Letter from the Chief Executive Officer
2013 has been a transformative year for BAWAG P.S.K. We have executed on several strategic initiatives and delivered strong financial results. Throughout the year, the management team took decisive actions to further position the Bank for sustained, long-term profitability
All actions executed supported the Bank’s goal of becoming the most efficient bank in Austria, whose dominant focus is on serving retail and corporate customers. We simplified our business model and invested in assets, products and services that are most valuable to both our customers and our other stakeholders. Austria is our home market, where the vast majority of our investment and resources continue to be dedicated.
Our results were driven by the Bank’s strategy for 2013, which was based on four key pillars:
- investing in our core retail franchise as well as our sustainable corporate lending and investment operations;
- repositioning the balance sheet to focus on our customers in core markets while de-risking from non-core assets, products and certain geographic locations;
- improving our cost base by accelerating the Bank-wide efficiency and productivity programs and simplifying our business model; and
- significantly strengthening our capital base and maintaining strong liquidity to address the changing regulatory environment while at the same time providing us with sufficient capacity for further investment in our core businesses.
1. Investing in Our Core Businesses
We continued to invest in our core businesses to support our multi-channel retail and corporate business model as well as anticipating possible structural changes in the banking sector. We focused on providing products and services which our customers value while at the same time positioning the Bank to benefit from any future positive macroeconomic conditions.
During the year, we launched our securities and insurance box products, which complete the full suite of easy-to-understand and efficient current account, savings, investment and lending products. Our unique “box concept”, with its tangible visibility, simplicity and consistency, is highly valued by our customers and meets our commitment to clear, fair and intuitive banking products. For example, the KontoBox, our current account product, has been sold more than 252,000 times since launch.
In 2013, we completed the build-out of our branch initiative “Filialoffensive” in retail banking. We are extremely pleased with the progress made and the foundation for accelerated growth from the investment in our network and products for our customers. Our unique branch network operated with our partner, Österreichische Post AG, allows us to offer banking and postal services from a centrally managed, flexible operating and cost infrastructure. Our branch structure provides good visibility for our brand where we can highlight our products and services not only to our current banking customers but also to future potential new customers who frequent these joint branches for postal services.
We also continued to invest and expand our digital distribution through our e-banking and direct banking platforms offering an enhanced range of services. We launched our new online platform at the end of the year with the goal of making banking business simpler, more efficient and more secure. The new interactive platform offers modern and easy access to all the Bank’s products and services.
easybank, our direct banking subsidiary, had a record year in 2013, with customer deposit growth to EUR 2.7 billion. easybank is complimentary to the BAWAG P.S.K. retail franchise, but with its own distinctive brand position and target market segment. easybank, however, shares the same principles as BAWAG P.S.K. of fairness, simplicity, transparency and innovation with a common operating platform.
We remain a strong provider for our Austrian corporate and public sector customers. Although the business segment continues to face competitive margin pressure, we have maintained stable operating income for our defined core client business, which we continue to invest in actively. In addition to lending, we are focusing on our payments and treasury services products, where we think the Bank is best in class.
We highly value our long-standing payments service relationship with the Republic of Austria and want to thank them for their continued confidence in and support of our Bank as a reliable partner.
Our international business strategy focuses primarily on Germany, the UK and selected areas of the rest of Western Europe. The international platform has been a key driver of earnings diversification and is focused on lending through both corporate and commercial real estate transactions that are within our core regions. Despite high redemptions over the past twelve months, the corporate portfolio has remained stable, while business volume has increased in the International Commercial Real Estate segment.
2. Repositioning Our Balance Sheet
As part of the strategic repositioning of the Bank, the execution of the exit and disposal of non-core assets continued during 2013 with successful results. During 2013, we further reduced our total CEE loan exposure to EUR 0.7 billion at year-end 2013, or less than 2 per cent of total assets.
We restructured our domestic leasing operations to concentrate on consumer-based vehicle financing. We successfully sold our Polish leasing subsidiary, completed the sale of our Austrian fleet management subsidiary and we are under agreement for the sale of the Hungarian subsidiary. By February 2014, the Bank also successfully sold its remaining shares in MKB, a Hungarian bank.
Taking advantage of strong market conditions, we closed out or sold the entire remaining legacy structured credit securities portfolio during 2013, which carried high capital requirements. These actions de-risked the balance sheet credit exposure substantially, reduced risk-weighted assets and resulted in a material profit upon sale.
In addition to discontinuing our proprietary trading activities in 2012, we also sold a material amount of retail and small business non-performing loans over the last year and concentrated on more streamlined Austrian corporate lending activities. These actions support our commitment to focus our capital primarily in our core customer businesses and reduce our non-core investments. We will continue to allocate capital diligently across businesses and assets which meet strict risk-adjusted return requirements.
3. Efficiency and Productivity Programs
In order to proactively address the challenges banks face across Europe with declining margins, increased competition and increasing regulatory requirements, we accelerated our restructuring program so that it would be largely complete by year-end 2013. This program follows on from the significant investments made since 2010 in our branch network, e-banking capabilities and IT systems as well as increasing productivity by introducing measures aimed at enhancing processes and end-to-end capabilities. With these efficiency and productivity programs, we are positioned to benefit from a material reduction in the overall cost base in 2014.
The restructuring program has been challenging for the Bank and its employees. However, this program was critical in order to successfully position the Bank to maintain sustainable profitability in a challenging economic environment.
We see developing opportunities to create an even more flexible operating infrastructure as we rationalize our products and services, operating locations and internal structures. We believe our strategy of simplifying our business model and repositioning of our balance sheet materially supports greater cost efficiency.
4. Strong Capital and Liquidity Base, Low Risk Profile
The Bank significantly strengthened its capital position during the course of 2013. As a result of the various capital measures, the Bank is pleased to report as of 31 December 2013 a Common Equity Tier I (“CET I”) capital ratio, excluding any transitional capital (minorities, hybrids and participation capital) not recognised under Basel 3, of 