF agreed the € 750 billion rescue package for troubled eurozone countries in May. By then the euro had lost 17 per cent against the US dollar, reaching a low for the year at USD 1.20. Between June and October, the debate about eurozone debt receded into the background to some extent, and the exchange rate was determined by US monetary policy, as the slowdown in the US economy early in the year revived fears that it could slip into recession. The Federal Reserve responded in September and November by further easing monetary policy, announcing it would buy more US bonds. As a result of these measures, the US dollar came under significant pressure, with the effect that the euro recovered to USD 1.42 by the start of November, when the focus returned to the eurozone debt crisis. After Ireland was forced to seek financial aid, concern grew that the problems could spread to Spain, and the euro duly slid back to USD 1.30.
CEE currencies After depreciating significantly at the end of 2008 and start of 2009, the CEE currencies stabilized in the subsequent months. The CEE central banks tried to counter the depreciations with (in some cases massive) key rate increases, and several countries also approached the IMF and EU for financial assistance. Following the interest rate cuts in the eurozone, the key rate hikes were reversed in several CEE countries at the start of 2009, e.g., Poland, Russia, the Czech Republic, and Hungary. The trend towards higher key rates was maintained in countries with weaker fundamentals, to compensate investors for the higher risk.
development of the banking sector The shortage and higher cost of external financing for banks and governments and the lower demand for credit, both due to banks’ tighter lending policies, resulted in stagnant credit growth in the CEE during the crisis.
In Southeastern Europe (SEE), where total assets of banks had risen even faster before the crisis at over 30 per cent a year, the increase in 2009 was only just under 3 per cent as a result of the crisis, and probably remained at that level in 2010 due to a further slowdown in growth. The recovery in SEE is somewhat sluggish, like the economy as a whole, so growth is not expected to return to around 10 per cent until 2012.
Financing environment for CEE states and banks The financing environment for CEE states had already significantly improved in the second half of 2009, securing both refinancing and new issues of sovereign debt on the local and global bond markets (Eurobonds). This positive trend continued in 2010. The financing environment for CEE countries and banks benefited from both the committed implementation of aid and support programs under IMF leadership as well as the emerging signs of stabilization in government borrowing in the Czech Republic and Poland. Yields on local sovereigns trended sideways in this period, due to the continuing expansionary mone tary policy and the decline in risk premiums. At the same time, the market took a very differentiated view of the individual CEE countries, with bond prices reflecting risk factors such as indebtedness, budget deficits, and political uncertainty. A financing environment like this will continue to benefit the reformist CEE nations. Currently, risk premiums for many CEE countries are lower than those for eurozone economies such as Spain or Italy.
The majority of RBI is indirectly held by RZB, which makes it part of the RZB Group. RZB held a stake of around 78.5 per cent at the end of the year 2010; the remaining shares were free float. The merger between Raiffeisen International and the principal business areas spun off by RZB took effect on being entered in the commercial register of the Commercial Court in Vienna on 10 October 2010. Raiffeisen International, renamed Raiff eisen Bank International after the merger took effect, was granted a banking license in the course of the merger. The formal legal merger was completed on 10 October 2010 as a transaction under common control. The management decided to make the Group’s internal vertical integration retroactive. The income statement for the whole financial year of 2010 is shown with the new organizational structure. Book value accounting (analogous to IAS 8.10) was used for the principal business areas of RZB transferred to Raiffeisen International.
RBI's operating result in 2010 fell by 1 per cent to € 2,424 million as a result of higher general administrative expenses and the Hungarian bank levy, which comes under other net operating income.
However, this positive trend was partially offset by lower net income from financial investments and derivatives, which fell by € 518 million. These components of net income were dominated in 2009 by recoveries. In 2010, conditions on most financial markets stabilized and, as a result, there were only very few revaluations.
The consolidated profit after tax thus amounted to €1,177 million, a rise of 122 per cent or € 646 million over the figure for the previous year.
Operating income up 5 per cent due to higher interest margins While individual income components showed differing trends, operating income remained relatively constant quarter by quarter in 2010. The 5 per cent year-on-year increase was primarily due to higher net interest income and growth in net fee and commission income, while net trading income and other net operating income showed negative development.
Other net operating income fell by € 39 million to € 6 million, largely as a result of the Hungarian bank levy of € 41 million charged to RBI.
pro forma pro forma Q1/2010 pro forma Q2/2010 pro forma Q3/2010 pro forma Q4/2010 development of the interest margin
Market-related changes in salary structures and reinstated bonus payments led to an 8 per cent increase in staff expenses. The average number of staff fell by 6 per cent or 3,692 to 59,188, primarily as a result of cutbacks in Ukraine, Russia and Romania. Other administrative expenses rose by 9 per cent, largely due to higher IT costs, the costs of the merger with RZB’s principal business areas and the costs of launching the direct bank ZUNO.
The number of business outlets fell by 68 to 2,961 in the year under review. That figure includes the five branches of RBI AG.
Higher general administrative expenses, which grew by 10 per cent and thus by more than operating income, which was up 5 per cent, were the main reason for the increase in the cost/income ratio by 2.6 percentage points to 55.1 per cent. This ratio of general administrative expenses to operating income is a key measure of a bank’s efficiency.
Provisioning for impairment losses fell by 47 per cent or € 1,038 million to € 1,194 million following a difficult year in 2009. This was a consequence of an improvement in the overall situation in most markets, which led to a reduction in the growth of non-performing loans, particularly in the second half of the year. About half of this reduction was offset by lower net income from financial investments and derivatives, which posted significant write-ups in 2009 due to the recovery of the markets. Overall, this resulted in a rise in profit before tax of 63 per cent or € 497 million to € 1,287 million.
Provisioning for impairment losses down in several markets Due to the improvement in overall economic conditions and the measures taken to stabilize the loan portfolio, provisioning for impairment losses in 2010 fell by 47 per cent or € 1,038 million to € 1,194 million. Net allocations to individual loan loss provisions of € 1,196 million were down by 43 per cent, while net allocations to portfolio-based loan loss provisions in the year under review only amounted to € 1 million due to the release of portfolio provisioning to impairment losses in Hungary, Ukraine as well as Bosnia and Herzegovina (a fall of € 175 million). The net provisioning ratio based on average credit risk-weighted assets also fell significantly by 123 basis points to 1.66 per cent. By contrast, the NPL ratio, which is the non-performing loan ratio in the loan portfolio, rose by 1.56 percentage points to 9.0 per cent. This followed an increase of 4.5 percentage points in the previous year. The strongest growth in 2010 was in business with large corporates and private individuals.
The decline in provisioning for impairment losses was most pronounced in the Retail customers division (down 41 per cent to € 601 million), but there were also marked declines in the Corporate customers division (down 37 per cent to € 564 million) and the Financial institutions & public sector division (down 93 per cent to € 23 million). As far as the segments are concerned, much of the new provisioning for impairment losses was in Central Europe, which accounted for a share of 34 per cent or € 408 million (down 16 per cent), dominated by Hungary, and in Southeastern Europe, which accounted for 28 per cent or € 335 million (down 19 per cent) and where there were increases in Bulgaria and Bosnia and Herzegovina. Provisioning for impairment losses fell sharply in Russia (down 76 per cent to € 77 million), in the CIS other segment (down 59 per cent to € 214 million) as a result of the favorable trend in Ukraine, and in Group markets (down 91 per cent to € 31 million) due to higher depreciation/amortization/write-downs of loans and advances to banks in the previous year.
Tax rate at only 9 per cent due to special effects Despite a clear increase in profit after tax, income taxes fell by 58 per cent to € 110 million. While current taxes rose in line with performance, deferred taxes were responsible for the decline in the effective tax rate, which fell from 32.8 per cent to 8.6 per cent. While a release of deferred taxes resulted in an extremely high tax rate in 2009, the opposite was true in the year under review. Due to the higher earnings expectations based on the latest medium-term planning, tax loss carryforwards that were unused to date were to be recognized at Group headquarters on the basis of the tax allocation agreement with RZB AG (€ 120 million). As a result of a change in tax legislation in Ukraine enacted in December 2010, there was a positive effect of € 26 million on deferred taxes. Adjusted for the special effects, the effective tax rate would have been 19 per cent. Not including the Corporate center segment, where there was tax income, the tax rate was highest in the Group markets segment (at 25 per cent) and lowest in the Southeastern Europe segment (at 13 per cent).
After taking the merger into account, RBI’s equity – including the capital of non-controlling interests – rose year-onyear by 12 per cent or € 1,078 million to € 10,404 million as at the reporting date.
Equity decreased by a total of € 384 million due to dividend payments. € 30 million of that went to Raiffeisen International shareholders, corresponding to a dividend of € 0.20 per share, and € 49 million to outside shareholders of Group companies. In addition, € 105 million was for dividends as a result of the merger with RZB’s principal business areas. Dividends on participation capital came to € 200 million.
Increase in tier 1 ratio to 9.7 per cent Regulatory own funds rose by 5 per cent year-on-year to € 12,608 million. In addition to the described changes in equity, resulting in a 10 per cent increase in core capital (tier 1), additional own funds (tier 2, down 1 per cent) and short-term additional own funds (tier 3, down 76 per cent) fell as a result of maturing issues. The own funds requirement increased by 6 per cent to € 7,585 million as a result of a slight rise in credit and securities volumes as well as higher default probabilities and lower ratings. The tier 1 ratio (total risk) increased by 0.3 percentage points to 9.7 per cent, while the core tier 1 ratio rose by 0.4 percentage points to 8.9 per cent. The own funds ratio fell by 0.2 percentage points to 13.3 per cent.
Average equity Profit before tax ROE before tax in € million
The interbank business, primarily with the RBG, declined toward the end of the year. In addition, unneeded liquidity was reduced. Loans and advances to banks fell as a result by 44 per cent to € 21.5 billion. By contrast, loans and advances from credit business rose. Taking into account the increase in provisioning for impairment losses, loans and advances to customers grew by 3 per cent or € 2.5 billion. This increase was largely driven by business with large corporates, although lending to private individuals also grew again slightly by 4 per cent. The biggest rises were seen in Russia (plus 18 per cent) and Central Europe (plus 5 per cent). Customer deposits rose by 4 per cent to € 57.6 billion, which meant that the loan/ deposit ratio remained unchanged at 131 per cent.
deposits from banks deposits from customers Other liabilities Own funds (equity and subordinated capital)
As a result of the merger of Cembra Beteiligungs AG – which incorporated the principal business areas of RZB – with Raiffeisen International, the figures shown cannot be directly compared with those for the previous year. Changes are primarily due to the integration of the principal business areas of RZB and – to a relatively minor extent – the organic growth or contraction of the Group units in CEE.
net interest income Net interest income grew by 22 per cent or € 642 million to € 3,578 million in the year under review. This represents a share of 66 per cent of operating income. The increase was due to the integration of the principal business areas of RZB. The new segments Group corporates, Group markets and Corporate center earned net interest income of € 946 million in 2010. The net interest margin (calculated on average total assets) was 2.51 per cent.
In Russia, net interest income fell by 22 per cent or € 143 million to € 507 million, primarily because of interest income on loans and advances to customers, which dropped by 28 per cent because of lower volumes in the retail and corporate divisions, lower new business and heavy competition. The net interest margin in this segment fell by 82 basis points to 4.14 per cent.
Net interest income in the CIS other segment fell by 13 per cent or € 65 million to € 424 million. In the fourth quarter of 2010 there was a non-recurring effect in Ukraine of approximately € 70 million, due to a change in the method of calculating interest on impaired loans and advances. However, this change does not influence the result, as impairment losses on loans and advances were reduced to the same extent. The net interest margin fell by 103 basis points, and together with the positive trend in margins (plus 38 basis points) the overall result was a decrease of 65 basis points to 6.19 per cent.
net provisioning for impairment losses The improved economic environment and measures initiated during the financial and economic crisis to stabilize the credit portfolio showed their effects in 2010. In the year under review there were significantly lower net allocations to provisioning for impairment losses (the balance of allocations and reversals of provisions for the lending business and direct writeoffs on the one hand and income in the form of amounts recovered on written-off loans and advances on the other hand). These totaled € 1,194 million, a decrease of € 544 million or 31 per cent. This item also includes income from the sale of loans totaling € 3 million.
The CIS other segment showed the highest decrease in net allocations to provisioning for impairment losses in comparison to the previous year in absolute terms. Net allocations fell by 58 per cent or € 301 million to € 214 million, of which a net € 200 million was allocated in Ukraine. This amount is already reduced by € 70 million due to the adjustment in methodology described above. Significantly lower growth of non-performing loans, improved portfolio quality, active measures for loan restructuring and improved repayment ratios were responsible for the positive trend in net provisioning for impairment losses in Ukraine.
net fee and commission income Net fee and commission income rose by 22 per cent or € 268 million to € 1,491 million, and accounted for 28 per cent of operating income. This increase was mostly the result of the new segments Group corporates and Group markets.
In the loan and guarantee business, net income rose by € 82 million to € 282 million. The biggest contributions here were from the Group corporates and Group markets segments (from letters of credit, guarantees and export financing). Net income in Central Europe rose by € 15 million due to the good result in Slovakia and the Czech Republic.
Income from the foreign currency, notes/coins and precious-metals business decreased by € 3 million. Together with the Central Europe segment, the new segments made a positive contribution to this result. In Central Europe, Slovakia and the Czech Republic boosted the result due to the increase in transactions, reflecting the improved economic situation. In Hungary, net income from the foreign currency, notes/coins and precious-metals business fell, due to a decline in new business in foreign currency loans. In Southeastern Europe there was a reduction because of decreasing business activity in Serbia and Romania as well as fewer arbitrage opportunities as a result of the stable local currency in Croatia.
Net income from management of investment and pension funds rose by 2 per cent to € 26 million.
Net income from the sale of own and third-party products rose by 3 per cent or € 2 million to € 26 million as a result of increased insurance activities in Southeastern Europe.
Net income from credit derivatives business was € 3 million, all of it from the Group corporates, Group markets and Corporate center segments.
Net income from other banking services doubled to € 69 million. Income in this position increased as a result of the new segments and higher income from various services in Russia, e.g. collection services for corporate customers.
Net income from interest-based transactions grew by 81 per cent or € 94 million to € 211 million. The Group markets segment was a major contributor to this, while net income from interest-related business decreased in Central Europe, mainly due to valuation losses from interest rate swap transactions in Slovakia. In Southeastern Europe it rose because of an increase in the fixed-interest securities portfolio in Albania. In the CIS other segment, net income rose as a result of an improved sovereign rating for Ukrainian government bonds. In Russia, net income was unchanged from the previous year.
Net income from currency-based transactions grew by 71 per cent or € 50 million to € 121 million. The new segments contributed approximately € 25 million to this. The result in Russia improved by € 87 million to € 14 million, due to valuation gains on foreign currency transactions for hedging measures. In Central Europe, by contrast, it fell due to valuation losses on foreign currency positions and derivatives in Hungary. In Southeastern Europe, the result declined as a result of valuation losses on foreign currency futures contracts in Romania and limited foreign currency trading in Croatia. In the CIS other segment, it was roughly unchanged from the previous year.
The result of equity-based transactions turned around from a loss of € 1 million in the previous year to a profit of € 10 million. The rise was the result of the Group markets segment, which incorporates Raiffeisen Centrobank AG, a specialist in equity products.
net income from derivatives and designated liabilities Net income from derivatives and designated liabilities decreased from € 8 million in 2009 to minus € 84 million. The main reason for this was the loss on other derivatives (€ 72 million) and on liabilities designated at fair value (minus € 23 million ), as the spreads on RBI issues tightened. The losses were predominantly in the Group markets segment.
net income from financial investments The capital market was heavily affected in the year under review by the recurring debates over the euro and the solvency of a number of EU states. This led to fluctuations in the individual quarters in the fair value of securities.
Net income from equity participations includes profit on sales of € 16 million and valuation losses of € 5 million, giving a balance of € 11 million in the year under review. In the Corporate center segment, shares in a real estate developer were sold at a profit of € 13 million.
With a share of 49 per cent, staff expenses accounted for the biggest share of general administrative expenses. Staff expenses rose by 38 per cent or € 399 million on the previous year to € 1,453 million. The main reason for this sharp rise was the integration of the principal business areas of RZB into Raiffeisen International. Staff expenses also rose because of salary increases and the resumption of bonus payments in individual countries, which had been minimal in the previous year. Broken down by segment, staff expenses rose most in the CIS other and Russia segments (18 per cent in each) as well as Central Europe (13 per cent). In Southeastern Europe on the other hand, staff expenses fell by 2 per cent.
The average number of staff employed in the Group (full-time equivalents) fell by 2 per cent or 998 to 59,188. While the integration of the principal business areas of RZB increased the average number of staff by 2,694, the regional segments in CEE predominantly showed decreases. The average number of staff in the CIS other segment fell by 7 per cent or 1,214, in Southeastern Europe by 6 per cent or 1,177, in Russia by 9 per cent or 882, and in Central Europe by 3 per cent or 439. Operating income per employee rose from € 72,000 to € 91,000.
Other administrative expenses rose by 22 per cent or € 216 million to € 1,187 million. Almost all categories of expenses were affected by this increase, but the largest rises were in IT expenses (up 41 per cent), advertising, PR and promotional expenses (up 37 per cent) as well as legal, advisory and consulting expenses (up 18 per cent).
The number of business outlets fell by 57 to 2,961 at the year-end. The biggest decreases here were in Ukraine (21), Romania (20) and Russia (18).
In the year under review investment in the Group totaled € 619 million. Of this, 47 per cent (€ 293 million) was on Group tangible assets. Intangible assets accounted for 33 per cent of investment, predominantly for software systems. The rest was in assets for operating leasing business.
Loans and advances to banks totaled € 21.5 billion on 31 December 2010. Compared with the previous year (€ 10.3 billion) this means an increase of € 11.2 billion, which primarily arose as a result of contributions made by RZB’s principal business areas. The loans were predominantly awarded to domestic and foreign commercial banks and were mostly of a short-term nature.
Equity and liabilities Equity and liabilities were dominated by deposits from customers, which accounted for a share of 44 per cent. Deposits from banks accounted for a 26 per cent share. Equity and subordinated capital represented 11 per cent of the equity and liabilities side of the statement of financial position and the remaining equity and liabilities totaled 19 per cent.
Equity Equity on the statement of financial position As at 31 December 2010, RBI’s equity, including consolidated profit and non-controlling interests, amounted to € 10,404 million. As a result of the merger, equity grew by € 2,325 million, primarily attributable to the € 1,900 million contribution made by the participation capital (balanced value after subtracting the outstanding participation rights), the € 300 million retained earnings and a € 125 million capital increase carried out within the framework of the merger.
The equity of the non-controlling interests amounted to € 1,066 million. The € 90 million share in the profit (owing to this) had a particularly uplifting effect. The dividend payments decreased non-controlling interests by € 49 million.
Own funds pursuant to the Austrian Banking Act (BWG) RBI does not form an independent credit institution group (Kreditinstitutsgruppe) as defined by the Austrian Banking Act (BWG) and therefore is not subject to the regulatory provisions on a consolidated basis. This is because it is part of the RZB Group. The majority of credit risk is calculated using the standardized approach in accordance with Section 22 of the BWG. Credit risk for most non-retail business at RBI AG and its subsidiaries in Croatia, Malta, Romania, Slovakia, the Czech Republic, Hungary and the USA is measured using the internal ratings based approach (foundation IRB approach). Since April 2010, a large share of the loans and advances to retail customers in Slovakia has been calculated for the first time using this approach. Since July 2010, the IRB approach has also been introduced for loans and advances to retail customers in Hungary. Market risk is predominantly calculated according to the standard approach in accordance with Section 22 of the BWG. Since August 2010, RBI AG has carried out the calculation in part according to the internal model. The consolidated values (shown below) have been worked out according to the provisions of the BWG and are assumed in the calculation of the RZB-Kreditinstitutsgruppe.
On 31 December 2010, the total own funds in accordance with the BWG amounted to € 12,608 million. Of this, € 9,206 million was accounted for by core capital, € 3,366 million by additional own funds and € 69 million by short-term subordinated capital. The total deductions relating to participations, securitization and insurance companies amounted to € 34 million. Currency appreciations against the euro (especially the Ukrainian hryvnia, the Russian rouble, the Polish zloty, the Czech koruna and the Belarusian rouble) had a positive effect on the core capital. The devaluations of the Serbian dinar and the Hungarian forint decreased the core capital.
The additional own funds amounted to € 3,366 million. This consists of the long-term subordinated capital of which the largest part fell to RBI AG at € 2,176 million, supplementary capital of RBI AG (€ 600 million), the provision excess of IRB-positions (€ 231 million) and hidden reserves (€ 55 million).
In the context of financial engineering, however, RBI does develop customized solutions for investment, financing or risk hedging. Financial engineering encompasses not only structured investment products but also structured financing: financing concepts which go beyond the application of standard instruments and are used in acquisition or project financing, for example. By the same token, RBI also develops individual solutions to hedge a broad spectrum of risks, from interest rate risk and currency risk through to commodity price risk.
At RBI, customers are the number one priority. Compliance with risk management guidelines is also vital.
The consolidated financial statements and management report are reviewed by the Audit Committee of the Supervisory Board and are also presented to the Supervisory Board for information. The consolidated financial statements are published on the Company's website and in the Wiener Zeitung's official register and are filed with the commercial register as part of the annual report.
The consolidated financial statements are prepared using Group-wide standard forms. The accounting and valuation standards are defined and explained in the RZB Group Accounts Manual and must be applied when preparing the financial statements. Detailed instructions for the Group units on measuring credit risk and similar issues are provided in the Group directives. The relevant units are kept abreast of any changes to the instructions and standards through regular training courses.
The Group produces consolidated quarterly reports. Statutory interim reports are produced that conform with the provisions of IAS 34 and are also published quarterly in accordance with the Austrian Stock Corporation Act. Before publication, the consolidated financial statements are presented to senior managers and the Chief Financial Officer for final approval and then submitted to the Supervisory Board's Audit Committee. Analyses pertaining to the consolidated financial statements are also provided for the management as are preliminary Group figures at regular intervals. The financial budgeting system includes a three-year Group budget.
Internal audits also constitute an integral part of the monitoring process. Group audit at RZB is responsible for auditing. 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 audit's internal rules also apply (notably the audit charter).
The following disclosures cover the provisions of Section 243a (1) of the Austrian Commercial Code (UGB): (1) The Company’s capital stock amounts to € 596,290,628 and is divided into 195,505,124 voting common bearer shares. Of those, 972,909 are own shares, which means that 194,532,215 shares were outstanding as of the balance sheet date. Please consult the notes to this report (page 190 onwards) for more information.
(3) RZB holds around 78.5 per cent of the shares in the Company indirectly through its wholly owned subsidiary Raiffeisen International Beteiligungs GmbH, Vienna. The remaining shares are free float, containing no direct or indirect participations in the capital amounting to 10 per cent or more.
(6) Pursuant to the articles of association, a person who is 68 years or older may not be appointed as a member of the Management Board or be reappointed for another term in office. The rule for the Supervisory Board is that a person who is 75 years or older may not be elected as a member of the Supervisory Board or be elected for another term in office. Furthermore, there are no regulations regarding the members of the Management Board and the Supervisory Board beyond the provisions of the relevant laws.
The Annual General Meeting of 8 July 2010 authorized the Management Board to acquire own shares, under the provisions of Section 65 (1) 8 of the Austrian Stock Corporation Act, during a period of 30 months from the date of the resolution, up to a maximum of 10 per cent of the Company’s respective capital stock and, if deemed appropriate, to retire them. This authorization may be exercised in one or several installments by the Company, by affiliated enterprises or, for their account, by third parties. The Management Board was further authorized to decide, with the approval of the Supervisory Board, on the sale of own shares by means other than the stock exchange or a public tender, to the exclusion of shareholders’ subscription rights. This authorization replaces the authorization to buy back and use own shares that was granted in the Annual General Meeting of 10 June 2008. No own shares have been bought since the authorization was issued in July 2010.
In Western Europe, funding options also improved compared to the previous two years. However, banks continued to pay higher risk premiums than before the crisis.
The government rescue package for Austrian banks was once again available in 2010 but was not used by RZB or RBI. The reason for this was that the liquidity situation of both banks was adequate, and sufficient funding could be raised on the capital markets.
Due to the less frequent maturities of refinancing funds, the funding needs of the Group headquarters in 2010 was limited and could easily be met, although the merger of Raiffeisen International with the principal business areas of RZB meant that for legal reasons no issues from the corresponding programs were possible for a while. Overall, RZB/RBI AG senior issues totaled € 750 million in 2010. € 163 million were retail issues successfully placed with Austrian retail customers, thereby forming a stable funding source.
Furthermore, subordinated bonds in the amount of € 297 million were issued, which served as substitution for the subordinated issue called in September 2010. In addition to issues on the capital markets, RZB and RBI used secured financing in which bonds and loans were used as collateral.
Market conditions remained volatile in 2010, however. When it came to wholesale funding, the network banks in 2010 focused on loans from RBI, loans from local and supranational banks, local private placements and individual lending transactions (club deals).
Strong funding sources RBI funding is made up of two different components: At the end of 2010, customer deposits accounted for the largest share at 51 per cent or € 57.6 billion, with wholesale funding contributing the remaining 49 per cent or € 54.2 billion.
In this environment, RBI’s risk management used a combination of new and existing instruments to deal with the increased market volatility and enable an early response to changes in general economic circumstances. At the same time, business activity was expanded in non-cyclical sectors, existing loans to governments and financial institutions in the affected markets were scaled back, and lending policies were modified, particularly for foreign currency loans. These measures helped further reduce the vulnerability of the RBI credit portfolio to the prevailing market volatility.
An early warning system for the Corporate and Retail business divisions has been introduced (in some cases since 2009) in numerous countries. Work will continue on implementing this system, to ensure early identification of risks at the level of the individual customer as part of active risk management, so that measures can be taken which are appropriate for the specific customer segment.
Risk management integration through the merger The creation of a fully integrated risk management was always a compelling argument in favor of the merger carried out during the year under review of Raiffeisen International and the principal business areas of RZB. All risk management functions were consolidated under the Chief Risk Officer with some reorganization. As part of this reorientation, the concept of risk committees with decision-making authority was modified for the new structure. Through the participation of a number of board members these committees were upgraded. In addition, the risk management processes of Raiffeisen International and RZB were consolidated.
In combination with the reorganization of credit risk management for large corporates by industry, credit portfolio management was given a regional dimension by consolidating country and credit portfolio risk management in a new department. This has the function of making uniform risk assessment for both countries and RBI portfolios possible. The conclusions and resulting measures are determined in close consultation with the responsible customer segments, and are being implemented within the existing management instruments (lending guidelines, portfolio limits, etc.).
In view of the problems facing many customers as a result of the economic crisis – particularly in Central and Eastern Europe – a unit was established at Group headquarters for managing non-performing loans to corporate customers and financial institutions. Its staff has many years of experience in workout management in both Western Europe and CEE, and is directly involved in the decision-making processes where key non-performing loans are involved. The emphasis is on central management of complex problem cases, advising local workout management departments and ongoing monitoring of returns. In addition, this unit handles all RBI AG non-performing loans and negotiates with its customers, bank syndicates and potential investors. A particular focus is coordinating international problem cases affecting a number of RBI units, by developing and implementing strategies to optimize results on a Group basis.
In addition to the stress tests for external purposes, like those of the CEBS and OeNB, internal studies were carried out in 2010 for further scenarios and potential risk drivers. Close cooperation with all the risk management areas and including other experts from the network banks made consideration of a large number of risk factors in the internal stress tests possible. Besides the increased capital requirement and rising provisions for credit portfolio impairments in the stress scenario, market risks, operational risks, increased financing costs and numerous other capital and earnings components were incorporated into the integrated consideration. The results of the stress tests and their analysis were reported regularly to the Management Board, making it possible to quickly adopt countermeasures for any threatening scenarios.
Market risk The sophisticated market risk management system developed since March 2008 on the basis of an internal model was implemented at the start of 2010. Since then, market risk management has been based on the figures from this internal model.
Simulating net interest income RBI’s net interest income is a significant component in earnings and makes a substantial contribution towards strengthening its capital. To reflect this importance, a separate unit was established in risk management to simulate this earnings component in various scenarios. In close cooperation with the market units, RBI is preparing itself for various developments in the markets, so that it can respond rapidly to adverse trends.
Basel III – regulatory changes In the year under review, RBI was closely concerned with the impending regulatory changes in capital requirements under the Basel III rules. The potential influence of the new and modified statutory regulations on RBI was analyzed in detail. In addition, the Group participated in the Quantitative Impact Study, organized and analyzed by the CEBS and the Bank for International Settlements (BIS). The results of the studies showed that RBI already met the capital ratios for 2019 in 2010.
Basel II – credit risk and operational risk Besides the preparations already initiated in connection with the new Basel III regulations, RBI risk management focused on the ongoing implementation of the revised Basel II approach. The Basel II related activities include implementing the internal ratings-based (IRB) approach in the retail and non-retail segments of the subsidiaries in CEE, further development of the internal market risk modes, and Group-wide introduction of the standard approach for operational risk. The following table shows an overview of the current status of these projects. In addition, the roll-out of the IRB approach in CEE subsidiaries will be continued in 2011.
Retail Retail Raiffeisen Bank International AG, Vienna (Austria) IRB1 n.a. Internal model2 STA
An opportunity for the future The change processes initiated by mergers always represent a particular challenge for organizations. The quantitative aspects are relatively straightforward: The principal business areas of RZB were split off and merged with Raiffeisen International. 356 employees of Raiffeisen International were brought together with 1,774 employees from RZB, who together now form RBI. 80 employees remained in the new RZB, which as a holding company primarily has a control function. The result was not a shift in the number of employees amongst the two companies, rather a complete restructuring of many of the units. Ensuring that this reorganization was also reflected in all personnel-related IT systems by the time of the merger represented a considerable challenge.
A systematically designed change process In addition to the accomplishment of these technical "hard" facts, there was and still is a need to work on the so-called "soft" issues, in particular on the consolidation of the different cultures of Raiffeisen International and RZB. The Management Board therefore decided to set up an accompanying change process. Its main aims were ■ to include all employees in order to obtain their consent to the planned changes, ■ to establish a new, shared corporate culture and ■ to support managers who have to deal with new management responsibilities as part of the integration process. Furthermore, the merger process was designed and overseen by a team of internal and external change experts.
Question: "How confident are you that RBI/the new RZB are heading towards a successful future?"
Structured job evaluation Besides working on these employee-related issues, Human resources also implemented fundamental measures relating to the organizational structure of the new bank. As part of a job evaluation project, an objective and systematic evaluation of all positions within the company was conducted, based on the internationally proven Watson Wyatt Global Grading System, which in future will form the basis for standard personnel management processes and tools. A market-based and objective wage and title structure as well as development plans and career paths will be drawn up on the basis of each position evaluation. Another project to introduce a new remuneration structure based on this system was started as early as the fourth quarter of 2010. This project will include salary ranges and bonus systems being drawn up and implemented that already meet the new guidelines of the Austrian Banking Act on the principles of remuneration policies and practices. The project is set to be completed within the first three months of 2011.
Further skills development was also promoted for managers, both locally and with company-wide offers. Following the successful introduction of a Group-wide leadership training architecture in 2009, many programs in network banks – and, because of the merger, also in Vienna – were adapted or created during the reporting period. They all build on a shared values and skills base and meet the development needs of all management levels. In the Russian ZAO Raiffeisenbank, for example, tailor-made leader ship training courses for more than 800 managers were held based on a self-assessment by the managers concerned and an evaluation by their respective superiors.
To promote the equal treatment of women, selection procedures are applied within RBI that ensure compliance with uniform, gender-neutral standards at the time of hiring. As a result, the percentage of female employees within RBI is 67 per cent. Women in existing employments are also targeted for promotion.
Within RBI's performance management area, the focus in 2010 was on the further standardization of the target and skills structure and of the rating scale to ensure a solid basis for variable remuneration structures. In each network bank, all management levels are included in the performance management system, and in many units all sales functions are included as well.
As a result of the merger, the performance management systems for the Vienna-based organizational units were also standardized within the space of just a few months, so that a common, automation-supported performance management process has been available since early 2011. This change was accompanied by a major training initiative to further increase the quality and sustainability of the target-setting process.
At the end of 2009, the Group-wide guideline "Total Rewards Management" was revised and introduced in accordance with international guidelines. In 2010, the focus was on implementing these guidelines in each country and on checking or amending the position evaluations, salary structures and variable pay schemes. In Hungary, Bosnia and Herzegovina, Serbia and Kosovo position evaluations were introduced or reviewed and the pay systems evaluated and, where necessary, revised. In the other network banks, the variable pay systems were evaluated and revised in individual projects.
SEE Southeastern Europe was still in recession in 2010, due to the economic situation in Romania, Bulgaria and Croatia, but is expected to recover in 2011 with forecast economic growth of 1.9 per cent. This is forecast to rise to an annualized rate of 3.4 per cent in 2012. However, the weak baseline for this growth should not be ignored. Overall, SEE is still vulnerable, due to the economic links with countries in the south of the eurozone which have economic problems of their own.
CIS The Commonwealth of Independent States (CIS) suffered the sharpest decline within CEE as a result of the financial and economic crisis. The recovery in 2010 was correspondingly marked, not least due to the recovery in primary commodity prices and the low baseline. As long as domestic inflation stays under control, Russia and Ukraine in particular can continue to benefit from the signs of emerging high food and commodity prices. In 2011, growth in the region is likely to continue to increase again to 4.5 per cent. The background to this is faster growth in Russia, which accounts for much of the GDP of the CIS as a whole. After Russia grew by 4 per cent in the previous year, growth of 4.5 per cent seems within reach in 2011.
Eurozone Current forecasts again predict two-speed growth in Europe in 2011. While growth prospects for internationally competitive nations are still promising, other countries are still suffering from the results of the crisis, for example burst real estate bubbles, high current account deficits, and tough savings measures in the public sector. Year-on-year GDP growth is likely to be significantly higher in Germany (2.5 per cent), Finland (2.5 per cent), Austria (2.5 per cent) and Belgium (1.8 per cent) than in Italy (0.9 per cent), Spain (0.4 per cent) and Portugal (0.4 per cent). Sharp decreases are currently expected in Greece (minus 3 per cent) and Ireland (minus 0.6 per cent).
In terms of credit risk, we expect to witness a further decline in the net provisioning ratio (provisioning for impairment losses in relation to the average credit risk-weighted assets) over the medium term. Based on current market forecasts, we assume that the non-performing loan ratio at Group level will peak in the second half of 2011.
The bank levies in Austria and Hungary will lead to an anticipated reduction in our 2011 result of some € 130 million (approximately € 90 million for Austria and € 40 million for Hungary).
In 2011, we plan to raise around € 6.5 billion in long-term wholesale funding in the capital markets, of which € 2.3 billion had already been successfully placed as of beginning of March.
Events after the balance sheet date Acquisition of a majority stake in Polbank On 3 February 2011, RBI closed an agreement with the Greek EFG Eurobank Ergasias S.A. (Eurobank EFG) concerning the acquisition of a majority 70 per cent stake in its business unit Polbank EFG (Polbank). Polbank is the Polish banking network of Eurobank EFG, which, prior to implementation of the acquisition, is set to be converted into an independent legal entity with a Polish banking license. RBI will pay € 490 million for the 70 per cent stake when the agreement is closed. The acquisition is still dependent on the successful closing of the agreement and the approval of the EU Commission as well that of the Greek and Polish regulatory authorities. The transaction is expected to close in the fourth quarter of 2011 or the first quarter of 2012.
With its keen focus on private customers, Polbank ideally complements Raiffeisen Bank Polska, which is very well positioned in business with corporate customers. Consequently, RBI expects to see a marked strengthening of its position in Poland as a result of the acquisition of Polbank. The merged unit consisting of Raiffeisen Bank Polska and Polbank will likely be Poland’s sixth largest universal bank based on assets; measured against customer loans it may even occupy fourth place. In addition, thanks to the merger, the strategically perfect add-on not only involves estimated cost synergies of € 60 million annually but also substantial revenue synergies.
Polbank, which enjoys a high level of customer awareness on the Polish market, commenced operations in 2006. It owns a network of around 350 business outlets and has around 2,900 employees, looking after around 800,000 customers. Its total assets as at 31 December 2010 came to € 5.7 billion.
Segments Segmentation principles Internal management reporting at RBI is based on the current organizational structure. The matrix structure means that each member of the Management Board is responsible both for individual countries and specific business activities (country and functional responsibility model). Within the Group, a cash generating unit is either a country or a business activity. The RBI management bodies – the Management Board and Supervisory Board – take decisions that determine the resources allocated to each segment in accordance with its financial strength and profitability. Consequently the reporting criteria are an essential component in the decision-making process. The segments are also defined in accordance with the International Financial Reporting Standards (IFRS) – in particular IFRS 8.
To define the CEE segments geographical aspects are used, with each Group unit being allocated to a segment in accordance with its location. Countries that are expected to achieve comparable long-term economic performance and that have similar economic profiles are grouped together in regional segments. Business outside the CEE area that was recently added due to the meger is defined by business activity.
This segment encompasses five countries in Central Europe: the Czech Republic, Hungary, Poland, Slovakia and Slovenia. These constitute the most mature banking markets in the CEE region and are also the markets in which RBI has been operating longest. Within the segment, the strategic focus is on developing and consolidating market leader positions whilst also ensuring long-term profitability. In terms of products, service and marketing, this represents an opportunity to offer premium solutions with attractive margins. In Poland, Raiffeisen Bank Polska S.A. provides services to corporate customers, SMEs and a growing number of affluent customers. Tatra banka, a.s. in Slovakia is primarily involved in corporate and retail activities, but also has a strong emphasis on affluent customers. Raiffeisen Banka d.d. represents the Group in Slovenia. The Czech Raiffeisenbank a.s. provides traditional banking services together with building society and insurance products in its local market. Raiffeisen Bank Zrt. has an extensive network in Hungary which serves retail customers, SMEs and a large number of corporate customers. RBI is also represented by ZUNO BANK AG, a direct bank, in Slovakia. Separate leasing companies also operate in each country.
The Southeastern Europe segment comprises Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Kosovo, Moldova, Romania and Serbia. The SEE segment still offers excellent development potential. As the process of economic convergence is less advanced than in Central Europe, greater demand for banking products in the medium to long term is expected. The RBI network banks are among the market leaders in the region. RBI will utilize its strong position to tap into existing market potential. A balanced risk profile is a key feature of the development strategy. The Albanian Raiffeisen Bank Sh.a. provides
financial services across all business activities. Its product range is complemented by Raiffeisen Leasing Sh.a. and a private pension fund. Raiffeisen Bank Kosovo J.S.C. and Raiffeisen Leasing Kosovo LLC represent RBI in Kosovo and offer a comprehensive product range. In Bosnia and Herzegovina, Raiffeisen Bank d.d. Bosna i Hercegovina and Raiffeisen Leasing d.o.o. Sarajevo focus on SMEs but also have a broad range of products for retail customers. In Bulgaria, the Group is represented by Raiffeisen (Bulgaria) EAD, Raiffeisen Leasing Bulgaria OOD. The Croatian Raiffeisenbank Austria d.d. specializes in large and medium-sized corporate customers and also has a substantial retail business. RBI also operates Raiffeisen Leasing d.o.o., capital management companies and an asset management company in Croatia. Raiffeisen Bank S.A. has an extensive branch network in Romania offering top-notch financial services. The Romanian operation also provides a tailored selection of products for corporate customers in Moldova. In view of its economic ties and the way it is therefore managed within the Group Moldova is included under Romania. RBI has a presence in the Serbian market in the form of Raiffeisen banka a.d., Raiffeisen Leasing d.o.o., pension funds and an asset management company.
The Group markets segment covers capital market customers and proprietary trading. The results show income from currency, interest and securities trading as well as from structured products for financial institutions and income from proprietary trading. Proprietary trading and market maker activities are allocated under the Capital markets and Credit investments (proprietary trading in securities unrelated to the strategic core business) profit centers plus the relevant profit centers in the Singapore, China and London branches. Income from transactions with customers is included in Financial institutions & sovereigns and Raiffeisen Financial institutions clients (operations involving Raiffeisen Landesbanks and related financial services companies). The profit centers post results from sales of all banking products and business relationships with banks, institutional customers, governments and local authorities.
Segment overview For the purposes of annual comparison the following description is based on unaudited pro forma figures for 2009, as the merger of the principal business areas of RZB, which took place on 10 October 2010 with retroactive effect for the full financial year, only relates to 2010.
In Russia, profit before tax rose by € 115 million to € 267 million. The year-on-year increase was the result of significantly lower net allocations to provisioning for impairment losses and the sharp increase in net trading income. Total assets in this segment were 4 per cent up year-on-year.
The Group corporates segment reported strong growth in net income in 2010 (up by 89 per cent), with profit before tax of € 295 million. This growth was due to the significant rise in operating income. Net provisioning for impairment losses fell by 21 per cent. Total assets in this segment were 6 per cent up year-on-year.
Profit before tax by segment in € million pro forma 2009 2010
The Group markets segment reported profit before tax of € 249 million, due to lower net allocations to provisioning for impairment losses and higher operating income. However, the high level of reversals in impairments on financial investments in 2009 was not repeated in 2010 due to economic stabilization. Total assets fell by 42 per cent compared to 2009.
In the Corporate center segment, profit before tax rose to € 109 million. The sharp rise of € 89 million compared to 2009 was almost entirely the result of net income from financial investments, which had shown a significant loss in the previous year due to valuation losses. Total assets in this segment were 9 per cent up year-on-year.
There was a change in the structure of Group assets by segment in the reporting year. The share of Central Europe rose by 2 percentage points to 21 per cent, and the share of Southeastern Europe rose by 1 percentage point to 14 per cent. The share of Russia also increased by 1 percentage point to 8 per cent, while the CIS other segment was unchanged at 4 per cent. While the share of Group corporates increased by 2 percentage points to 15 per cent, the share of Group markets fell by 9 percentage points year-on-year to 17 per cent, partly in favor of Corporate center, whose share rose by 3 percentage points to 21 per cent.
Central Europe In Central Europe, profit before tax in 2010 was € 269 million, an increase of 17 per cent or € 39 million on the previous year. Higher net interest and net fee and commission income was primarily responsible for this increase. By contrast, net trading income was only half its level in the previous year. The return on equity before tax rose by 0.3 percentage points to 10.4 per cent.
Net fee and commission income grew in every country in the region except Hungary, by 9 per cent or € 37 million to come in at € 473 million. Net income from payment transfer business accounted for € 186 million of this figure, a 9 per cent gain year-on-year (€ 15 million). The largest contributions were generated by higher transaction volumes in the Czech Republic and Slovakia. Net income from the loan and guarantee business grew by 14 per cent to € 66 million. Again, Slovakia and the Czech Republic accounted for much of this gain, this time through guarantee price adjustments and higher guarantee volumes. Net income from foreign currency, notes/coins and precious-metals transactions advanced by 5 per cent to € 147 million, although Hungary posted a decline of € 6 million as new foreign currency lending fell. Net income from securities business rose by 26 per cent year-on-year to € 29 million, largely driven by income growth in Slovakia.
Net allocation to provisioning for impairment losses in the Central European region fell by 16 per cent or € 79 million in 2010 to € 408 million. Net allocations to individual loan loss provisions advanced by 6 per cent year-on-year to € 406 million, almost entirely due to net allocations to provisioning for impairment losses in Hungary for loans to retail customers. Portfolio-based loan loss provisions totaled € 3 million in the year under review. In Hungary, provisions were released in the course of a shift to individual provisions, whilst provisions were allocated for corporate customers in the Czech Republic and for large corporates in Slovakia. The ratio of non-performing loans in the credit portfolio totaled 9.1 per cent at the end of 2010.
The net income from derivatives amounted to minus € 10 million which was almost entirely caused by valuation losses linked to hedging transactions used to adjust the currency structure in the Czech Republic. Net income from financial investments shrank year-on-year from € 37 million to € 13 million, partly due to the € 12 million one-off gain from the group internal sale of a company in Slovakia in 2009 and partly the result of valuation losses on municipal bonds in Hungary. Following the disposal of project companies for materiality reasons, most of them domiciled in the Czech Republic and Hungary, the segment recorded net income from disposal of group assets of € 4 million.
Income taxes climbed 29 per cent year-on-year to € 65 million. The tax rate in the region rose by 2 percentage points to 24 per cent. Profit after non-controlling interests came in at € 149 million.
Southeastern Europe The Southeastern Europe segment saw profit before tax advance by 17 per cent or € 44 million to € 305 million in 2010. Profit before tax was boosted by considerably lower net allocations to provisioning for impairment losses. Net trading income declined, putting operating income slightly lower year-on-year. The return on equity before tax rose 1.0 percentage point year-on-year to 15.7 per cent.
Total assets were down by 4 per cent year-on-year at € 22.7 billion whilst the net interest margin rose by 20 basis points to 3.90 per cent. Risk-weighted assets (credit risk) rose 3 per cent from € 16.3 billion to € 16.7 billion, influenced mainly by increases in Croatia and Romania. Higher volumes for corporate customers and a new guarantee structure prompted the rise in Croatia. In Romania, the increase was mainly linked to rating downgrades for loans and advances to corporate customers.
Other net operating income rose by 46 per cent year-on-year to € 37 million, which included income from operating leases totaling € 38 million, the bulk of which was recorded in Croatia.
General administrative expenses fell by 1 per cent year-on-year to € 738 million. Staff expenses declined in Bulgaria and Serbia, but depreciation was higher in Romania. Other administrative expenses were more or less stable. The number of business outlets dropped from 1,204 at the end of 2009, down by 3 per cent to 1,167. The segment’s cost/income ratio rose slightly, up 0.8 percentage points at 53.5 per cent.
Almost all of the € 4 million net loss from derivatives was linked to hedging transactions used to adjust the currency structure in Croatia. Net income from financial investments advanced from € 8 million in 2009 to € 10 million in the year under review, with gains from disposals and valuation gains on government bonds in Romania. Following the disposal of project companies for materiality reasons, most of them based in Romania, the segment posted a € 7 million net loss from the disposal of Group assets.
Income taxes were up € 25 million year-on-year at € 53 million. The tax rate climbed 1 percentage point to 20 per cent. Profit after deduction of non-controlling interests advanced by € 90 million to € 214 million.
Net interest income for the segment fell by 13 per cent or € 65 million to € 424 million. In the fourth quarter of 2010, Ukraine posted a € 70 million non-recurring loss linked to a change in method for calculating interest on impaired loans. However, this change did not affect results, as it was offset by the corresponding reduction in provisioning for impairment losses. The shift of emphasis in Belarus from refinancing from banks to the more favorable customer deposits cut interest expenses and boosted net interest income considerably.
Overall, net fee and commission income rose slightly year-on-year by 5 per cent or € 8 million to € 183 million, primarily as a result of higher income in Belarus. Income from the payment transfer business increased by 14 per cent or € 15 million to € 128 million, thus making the largest contribution to net fee and commission income. Net income from foreign exchange, notes/coins and precious-metals business dropped by a total of 21 per cent to € 42 million year-on-year as a result of decreased customer activity and the granting of fewer foreign currency loans to retail customers in Ukraine. Net income from the loan administration and guarantee business grew sharply and contributed € 7 million to net fee and commission income.
General administrative expenses were up year-on-year by 18 per cent or € 52 million to € 346 million. Within staff expenses, the pay rises that were introduced in Ukraine and Belarus towards the end of 2009 contributed to an increase in expenses in 2010. The number of business outlets in these two countries was reduced by 2 per cent or 22 to 1,028. Other administrative expenses rose mainly as a result of an increase in expenditure on IT in Ukraine. Likewise, depreciation, amortization and write-downs were higher, primarily due to investment in the new IT core banking system here. As a result of the decline in operating income and higher general administrative expenses, the cost/income ratio rose by 12.3 percentage points to 55.7 per cent.
Income taxes for the segment totaled € 7 million. Following a loss in 2009, profit stood at € 74 million after deducting noncontrolling interests. An adjustment of deferred taxes in Ukraine resulted in a positive effect of € 26 million on net income.
General administrative expenses rose overall by 9 per cent to € 142 million. The main reasons for this were an increase in staff expenses due to in part to higher bonus payments and a rise in other administrative expenses. This segment operated eight business outlets at the end of 2010. Due to higher operating profits, the cost/income ratio experienced a dramatic improvement, falling by 4.4 percentage points to 25.9 per cent.
Provisioning for impairment losses fell by 21 per cent from € 163 million to € 129 million. This was chiefly linked to lower net allocations to individual loan loss provisions to corporate clients at the Singapore branch and at the Group unit in the US. By contrast, net allocations to individual loan loss provisions remained at 2009 levels in the profit centers of Group headquarters due to provisions made for troubled loans in the year under review. The ratio of non-performing loans in the credit portfolio totaled 4.3 per cent at the end of 2010.
Other results stood at € 19 million, in line with levels in the preceding year, and mainly included positive market valuations of various corporate bonds and options held in the portfolio.
Net interest income tripled year-on-year to € 284 million, boosted almost exclusively by the Capital markets head office profit center. The high-quality securities portfolio, which exclusively comprises securities with the best ratings, resulted in considerable net interest income. This rise in net interest income was driven partly by favorable refinancing costs due to interest rate movements in the year under review and partly by the fact that the portfolio was only created during the course of the previous year so it had less impact on income during that period. The Financial Institutions & Sovereigns head office profit center, on the other hand, posted a decline in net interest income. Selective lending activity led to a significant reduction in business volumes here.
Total assets in this segment fell by 42 per cent year-on-year to € 27.2 billion. The main reason for this was the reclassification of some of the assets as belonging to the Corporate center segment following internal reorganization that resulted in the separation of the Treasury’s activities from those of the Capital markets division. The net interest margin increased by 50 basis points to 0.70 per cent, and the segment’s risk-weighted (credit risk) assets shrank by 43 per cent from € 9.3 billion in total to € 5.3 billion. This decline was also the result of the shift of some of the volume to the Corporate center segment. In addition, a decline in risk-weighted assets (credit risk) was also recorded in the Capital markets head office profit center, which was caused by the reduction in money market and securities commitments for financial institutions, predominantly in Great Britain, the Netherlands and Germany. The Financial institutions & sovereigns head office profit center was generally affected by smaller business volumes during the course of the year under review. However, the Credit investments division did post a rise in risk-weighted assets (credit risk) due to the creation of securities commitments.
General administrative expenses remained largely stable compared to the previous year, falling by 1 per cent to € 241 million. While other administrative expenses fell, depreciation rose due to a new Treasury system. The segment comprised four business outlets at the end of the year under review. Due to the rise in operating income, the cost/income ratio improved significantly by 25.3 percentage points to 46.9 per cent.
Other results was much lower in the year under review at € 7 million. However, the figure of € 517 million for 2009 was heavily impacted by the appreciation of those securities that had been written down in the 2008 financial crisis. In the year under review, the valuation gains from financial investments exceeded the loss on derivatives.
Operating income fell by 30 per cent year-on-year from € 605 million to € 426 million due to a decline in both net interest income and net trading income. Net interest income was down 20 per cent to € 291 million. The main reasons for this decline were the higher capital-raising costs for own issues as well as the net loss from maturity transformation. Net interest income from internal financing was also considerably lower compared with the previous year, and the segment’s results were weighed down further by reduced income from the equity investment portfolio, where Group internal dividends, in particular, were lower. The net interest margin fell year-on-year by 42 basis points to 0.79 per cent.
Assets in this segment rose by 9 per cent year-on-year to € 32.9 billion. However, this development was distorted by nonrecurring effects due to the above-mentioned reorganization, which meant that the Treasury division was moved from the Group markets segment to the Corporate center segment in the year under review. Risk-weighted assets (credit risk) shrank by 24 per cent from € 21.2 billion to € 16.1 billion in connection with a reduction in off-balance-sheet items.
Net allocations to provisioning for impairment losses played a minor role due to the group internal nature of the Corporate center segment.
Business divisions In addition to being subdivided into segments in accordance with IFRS 8, RBI is also organized into business divisions that reflect the internal organization and reporting structure. The Group's business is broken down into the following divisions: ■ Corporate customers ■ Retail customers ■ Financial institutions & public sector ■ Capital markets & treasury ■ Participations & other
Corporate customers includes business with local and international large and medium-sized enterprises. Retail customers handles business with private individuals and small and medium-sized enterprises (SMEs) with annual sales of up to € 5 million. The Financial institutions & public sector business division focuses on business with customers from the financial and public sectors. Capital markets & treasury covers Treasury proprietary trading and investment banking, which is undertaken only in certain Group units. Participations & other is concerned with non-bank-specific activities as well as the administration of participations. It also deals with other cross-division functions, particularly in the parent company RBI AG.
Overview of business divisions Business year 2010 Corporate Retail Financial Capital Partici- Total customers customers insti tutions markets & pations & public treasury & other in € million sector
Net fee and commission income 518 845 147 0 (19) 1,491
Return on equity before tax 14.9% 5.7% 26.7% 25.4% – 13.7%
Business year 2009 pro forma Corporate Retail Financial Capital Partici- Total customers customers insti tutions markets & pations & public treasury & other in € million sector
Net provisioning for impairment losses (888) (1,010) (333) (1) 0 (2,232)
Based on this corporate banking strategy, a new structure was set up in Group headquarters that clearly differentiates between Group functions, where the focus is on support and knowledge transfer, and an operational business division, for which a selective industry focus was introduced.
The cornerstones of the new strategy are: ■ the Group-wide introduction of a differentiated service model, depending on the size and needs of the respective customer segment; ■ the continuation and further development of relationship banking with a particular focus on taking a comprehensive and cross-border view of customers as well as cross-selling; ■ improved and structured knowledge transfer throughout the Group; ■ efficiency improvements through the continuation of process optimization measures (e.g. improvement of the lending process, particularly in the case of medium-sized enterprises).
As far as our customers are concerned, 2010 was largely characterized by a change for the better. There was a considerable improvement in sales in most sectors. Many companies took advantage of the crisis to optimize efficiency and reduce their levels of debt. On the whole, they responded quickly to the changed market conditions. In addition, business picked up strongly in Austria, Poland, the Czech Republic, Slovakia, Russia and Ukraine, in particular, but also in Asia. With the alleviation of the risk situation in these countries and regions, there were in some cases significant releases of individual loan loss provisions from previous years.
Operating income increased, due to increased net fee and commission income and improved trading income, from € 1,770 million to € 1,800 million and was thus 2 per cent higher than for the previous year. The 2 per cent fall in net interest income was largely due to business with major customers in Russia, where the asset-side margins in new business were significantly lower. Net interest income from major customers remained at the level of the previous year for RBI AG. Net fee and commission income increased by 12 per cent to € 518 million with the largest contribution coming from business in Russia (€ 108 million). Other net operating income fell by 59 per cent to € 12 million. Operating leasing in Croatia and Serbia and real estate business in the Czech Republic contributed € 30 million. The bank levy in Hungary, on the other hand, reduced net income by € 23 million.
General administrative expenses increased, due to salary increases, bonus payments and growth in IT expenses, by 8 per cent to € 574 million. This increased the cost/income ratio by 2.0 percentage points to 31.9 per cent.
Other net income fell by 62 per cent to € 18 million. In particular, net income from derivatives was considerably lower than in the previous year (minus € 20 million).
The quality of the loan portfolio was again a major focus in 2010. Particular attention was paid to the quality of newly issued loans. Product parameters with an impact on risk – such as the maximum loan-to-value ratio for mortgages or the maximum term for consumer loans – were adjusted for each Group unit, depending on market conditions and risk-control capacities. Improving the quality of the portfolio, with particular emphasis on risk assessment and collection, remains the strategic focus.
The main factors contributing to success in the year under review were the focus on standardizing the training of relationship managers in affluent banking, efficiency improvements through the introduction of IT support in the advice process and the expansion of the product range. Over 420,000 customers currently receive individual service in this area.
Small and medium-sized enterprises The positive trend with regard to small and medium-sized enterprises (SMEs) in 2010 confirmed their significance to RBI in Central and Eastern Europe. The favorable result was mainly attributable to the focus on customer relationships and transaction business but also to the strengthening of portfolio management and collection activities across the entire network.
Kathrein & Co. Privatgeschäftsbank AG, headquartered in Vienna, has established itself over recent years as a private bank for business owners, foundations and asset transfers. In 2010, the assets managed by this private bank stood at around € 4.6 billion (2009: € 3.9 billion), of which around € 2.4 billion was in fund assets. This increased by approximately a third year-on-year as a result of net inflows and valuation gains. In addition to the improvement in fund business, securities also made a positive contribution to net income.
As a result of salary increases, bonus payments and growth in IT expenses for the various banking systems, general administrative expenses increased by 8 per cent to € 1,762 million in the year under review. The cost/income ratio therefore increased by 5.4 percentage points to 71.2 per cent.
Net allocations to provisioning for impairment losses remained relatively high at € 601 million. Provisioning for individual and portfolio-based loan losses was highest in Hungary, Ukraine and the Czech Republic.
In contrast to the previous year, the return on equity before tax was positive at 5.7 per cent.
In addition to this issue, equity-sparing financial service products without an effect on liquidity were very much in demand in 2010. RBI again underlined its dominant role here as a partner for payment transfers between East and West – and succeeded in acquiring new customers.
The Financial institutions & public sector division posted an increase in income over the year under review. Profit before tax increased by 27 per cent to € 262 million. While earnings were boosted by reduced net allocations, there was no repetition of the considerable valuation gains on derivative financial instruments and financial investments in 2009, following the financial crisis in 2008.
General administrative expenses increased by 7 per cent to € 198 million, and the cost/income ratio increased by 3.4 percentage points to 41.3 per cent. As in all business divisions, the increase was caused by salary increases and bonus payments as well as by growth in IT expenses as a result of investment.
Return on equity before tax in the Financial institutions & public sector division rose on the back of growth in profit before tax by 4.1 percentage points to 26.7 per cent.
Bond trading was realigned with a clear focus on customer trading and home markets. Austrian and state-guaranteed bonds were two products in particular demand. In the field of interest rate derivatives, trading with cross-currency swaps and interest-rate caps made a satisfying contribution to the result.
Treasury Through the course of the merger of Raiffeisen International with the principal business areas of RZB, the Treasury organization structure has been changed. Liquidity management was established as an independent field within financial management. More details can be found in the funding section of the management report.
The Capital markets & treasury division posted a profit before tax of € 297 million, a decrease of 38 per cent year-on-year.
Net trading income fell by 38 per cent to € 238 million, mainly as a result of contractions at Group headquarters. While 2009 saw trading portfolios valuation gains in the wake of the financial and economic crisis, this was not the case in 2010.
General administrative expenses increased by 3 per cent year-on-year to € 172 million. Thanks to a sharp rise in operating income, the cost/income ratio improved by 10.9 percentage points to 36.7 per cent.
The Participations & other division posted a net loss before tax of € 83 million. The result was mainly negative because it includes the imputed results from the investment of equity, which decreased strongly in the reporting period as interest rates fell in Russia, Romania and Hungary. Net interest income increased considerably year-on-year. This increase was primarily attributable to RBI AG.
Other net operating income includes income from valuation gains on equity investments.
Net income from derivatives and designated liabilities (6) (84,185) 8,205 –
In the reporting period, the principal business areas of RZB were transferred to Raiffeisen International Bank-Holding AG. The comparable figures for 2009 are the consolidated figures of Raiffeisen International Bank-Holding AG. Details to the merger are stated in the notes under consolidated group.
Retained earnings Items recognized directly in retained earnings developed as follows: Exchange differences
Net income from derivatives and designated liabilities (45,209) (86,338) 4,596 42,766
Net income from derivatives and designated liabilities (4,911) 23,877 (13,480) 2,720
Own shares/share incentive program 136 0 1,129 0 0 0 1,265
The effects due to the merger amounted to € 2,325,259 thousand and consist of the participation capital amounting to € 2,500,000 thousand and retained earnings of € 299,757 thousand, which were transferred and a capital increase of € 124,555 thousand against a contribution in kind. In the course of the merger, receivables and liabilities of the dispensing and the absorbing company were offset. This was also the case for the participation rights of € 600,000 thousand, which were fully held by RZB AG.
Gains (losses) from disposals of tangible fixed assets and financial investments (11,505) (5,462)
Payments for purchase of: Tangible and intangible fixed assets (618,706) (417,361)
Cash and cash equivalents at the end of previous period 4,179,572 7,129,860
In the reporting period, the principal business areas of RZB were transferred during the merger to Raiffeisen International BankHolding AG. The comparable figures for 2009 are the consolidated figures of Raiffeisen International Bank-Holding AG.
The statement of cash flows shows the structure and changes in cash and cash equivalents during the financial year and is broken down into three sections: net cash from operating activities, from investing activities and from financing activities. It was applied retrospectively by analogy with the comments in connection with the merger.
Internal management reporting at RBI is based on the current organizational structure. This is formed in a matrix structure i.e. directors are responsible both for individual countries and specific business activities (“country and functional responsibility” model). Within the Group, a cash generating unit is either a country or a business activity. The RBI management bodies – the Management Board and Supervisory Board – take decisions that determine the resources allocated to each segment in accordance with its financial strength and profitability. Consequently the reporting criteria are an essential component in the decisionmaking process. The segments are also defined in accordance with IFRS 8.
In the CEE area (in which the RBI follows the universal bank approach), segments are formed in accordance with geographic regions which are allocated to Group units according to the location of their head office. Countries that are expected to achieve comparable long-term economic performance and that have similar business structures are grouped together in regional segments. Outside the CEE area, RBI follows a relationship approach in which the segments are classed according to business fields. The segments therefore correspond to the Group organizational structure and are reflected in the internal management reports and in the management approach required under IFRS 8.
The segmentation is based on the Group structure as at 31 December 2010. The Group comprises the following segments: Central Europe This segment is made up of five countries in Central Europe: Czech Republic, Hungary, Poland, Slovakia and Slovenia. These constitute the most mature banking markets in the CEE region. They are also the markets in which RBI has been operating longest. Within the segment, the strategic focus is on developing and consolidating market leader positions whilst also ensuring long-term profitability. In terms of products, service and marketing, this represents an opportunity to offer exciting solutions with attractive margins. In Poland, Raiffeisen Bank Polska S.A. provides services to corporate customers, SMEs and a growing number of affluent retail customers. Tatra Banka a.s. in Slovakia is primarily involved in corporate and retail activities, but also has a strong emphasis on looking after affluent retail customers. In Slovenia, the Group is represented by Raiffeisen Banka d.d.. This bank especially concentrates on business with local corporate customers. The Czech Raiffeisenbank a.s. provides traditional banking services together with building society and insurance products in its local market. Raiffeisen Bank Zrt. has an extensive branch network in Hungary which serves retail customers, SMEs and a large number of corporate customers. RBI is also represented by the online ZUNO Bank in Slovakia. Separate leasing companies also operate in each country.
Southeastern Europe The S.E. Europe segment comprises Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Kosovo, Moldova, Romania and Serbia. The Albanian Raiffeisen Bank Sh.a. provides financial services across all business activities. Its product range is complemented by Raiffeisen Leasing Sh.a. and a private pension fund. Raiffeisen Bank Kosovo J.S.C. and Raiffeisen Leasing Kosovo represent RBI in Kosovo and offer a comprehensive product range. In Bosnia and Herzegovina, Raiffeisen Bank d.d. Bosnia Herzegovina and Raiffeisen Leasing d.o.o. Sarajevo focus on SMEs but also have a broad range of products for retail customers. In Bulgaria, the Group is represented by Raiffeisen (Bulgaria) EAD, Raiffeisen Leasing Bulgaria OOD and asset management companies. The Croatian Raiffeisen Austria d.d. specializes in large and medium-sized corporate customers and also has a substantial retail business. RBI also operates Raiffeisen Leasing d.o.o., capital management companies and an asset management company in Croatia. Raiffeisen Bank S.A. has an extensive branch network in Romania offering top-notch financial services. The Romanian operation also provides a tailored selection of products for corporate customers in Moldova. Moldova is included under Romania in view of its economic ties to Romania and the way it is therefore managed within the Group. RBI has a presence in the Serbian market in the form of Raiffeisen banka a.d., Raiffeisen Leasing d.o.o., two pension funds and an asset management company.
CIS other This comprises Belarus, Kazakhstan and the Ukraine. The Group is represented by Priorbank JSC and SOOO Raiffeisen Leasing in Belarus. In Kazakhstan, RBI is represented by Raiffeisen Leasing Kazakhstan LLP and in the Ukraine, Raiffeisen Bank Aval JSC, LLC Raiffeisen Leasing Aval and a capital management company provide a full range of financial services and products via an extensive branch network. Within the Ukrainian Group, the Ukrainian Processing Center PJSC processes the bulk of the card business.
Group markets The Group markets segment covers capital market customers and proprietary trading.. The results show income from currency and securities trading, interest-based transactions and structured products for financial institutions, as well as income from proprietary trading.
Proprietary trading and market maker activities are itemized under the Capital Markets and Credit Investments (non–core strategic proprietary trading in securities) profit centers plus the relevant profit centers in the Singapore, China and London branches. Net income from transactions for customers is posted against Financial Institutions & Sovereigns and Raiffeisen Financial Institutions Clients (operations involving Raiffeisen Landesbanks and related financial services providers) profit centers. The profit centers post net income from sales of all banking products and business relationships with banks, institutional customers, governments and local authorities. Raiffeisen Centrobank AG, where securities trading and capital market financing constitute the core business, is also part of this segment. The Mergers & Acquisitions division, which operates via locations in a number of different countries, is also represented in this segment by the subsidiaries of Raiffeisen Investment AG. The segment also includes private banking, reporting net income from Kathrein & Co. Privatgeschäftsbank, which advises on investing private and foundation assets, as well as on inheritance issues.
Corporate center The Corporate center segment encompasses all the services provided by Group headquarters for various parts of the Group to realize the Group’s overall strategy and which are allocated to this segment to ensure comparability. Liquidity management and balance sheet structure management linked to proprietary trading are again included under this segment and posted against the Treasury profit center. Net income from the equity investment portfolio is also recorded against the segment. In addition, the Corporate center segment report covers net income from banking operations carried out by Group headquarters and the Maltese subsidiary in relation to refinancing for Group units. Net income from the Special Customers profit center – customers for whom members of the Management Board are directly responsible – is also posted under this segment, as is income from the Austrian transaction services business operated by Raiffeisen Data Service Center, which offers a wide selection of order processing products and services for financial services providers. The net income of special and holding companies and other companies not directly allocated to a segment is also shown here. Interest costs linked to refinancing using hybrid equity instruments also appear against this segment.
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 group results. 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 accounts.
The performance of the CGUs is evaluated as follows: • Profitability The profitability is measured by the return on eyuity (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 proportion between profit/loss after deduction of non-controlling interests and the average consolidated capital employed. The return on equity reflects the yield of the capital of each segment. The calculation of the RORAC indicates the risk adjusted capital, which reflects the demand of own funds and which has to be brought forward in case of unexpected losses by the bank. In RBI this capital requirement is calculated within the economic capital model for credit, market and operational risk. That ratio shows the interest of the risk-adjusted equity (economic capital), which is no indicator according to IFRS. Within the different countries and business lines the real earned RORAC will be compared with the predetermined minimal value for the RORAC (Hurdle), which reflects the market adequate yield expectations.
• Efficiency The cost/income ratio represents the cost efficiency of the segment. The cost/income ratio shows the proportion of the administrative expenses and the operating income, meaning the sum of net interest income, net fee and commission income, net trading income and the other net operating income.
• Constraints In accordance with Basel II framework, specific determining factors have to be considered. The proportion of core tier 1 capital to risk-weighted assets (core tier 1 ratio) is an important indicator if the capital underlying for the business volume is adequate. The industry sector specifics are tending to different risk weights within the calculation of risk-weighted assets according to the Austrian Banking Act (based on Basel II). These factors are crucial for the calculation of the regulatory minimum own funds requirements. Moreover the efficient use of the available capital is calculated internally, whereas the actual usage is brought in proportion to the theoretical available risk coverage capital. The long term liquidity ratios are additionally restrictive and they are defined in accordance with the regulatory guidelines. The performance is also measured with the risk/earning ratio.
The presentation of segment performance is based on the income statement. Income and expenses are attributed to the country in which they are generated. Operating income positions are the net interest income, net fee and commission income, net trading income and the other net operating income. The other results include the net income from financial investments, the net income from derivatives (hedging) and designated liabilities and the net income from disposal of group assets. The segment result is shown till the profit/loss after deduction of non-controlling interests. The segment assets are represented by the total
Net provisioning ratio (average risk-weighted assets, credit risk) 1.86% 2.07% 0.96% 4.00% 0.86%
Share of profit before tax 44.9% 49.9% 29.3% (24.1)% – 100.0%
Return on equity before tax 9.1% 12.8% 14.6% – – 5.7%
Raiffeisen Bank International AG (RBI AG) is registered at the Vienna Commercial Court (Handelsgericht Wien) under Companies Register number FN 122.119m. The company is domiciled at Am Stadtpark 9, 1030 Vienna. The consolidated financial statements are lodged in the Companies Register in accordance with Austrian disclosure regulations and published in the official register of the Wiener Zeitung newspaper. Raiffeisen-Landesbanken-Holding GmbH indirectly holds the majority stake in Raiffeisen Bank International AG. The company therefore belongs to the Group of Raiffeisen-Landesbanken-Holding GmbH. Raiffeisen Zentralbank Österreich Aktiengesellschaft is the superordinated credit institution and RBI forms part of this credit institution group.
Raiffeisen Bank International (RBI) is a universal bank focusing on corporates and private customers in Central and Eastern Europe (CEE) and Austria. In CEE, RBI consists of a closely-knit network of banks, leasing companies and numerous specialized financial service providers with about 3,000 business outlets. In Austria, RBI serves the top 1,000 corporate customers and it is one of Austria’s prominent corporate finance and export and trade finance banks. Cash and asset management and treasury operations are further fields of activity. RBI’s focus as a highly specialized financial structurer is on serving Austrian and foreign key accounts, multinationals and providers of financial services. RBI has branches, subsidiaries and representative offices in the world’s major financial centers and in Asia, which have selective business with corporate customers and financial institutions.
As of 31 December 2009, the corporate customer business and all associated equity participations of Raiffeisen Zentralbank Österreich Aktiengesellschaft (RZB AG) were transferred to Cembra Beteiligungs AG (Cembra) based on a spin-off and acquisition agreement made between RZB AG and Cembra – a 100 per cent subsidiary of RZB AG – which held 72.8 per cent of Raiffeisen International Bank-Holding AG. Furthermore, Cembra was merged with Raiffeisen International Bank-Holding AG. In order to perform the merger, the subscribed capital was increased by € 124,555 thousand. In addition to the shares that Cembra held in Raiffeisen International to date, these newly issued shares were granted to Cembra’s sole shareholder as settlement for the company assets transferred. According to civil law, the merger became effective with the registration in the Companies Register as of 10 October 2010. After the merger, the company possessed a bank license and was renamed Raiffeisen Bank International AG. Raiffeisen International Beteiligungs GmbH, a fully owned subsidiary of RZB AG, now holds 78.5 per cent of RBI AG.
The merger was a transaction under common control and management has decided to show the intra-group vertical integration retrospectively. The company did not provide comparable figures due to impracticability. The changes in the organizational structure can only be approximately shown in the comparable period, as they can not be retrospectively presented in the banking and accounting system. Lack of information regarding decisions on refinancing in the course of the new company structure and allocation of resources guided us to make estimations. The resulting inexactness and lack of details led to the decision to present the previous year figures of Raiffeisen International.
The merger of the principal business areas of RZB with Raiffeisen International was accounted for by carrying over book values according to IAS 8.10. The regulations of IRS 3 were not applicable for intra-group business combinations.
The consolidated financial statements were signed by the Managing Board on 10 March 2011and subsequently submitted to the Supervisory Board for review and notice.
The consolidated financial statements for the financial year 2010 and the comparative figures for the financial year 2009 were prepared in accordance with the International Financial Reporting Standards (IFRS) published by the International Accounting Standards Board (IASB) and the international accounting standards adopted by the EU on the basis of IAS Regulation (EC) 1606/2002 including the interpretations of the International Financial Reporting Interpretations Committee (IFRIC/SIC) that were already applicable. All standards published by the IASB to be applied to financial statements for 2010 and adopted by the EU, have been applied. The consolidated financial statements satisfy the requirements of Section 245a of the Austrian Commercial Code (UGB) and Section 59a of the Austrian Banking Act (BWG) regarding exempting consolidated financial statements that comply with internationally accepted accounting principles.
All standards and interpretations to be applied to financial statements 2010 have been applied. IAS 20, IAS 31, IAS 41, IFRS 4 and IFRS 6 have not been applied as there were no relevant business transactions in the Group.
Other relevant standards and interpretations that have been published, but whose application is not yet compulsory, have not yet been adopted. This applies to the amended IFRS 7 (Financial Instruments: Disclosures, effective 1 July 2011), IAS 24 (Related Party Disclosures; effective 1 January 2011), IAS 32 (Classification of Warrants; effective 1 February 2010), IFRIC 14 (The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction; effective 1 January 2011), IFRIC 19 (Extinguishing Financial Liabilities with Equity Instruments; effective 1 July 2010, as well as changes in the so-called “Improvements Project - 2010”.
Shareholdings in subsidiaries not included in the consolidated financial statements because of their minor significance and shareholdings in companies that have not been valued at equity are shown under financial investments and are measured at cost.
Intra-group income and expenses are eliminated and temporary differences resulting from bank business transactions are shown in net interest income. Other differences were shown in other net operating income.
The estimation of the future development of the cash generating units starts with macroeconomic facts (gross domestic product, inflation expectations) and considers specific market conditions and the business policy. The data is used to capture the terminal value on a going concern concept. Discounting of the earnings relevant for the measurement (expected dividends) is made on different country-specific equity capital cost rates, which are based on the capital asset pricing model. The individual components (risk-free interest rate, inflation difference, market risk premium, country-specific risks and beta factors) are defined by using external information sources. The annual impairment test for goodwill for 2010 and 2009 did not result in an impairment loss as the recoverable amount for all cash generating units was higher than their respective carrying amount. The planning period is divided into two phases, phase I covers the first ten years, phase II covers the period over ten years.
Reduction in growth rate 2.4 PP 9.1 PP 16.4 PP 30.7 PP 39.1 PP
Discount rates (after tax) 1.2 PP 4.6 PP 12.5 PP 33.9 PP 112.1 PP
Group companies use brands to differentiate their services from 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 have to be tested annually for impairment and additionally whenever indications of impairment arise.
Included for the first time in the financial period 6 8 0 0
A list of fully consolidated companies, companies valued at equity and other equity participations may be found on page 251 ff.
In the financial year 2010, the following companies were included in the consolidated financial statements during the course of the merger of the principal business areas of RZB with Raiffeisen International: Name Share Included as of Reason
RZB Finance (Jersey) II Ltd., St. Helier (JE) 0.0% 1/1 Merger
RSC Raiffeisen Daten Service Center GmbH, Vienna (AT) 71.9% 1/1 Merger
F.J. Elsner & Co. Gesellschaft mbH, Innsbruck (AT) 100.0% 1/1 Merger
RI FINANCE (JERSEY) PCC, St. Helier (JE) 100.0% 30/11 End of operations
ROOF Global Loan CLO 2009-1, Dublin (IRL) 0.0% 31/3 End of operations
GSI Group Software Investment AG, Zug (CH) 100.0% 1/1 End of operations
Other companies 7 subsidiaries Raiffeisen Financial Services Company Zrt., Budapest (HU) 1/1 Immaterial
In the reporting period, there was no effect on cash flow resulting from disposal of group assets, as the disposal was mainly due to reasons of immateriality.
Financial statements of fully consolidated companies prepared in foreign currencies were translated into euros employing the modified current rate method in accordance with IAS 21. Equity was translated at its historical exchange rates while all other assets, liabilities and the notes were translated at the prevailing foreign exchange rates as of the reporting date. Differences arising from the translation of equity (historical exchange rates) were offset against retained earnings.
In the case of three subsidiaries not headquartered in the euro-area, the euro, and for three subsidiaries, the US dollar was the reporting currency for measurement purposes given the economic substance of the underlying transactions. Roof Russia S.A., Luxemburg, carries out its business transactions and refinancing in US dollars, therefore the functional currency is the US dollar.
As of 31/12 Average as of 31/12 As of 31/12 Average as of 31/12
According to IAS 39, financial assets, financial liabilities and derivative financial instruments are to be recognized on the statement of financial position. A financial instrument is defined as any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. Measurement of financial instruments is effected according to the measurement categories to which they belong. They are defined as follows: 1. Financial assets or liabilities at fair value through profit and loss a. Trading assets/liabilities b. Designated financial instruments at fair value 2. Financial assets held-to-maturity 3. Loans and advances 4. Financial assets available-for-sale 5. Financial liabilities 1. Financial assets or liabilities at fair value through profit and loss a. Trading assets/liabilities Trading assets/liabilities are acquired or incurred principally for the purpose of generating profit from short-term fluctuations in market prices. Securities (including short selling of securities) and derivative financial instruments held-for-trading are recognized at their fair values. If securities are listed, the fair value is based on stock exchange prices. Where such prices are not available, internal prices based on present value calculations for originated financial instruments and futures or option pricing models for options are applied. Present value calculations are based on an interest curve which consist of money market rates, future rates and swap rates and do not include risk premium. As option price formulas Black-Scholes 1972, Black 1976 or GarmanKohlhagen are applied depending on the kind of option.
Derivative financial instruments held-for-trading are also shown under trading assets or trading liabilities. Positive fair values including accrued interest (dirty price) are shown under trading assets. Negative fair values are recorded under trading liabilities. Positive and negative fair values are not netted. Changes in dirty prices are recognized in net trading income. Derivatives that are used neither for trading purposes nor for hedging purposes are recorded under the item derivatives. Furthermore, any liabilities from the short selling of securities are shown in trading liabilities.
On the other hand, liabilities are designated as financial instruments at fair value to avoid valuation discrepancies with related derivatives. The fair value of financial obligations under the fair value option contains all market risk factors, including those related to the credit risk of the Group. These financial obligations are mainly structured bonds. The fair value of these financial obligations is determined by discounting the contractual cash flows using a credit risk adjusted yield curve, which reflects the level at which a similar financial instrument could be issued at the reporting date. Market risk parameters are evaluated in comparison to similar financial instruments that are held as assets. Valuation results for liabilities that are designated as financial instruments at fair value are reported in net income from derivatives and designated liabilities.
4. Financial assets available-for-sale The category of financial assets available-for-sale contains those financial instruments (mainly equity participations for which there is no active market) that did not qualify for any of the other three categories. They are stated at fair value, if a fair value is reliably measurable. Valuation differences are shown in other comprehensive income and only recognized in the income statement under net income from financial investments if there is an objective indication of impairment. For equity instruments impairment exists, among other things, if the fair value is either significantly or for a prolonged period of time below cost.
In accordance with IAS 39.50, non-derivative financial instruments classified as trading assets and available-for-sale financial instruments can be reclassified as financial assets held-to-maturity and loans and advances in exceptional circumstances. In 2010, no use was made of the possibility to reclassify. The effects resulting from the reclassification of previous years are shown in the notes under (20) financial investments.
If market prices are available, the fair value is reflected by the market price. This category contains equity instruments traded on the stock exchange, debt instruments traded on the interbank market, and derivatives traded on the stock exchange.
When current bid and asking prices for financial instruments are unavailable, the prices of similar financial instruments provide evidence of the current fair value or are determined by accepted measurement methods enclosing observable prices or parameters (in particular present value calculation or option price model). These methods concern the majority of the OTC-derivates and non-quoted debt instruments.
Loans and advances to customers X Loans and advances of which finance lease business X n/a
Positive fair values of derivatives for hedge accounting (IAS 39) X
If derivates are held for the purpose of risk management and if the respective transactions meet specific criteria, the Group uses hedge accounting. The Group designates hedging instruments, primarily derivatives, as either fair value hedge, cash-flow hedge or hedge of a net investment in a foreign operation (capital hedge). At the beginning of the hedging relationship, the relationship between underlying and hedging instrument, including the risk management objectives, is documented. Furthermore, it is necessary to document from the beginning and during the hedging relationship that the fair value or cash flow hedge is effective to a large degree.
Hedge Accounting according to IAS 39 applies for those derivatives that are used to hedge the fair values of financial assets and liabilities. The credit business is especially subject to such fair value risks if it deals with fixed-interest loans. Interest-rate swaps that satisfy the prerequisites for hedge accounting are contracted to hedge against the interest-rate risks arising from loans. Hedges are formally documented, continuously assessed, and rated to be highly effective. In other words, throughout the term of a hedge, one can assume that changes in the fair value of a hedged item will be nearly completely offset by a change in the fair value of the hedging instrument and that the actual outcome will lie within a band of 80 to 125 per cent.
Derivative instruments held to hedge the fair values of individual items in the statement of financial position (except trading assets/liabilities) are recognized at their fair values (dirty prices) under derivatives (on the assets side: positive dirty prices; on liabilities side: negative dirty prices). Changes in the carrying amounts of hedged items (assets or liabilities) are allocated directly to the corresponding items of the statement of financial position and reported separately in the notes. Both the effect of changes in the carrying values of positions requiring hedging and the effects of changes in the clean prices of the derivative instruments are recorded under net income from derivatives (net income from hedge accounting).
In the Group, hedges of investments in economically independent sub-units (IAS 39.102) were made in order to reduce differences arising from the translation of equity. Liabilities in foreign currency, currency options, currency futures and currency swaps are mainly used as hedging instruments.
Where the hedge is effective the resulting gains or losses from foreign currency translation are recognized and shown separately in other comprehensive income.
The group securitizes several financial assets from transactions with private customers and business customers by selling them to a special purpose entity that issues securities to investors. The assets transferred are derecognized fully or partly. Rights to securitized financial assets can be retained in the form of junior or subordinated tranches, interest claims or other remaining claims (retained rights).
Under reverse repurchase agreements, assets are acquired with the obligation to sell them in the future. Cash outflows arising from reverse repurchase agreements are recorded in the statement of financial position under loans and advances to banks or loans and advances to customers.
Leases are classified according to their contractual structure as follows: Page 156 Consolidated financial statement
An operating lease occurs when the risks and rewards of ownership remain with the lessor. The leased assets are allocated to the Group under tangible fixed assets and depreciated in accordance with the principles applicable to the type of fixed assets. Rental income from the corresponding lease object is amortized on a straight-line basis over the term of the leasing contract and reported in other net operating income. Operating expenses for leases are generally amortized on a straight-line basis over the term of leasing contract and reported as administrative expenses.
Under this item, internally developed and acquired software, brand rights, acquired customer bases and especially goodwill are stated. Intangible fixed assets acquired in a business combination are reported separately from goodwill and measured at fair value. Goodwill and other intangible fixed assets (e.g. brand rights) without definite useful lives are tested for impairment at each reporting date and also during the year whenever trigger events occur. Whenever events or changes in circumstances indicate that the expected benefit no longer exists, impairment must be made pursuant to IAS 36.
The resulting gain or loss from the sale of any asset is determined as the difference between the proceeds and the carrying value of the asset and is recognized in other net operating income. When assets are retired, the remaining carrying amount is also recognized in the income statement.
This means property that is held to earn rental income and/or for capital appreciation. Investment property is reported at amortized cost using the cost model permitted by IAS 40 and is shown under tangible fixed assets because of minor importance. Income resulting from investment property is shown in other net operating income.
Inventories are measured at the lower of cost or net realizable value. Write-downs are made if the acquisition cost is above the net realizable value as of the reporting date or if limited usage or longer storage periods have impaired the value of the inventory.
The actuarial calculation of pension obligations for active employees is based on the following assumptions: Effective salary increase for active employees 2.5 3.0
Calculations are based on an assumed retirement accession age of 65 years for men and 60 years for women and are subject to transitional statutory regulations and special arrangements in individual contracts. Actuarial gains or losses calculated for pension obligations are recognized immediately in profit. No use was made of the corridor method according to IAS 19.92.
Other provisions are made to uncertain liabilities against third parties in the amount of the expected claim. These provisions are not discounted because the resulting interest effect is immaterial.
The item comprises subordinated capital and supplementary capital. Liabilities documented or undocumented are subordinated if, in the event of liquidation or bankruptcy, they can only be met after the claims of the other – not subordinated – creditors have been satisfied. Supplementary capital contains all paid-in own funds which are available for the company for more than eight years, for which interest is paid only from the profit and which can be repaid in the case of solvency only after all other debtors are satisfied.
The number of common shares in RBI AG to be actually transferred will depend on meeting two performance criteria: the targeted average return on equity (ROE) and the total shareholder return (TSR) for RBI AG shares in relation to TSRs of shares in the DJ EURO STOXX BANKS index after a three-year holding period. Moreover, beneficiaries have to be in active service for RBI. SIP participation is voluntary.
All share-based remunerations are recognized according to IFRS 2 (Share-based Payment) as staff expenses and recognized directly against equity.
Net fee and commission income mainly includes income and expenses arising from payment transfers, foreign exchange business and credit business. Fee and commission income and expenses are accrued in the reporting period.
Net trading income comprises the trading margins resulting from the foreign exchange business, results due to foreign exchange revaluations and all realized and unrealized gains and losses from financial assets and liabilities at fair value. In addition, it includes all interest and dividend income attributable to trading activities and related refinancing costs.
Current taxes are calculated on the basis of taxable income of the current year. The taxable income deviates from the profit of the statement of comprehensive income due to expenses and income which are taxable or tax-deductible in the following years or which are never taxable or tax-deductible. The liability is recognized on the basis of the actual tax rate or the future tax rate which is enacted by the end of the reporting period.
Deferred taxes are recognized and calculated in accordance with IAS 12 applying the liability method. Deferred taxes are based on all temporary differences that result from comparing the carrying amounts of assets and liabilities in the IFRS accounts with the tax bases of assets and liabilities, and which will reverse in the future. Deferred taxes are calculated by using tax rates applicable in the countries concerned. A deferred tax asset should also be recognized on tax loss carry-forwards if it is probable that sufficient taxable profit will be available against which the tax loss carry-forwards can be utilized within the same entity. On each reporting date, the carrying amount of the deferred tax assets is reviewed and impaired if it is not probable that sufficient taxable income is available in order to partly or fully realize the tax assets. Deferred tax assets and deferred tax liabilities within the same entity are netted.
Net realized gains (losses) on financial assets not measured at fair value through profit and loss 15,728 8,540
Impairment on financial assets not measured at fair value through profit and loss (4,756) (5,075)
Impairment on financial assets not measured at fair value through profit and loss (1,211,179) (1,750,534)
Net realized gains (losses) on financial assets not measured at fair value through profit and loss 5,010 3
Profit before tax from continuing operations 1,287,322 367,597 1 Adaption of previous year figures due to different mapping.
The net interest income position includes income and expenses from items of banking business, dividend income, and fees and commissions with interest-like characteristics.
The interest margin on the respective averages of the stated base is as follows: Interest margin (total assets) 2.51 3.73
Net provisioning for impairment losses on items reported on and off the statement of financial position is as follows: Individual loan loss provisions (1,196,101) (1,564,705)
The position net trading income also includes interest and dividend income, refinancing costs, commissions and any changes in fair value of trading portfolios.
Net income from other derivatives includes valuation results, which are held to hedge against market risks (except trading assets/liabilities). They are based on an inhomogeneous portfolio and do not satisfy the requirements for hedge accounting according to IAS 39.
Net income from liabilities designated at fair value comprises a profit from changes in own credit risk amounting to € 33,000 thousand (2009: € 0) and negative effects from changes in market interest rates.
Net valuations of securities at fair value through profit and loss 57,869 22,588
General administrative expenses contain staff expenses, other administrative expenses and depreciation on tangible and intangible fixed assets. They break down as follows: Wages and salaries (1,115,001) (805,599)
Expenses on severance payments, retirement benefits and anniversary payments (26,761) (3,950)
Legal, advisory and consulting expenses include audit fees of the Group companies which comprise expenses paid for the audit of financial statements amounting to € 7,345 thousand (2009: € 5,315 thousand) and tax advisory as well as other additional consulting services provided by the auditors amounting to € 2,977 thousand (2009: € 1,954 thousand). T thereof, € 1,651 thousand (2009: € 300 thousand) are accounted for by the group auditor for the audit of the consolidated financial statement and the individual financial statement and € 670 thousand (2009: € 130 thousand) is accounted for the by other consulting services.
In the reporting period, 41 subsidiaries were excluded from the consolidated group due to changed materiality limits. six subsidiaries were excluded due to end of operations. Net income from disposal of group assets amounted to € 4,734 thousand (2009: € 76 thousand).
Income taxes break down as follows: Current income taxes (357,066) (148,722)
The following reconciliation shows the relation between profit before tax and the effective tax burden: Profit before tax 1,287,322 367,597
Tax decrease because of tax-exempted income from equity participations and other income 102,649 97,436
The following table shows the statement of financial position according to IAS 39 measurement categories: Assets according to measurement categories €000
Of the purchased loans amounting to € 34,510 thousand, € 34,203 thousand are assigned to the measurement category loans and advances (2009: € 107 thousand) and € 307 thousand to held-to-maturity (2009: € 101 thousand).
Loans and advances to banks classified regionally (counterparty’s seat) are as follows: Loans and advances to banks break down into the following bank segments: Multilateral development banks 9,983 22,652
Loans and advances to customers classified regionally (counterparty’s seat) are as follows: Consolidated financial statement Page 173
Provisions for impairment losses are formed in accordance with uniform Group standards and cover all recognizable credit risks. A table with the development of the impairment losses on loans and advances can be found in the risk report on page 200 Provisions for impairment losses are allocated to the following asset classes according to the Basel II definition: Corporate customers – large 2,431,647 1,364,783
The following table shows the carrying amount of individually impaired assets, the amount of individually allocated provisions and the corresponding net value of available collaterals: 31/12/2010 Impairments and collaterals
The trading assets consist of the following securities and derivative instruments held-for-trading: Bonds, notes and other fixed-interest securities 4,013,416 3,152,498
Positive fair values of derivatives in fair value hedges (IAS 39) 360,827 21,565
Pledged securities ready to be sold or repledged by the transferee are allocated to the appropriate securities category in the table above. Further details are shown under note (40) genuine sale and repurchase agreements.
As in the previous year, no reclassification was made for securities held-for-trading to the categories held-to-maturity and loans and advances. The carrying amount of the securities reclassified into the category held-to-maturity amounted to € 371,686 thousand at the date of reclassification in 2008. As of 31 December 2010, the carrying amount was € 238,188 thousand and the fair value totaled € 244,238. In 2010, a result from the reclassified securities of € 16,343 thousand (2009: € 13,709 thousand) was shown in the income statement. If the reclassification had not been made, a gain of € 9,042 thousand (2009: € 3,983 thousand) would have arisen.
The carrying amount of the securities reclassified into the category loans and advances amounted to € 1,559,682 thousand at the date of reclassification in 2008. The carrying amount as of 31 December 2010 totaled € 1,316,691 thousand and the fair value was € 1,317,946 thousand. In 2010, a result from the reclassified securities of € 41,306 thousand (2009: 0) was shown in the income statement. If the reclassification had not been made, a gain of € 69,648 0 thousand (2009: € 0) would have arisen.
Equity participations valued at amortized cost for which fair values could not be measured reliably amounted to € 80,549 thousand (2009: € 33,590 thousand).
The shares in companies valued at equity are as follows: Investments in associates 4,961 5,437
The fair value of investment property totaled € 110,630 thousand (2009: € 26,864 thousand).
Write-ups, amortization, depreciation, impairment Carrying amount hereof hereof €000 Cumulative Write-ups Depreciation 31/12/2010
Land and buildings used by the Group for own purpose (183,735) 0 (33,304) 553,590 of which land value of developed land 0 0 0 13,901
Office furniture, equipment and other tangible fixed assets 1,053,552 1,240 (35,051) 155,635 (84,067) (36,383) 1,054,926
Write-ups, amortization, depreciation, impairment Carrying amount hereof hereof €000 Cumulative Write-ups Depreciation 31/12/2009
Office furniture, equipment and other tangible fixed assets (575,505) 48 (119,154) 479,421
Deferred taxes break down as follows: Deferred tax assets 462,688 120,069
RBI refinances itself periodically with international commercial banks and multinational development banks. These credit contracts contain ownership clauses normally used in business. These clauses give permission to an exceptional termination in the case of change in direct or indirect control over RBI AG, e.g. if Raiffeisen Zentralbank Österreich Aktiengesellschaft loses the majority shareholding in RBI AG. This can lead to increased refinancing costs for RBI in the future.
Deposits from banks classified regionally (counterparty’s seat) break down as follows: Deposits from banks break down into the following bank segments: Multilateral development banks 1,311,415 847,306
Deposits from customers break down analog to Basel II definition as follows: Corporate customers – large 26,924,075 14,180,912
RBI is involved in pending legal issues, which may occur in the banking business. RBI does not expect that these legal cases will have a material impact on the financial position of the Group.
Provisions for retirement benefits developed as follows: Defined benefit obligation (DBO) as of 1/1 4,960 4,769
Plan assets developed as follows: Plan assets at fair value as of 1/1 0 0
Negative fair values of derivatives in cash flow hedges (IAS 39) 453,276 44,913
As long as the conditions for hedge accounting according to IAS 39 are fulfilled, derivative financial instruments are measured at their fair values (dirty prices) in their function as hedging instruments. The hedged items in connection with fair value hedges are loans and advances to customers and deposits from banks. The hedged risks are interest rate risks.
In the reporting period, expenses on subordinated capital totaled € 193,147 thousand (2009: € 93,850 thousand).
Own shares The Annual General Meeting held on 8 July 2010 authorized the Managing Board to acquire own shares, pursuant to Section 65 (1), item 8 of the Austrian Joint Stock Companies Act (AktG), during a period of 30 months as of the date of the resolution, up to 10 per cent of the subscribed capital of the company and to withdraw if applicable. This authorization may be exercised in one or several installments by the company, by affiliated companies or, for their account, by third parties. The Management Board was further authorized to decide, with the approval of the Supervisory Board, on the sale of own shares by means other than the stock exchange or a public tender excluding the subscription rights of shareholders. This authorization replaces the authorization to buy back and use own shares that was granted in the Annual General Meeting of 10 June 2008. No own shares have been bought since the authorization was issued in July 2010.
The Annual General Meeting held on 8 July 2010 also authorized the Managing Board to acquire own shares for the purpose of securities trading in accordance with Section 65 (1), item 7 of the Austrian Joint Stock Companies Act (AktG) during a period of 30 months from the date of the resolution, up to a maximum of 5 per cent of the respective subscribed capital of the company. 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
The Managing Board was authorized by the Annual General Meeting held on 5 June 2007, within five years after registration of the respective change in the articles of incorporation in the Company Register, to increase the share capital up to € 181,437 thousand against contribution in cash and/or in kind by issuing 59,487,500 new common bearer shares with voting rights while preserving the subscription rights of the shareholders, including the indirect subscription by way of a bank pursuant to Section 153 (6) of the Austrian Joint Stock Companies Act, and to determine the offering price and terms of the issue with the approval of the Supervisory Board. The Supervisory Board or a committee authorized for this purpose by the Supervisory Board is entitled to adopt amendments to the articles of association that arise upon issuing shares from the authorized capital.
Convertible bonds In the Annual General Meeting held on 10 June 2008, the Managing Board was given the authorization pursuant to Section 174 (2) of the Austrian Joint Stock Companies Act to issue – with the approval of the Supervisory Board – convertible bonds, also in several tranches, within five years as of the date of the resolution, for a maximum total nominal amount of € 2,000,000 thousand, to which attaches a conversion or subscription right to obtain a maximum of 15,466,750 ordinary bearer shares of the company with a corresponding pro-rata share in the subscribed capital of a maximum of € 47,174 thousand – and to do so also indirectly by means of a guarantee for an issue of convertible bonds by a subsidiary company, of which the company holds one hundred per cent directly, or indirectly, that entails conversion rights to obtain shares of that company – as well as to determine all further conditions (including the currency of the issue), the issue and the conversion procedure for the convertible bonds. The subscription right of shareholders is excluded.
Pursuant to Section 159 (2) item 1 of the Austrian Joint Stock Companies Act, the subscribed capital has been increased contingently by a maximum of € 47,154 thousand by issuing a maximum of 15,466,750 common bearer shares (contingent capital). The contingent capital increase would only be carried out to the extent that holders of convertible bonds issued under the resolution of the Annual General Meeting of 10 June 2008 make use of their right to convert such bonds into shares of the Company. No convertible bonds have been issued to date, however.
The number of shares outstanding developed as follows: Number of shares 2010 2009
Amount with share price of € 31.91 at the allotment date (9/3/2010)
Members of the Managing Board of the company 4,899 156,327 3,971
Members of the managing boards of bank subsidiaries affiliated with the company 7,163 228,571 6,277
In order to avoid legal uncertainties and in accordance with the program’s terms and conditions, eligible employees in two countries were given a cash settlement instead of an allotment of shares. In Austria the eligible parties were granted the option of accepting a cash settlement instead of half of the matured shares in order to offset the wage tax payable at the time of transfer. Therefore, the number of actually transferred shares is lower than the number of due shares. The portfolio of own shares was subsequently reduced by the lower number of actually transferred shares.
Members of the Managing Board of the company 147,611 43,061 221,417
Members of the managing boards of bank subsidiaries affiliated with the company 252,269 73,399 378,404
Impairment losses on loans and advances (4,755,872) 0 0 0 0 31/12/2009
As of 31 December 2009, the transactions with related parties were as follows: 31/12/2009
Assets and liabilities with counterparties outside Austria are as follows: (39) Securitization RBI as originator
Up to now the following transactions have been executed with external contractual partners (the indicated amounts represent the transaction volumes at the closing date): Consolidated financial statement Page 195
ZAO Raiffeisenbank, Moscow (RUS) May 2007 May 2017 297,000 Car loans 1.9%
As of 31 December 2010, RBI reported the following investment exposure (excluding CDS): €000 Outstanding notional amount Carrying amount
Securities sold in genuine sale and repurchase agreement 5,415,578 1,024,330 hereof sold or repledged 5,355,684 894,255 hereof bonds, notes and other fixed-interest securities 5,355,684 894,255
Within the framework of securities lending, borrowed securities amounted to € 973,283 thousand (2009: € 4,696 thousand) and loaned securities amounted to € 3,912,527 thousand (2009: 0).
As of 31 December 2010, write-offs on unrecoverable minimum lease payments outstanding totaled € 39,958 thousand (2009: € 46,597 thousand).
Future minimum lease payments under non-cancelable operating leases are as follows: More than 1 year, up to 5 years 64,388 79,467
Operating leases from view of lessee Future minimum lease payments under non-cancelable operating leases are as follows: More than 1 year, up to 5 years 167,327 238,918
• Continuous planning: Risk strategies and risk capital are reviewed and approved in the course of the annual budgeting and planning process, whereby special attention is also paid to risk concentrations.
• 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 done under risk-return considerations and that there are no incentives for taking high risks.
The Managing Board of Raiffeisen Bank International ensures the proper organization and ongoing development of risk management. It decides which procedures are to be employed for identifying, measuring, and monitoring risks, and makes steering decisions according to the created risk reports and analyses. The Managing Board is supported in implementing these tasks by independent risk management units and specially appointed committees.
The Risk Management Committee is responsible for ongoing development and implementation of methods and parameters for risk quantification models and for refining steering instruments. The committee also analyzes the current risk situation of the Group with respect to internal capital adequacy and the corresponding risk limits. It approves risk management and controlling activities (like the allocation of risk capital) and advises the Managing Board in these matters.
The Credit Committees are staffed by front office and back office divisions with different participants depending on the customer segment (corporate customers, financial institutions and sovereigns, and retail). They approve limit applications according to the credit approval authority (depending on rating and exposure size) and vote on all credit decisions.
The Group Asset/Liability Committee assesses and manages balance sheet and liquidity risks. In this context it plays an important role for the Group’s long term funding planning and the hedging of structural risk positions.
The Credit Portfolio Committees define the credit portfolio strategies for different customer segments. In these committees, representatives from business and risk management divisions together discuss the risks and opportunities of different customer segments (e.g. industries, countries, retail products). Based on the discussion credit portfolio management then develops lending policies and sets limits steering the future credit portfolio.
Quality assurance with respect to risk management refers to ensuring the integrity, soundness, and accuracy of processes, models, calculations, and data sources. This should ensure that the Group adheres to all legal requirements and that it can achieve the highest standards in risk management related operations.
The Compliance Office is responsible for all issues concerning compliance with legal requirements. It is supplementary to and at the same time an integral part of the internal control system and is responsible for preventing any shortcomings in daily operations.
Unexpected losses on an annual basis (economic capital) must not exceed the present value of equity and subordinated liabilities 99.95 per cent as derived from the target rating
Risk-taking capacity (projected earnings plus capital exceeding regulatory requirements) must not fall below the annualized value-at-risk of the Group 99 per cent reflecting the owners’ willingness to inject additional own funds
Risk of falling short of a sustainable core capital ratio over a full business cycle
Capital and loss projection for the three-year planning period based on a severe macroeconomic downturn scenario 70-90 per cent based on the management decision that the Group might be required to temporarily reduce risks or raise additional core capital
RBI uses a confidence level of 99.95 per cent for calculating unexpected losses for a 1 year horizon. This confidence level is based on the probability of default implied by the target rating. The purpose of calculating economic capital is to determine the amount of capital that would be required for servicing the claims of customers and creditors even in the case of such an extremely rare event.
Economic capital shows – as in the previous year – that credit risk of asset class corporate customers remains the dominant risk category. Its share in total risk is 34 per cent; credit risks in total accounts for 70 per cent of economic capital. Market risk and operational risks account for 9 per cent each and in addition a general risk buffer is allocated for other risks as well.
In the regional break down of economic capital as of 31 Decmber 2010 the largest share is allocated to Group units located in Austria. About 26 per cent of economic capital is allocated there which can be attributed mostly to the head office of RBI. It contributes significantly to the total risk position in particular due to centralized functions (e.g. capital and liquidity management) and its corporate lending business.
The main focus of this integrated stress test is the resulting core capital ratio for a multi-year period. The minimum amount of core capital is thus determined by the size of the potential economic downturn. In this analysis the need for allocating loan loss provisions, potential procyclical effects that increase minimum regulatory capital requirements, the impact of foreign exchange fluctuations as well as other valuation and earnings effects resulting from the downturn scenario are incorporated.
This perspective thus also complements traditional risk measurement based on the value-at-risk concept, which is in general based on historic data. Therefore it can incorporate exceptional market situations that have not been observed in the past and it is possible to estimate the potential impact of such developments. The stress test also allows for analyzing risk concentrations (e.g. individual items, industries, or geographical regions) and gives insight into the profitability, liquidity situation, and solvability under extreme situations.
Credit risk within RBI stems mainly from default risks that arise from business with retail and corporate customers, other banks and sovereign borrowers. Default risk is defined as the risk that a customer will not be able to fulfill contractual financial obligations. Also migration risks (caused by deteriorations in customers’ creditworthiness), concentration risks of creditors, risks in credit risk mitigation techniques, and country risk are also considered.
No lending transaction is performed in the non-retail segments without running through the limit application process beforehand. This process is also consistently applied – besides new lending – to increases in existing limits, extensions, overdrafts, and if changes in the risk profile of a borrower occur (e.g. with respect to the financial situation of the borrower, the terms and conditions, or collateral) compared to the time the original lending decision was made. In addition it is used when setting counterparty limits in treasury and investment banking operations, other credit limits, and for equity participations.
Reconciliation of figures from the IFRS consolidated financial statements to total credit exposure (according to Basel II)
Rating models in the main non-retail asset classes – corporates, financial institutions, and sovereigns – are uniform in all Group units and rank creditworthiness in ten classes. Country specific scorecards are developed for retail asset classes based on uniform Group standards. Customer rating, as well as validation is supported by specific software tools (e.g. for business valuation, rating and default database).
5.0 Default (acc. to Basel II definition) 4,287,339 5.3% 2,531,273 6.6%
Analyzed in terms of internal rating, the portfolio is concentrated in solid rating categories. This concentration mainly results from the credit exposure to customers located in Central and Eastern European growth markets. The contributed business from Raiffeisen Zentralbank Österreich AG improves the average credit portfolio quality, as shown by the increasing share of customers with good and excellent credit standing. This is confirmed by analyzing the average credit portfolio quality as well (according to the exposure weighted average default probability). The new segment Group Corporates shows the lowest average default probability, followed by Russia and CIS other, and the segment Southeastern Europe.
6.3 Acceptable project risk profile – average risk 912,439 14.7% 745,345 22.5%
6.4 Poor project risk profile – high risk 369,901 6.0% 219,127 6.6%
The maximum credit exposure in project finance amounted to € 6,199,300 thousand at year end 2010. Projects are rated either in categories ‘Excellent project risk profile – very low risk’ (rating 6.1) or ‘Good project risk profile – low risk’ (rating 6.2) account for 72 per cent and thus take the highest share of the portfolio. This reflects mainly the high level of collateralization in specialized lending transactions. Unrated projects make up less 1 per cent (€ 56,824 thousand) of the portfolio.
Corporates: maximum credit exposure by internal rating and segment 208 Consolidated financial statements
The rating model for project finance has five different grades. The exposure from project finance is shown in € thousand in the table below. Project ratings incorporate both individual default probabilities and collateral provided: 6.1 Excellent project risk profile – very low risk 2,459,758 39.7% 940,405 28.4%
Corporates: maximum credit exposure by internal rating and segment in € million
Corporate center hereof nonhereof individual loan loss provision 191,599 255,487 149,615 337,813 – –
The financial institutions asset class mainly contains exposures to banks and securities firms. The internal rating model for financial institutions is based on a peer-group approach that takes both qualitative and quantitative information into account. The final rating for financial institutions is capped by the country rating of the respective home country.
A1 A2 A3 B1 B2 B3 B4 B5 C d nR
The maximum credit exposure of these customers is € 32,360,405 thousand. With respect to the rating distribution in this asset class, the rating class A3 contributes € 18,250,722 thousand or a share of 56.4 per cent. The absolute increase results mainly from short-term deposits at other banks and can be mainly attributed to segment Group markets. Taking all rating classes together, the Group markets segment accounts for the largest portfolio share (€ 25,457,128 thousand or 78.7 per cent) followed by the Corporate center segment at € 2,172,623 thousand or 6.2 per cent.
The share of unrated financial institutions was below 1 per cent at year-end 2010. This exposure was mainly caused by shortterm loans to small banks, where the rating process had not yet been completed.
As a result of the economic crisis and the resulting risks for this industry class, the bank’s management decided that the exposure in this asset class will not be increased any further. As some existing contracts will not be renewed, the maximum credit exposure will eventually even decrease. Credit business with other financial institutions in the Raiffeisen Banking Group (which are covered by a joint risk monitoring system) is not restricted by this decision.
Credit exposure – Sovereigns Another asset class is formed by central governments, central banks, and regional municipalities as well as other public sector entities. The table below provides a breakdown of the credit exposure to sovereigns (including central banks) by internal rating. Since defaults in this asset class are historically very rare, default probabilities are estimated using full data sets provided by external rating agencies.
Average rating grades (‘Very good credit standing’, rating A3 to ‘Mediocre credit standing’, rating B3) form 49.9 per cent of the portfolio. The high exposure in these rating categories mainly results from deposits of network banks at local central banks in Central and Eastern Europe. They are mandatory for meeting the respective minimum reserve requirements or used in order to manage excess liquidity on a short-term basis and therefore are intrinsically linked to the banking business in these countries. The exposure in rating class B4 is € 2,097,273 thousand (or 8.1 per cent) and results mainly from short-term deposits at the central banks of Russia and in region CIS other.
The maximum credit risk exposure and the market price (fair value) of collaterals are shown in the following table: 31/12/2010 Maximum credit exposure Fair value of collateral €000 Net exposure Commitments/guarantees issued
Retail customers – small and medium-sized entities 2,198,479 347,148 1,553,402 31/12/2009 Maximum credit exposure Fair value of collateral €000 Net exposure Commitments/guarantees issued
Collateral ready to be sold or repledged in the absence of default of the debtor amounted to € 16,820,440 thousand (2009: € 15,540,905 thousand).
Problem loans (where debtors might run into material financial difficulties, or a delayed payment is expected) need special treatment. In non-retail divisions, problem loan committees in the individual Group units make decisions on problematic exposures. If the need for intensified treatment and workout is identified, then problem loans are assigned either to a designated specialist or to a restructuring unit (workout department). Employees of the workout units are specially trained and have extensive experienced. They typically handle medium-sized to large cases and are assisted by in-house legal departments and/or by external specialists as well. Work-out units play a decisive role in accounting and analyzing as well as booking provisions for impairment losses (write-offs, value adjustments, provisioning). Their early involvement can help reduce losses resulting from problem loans.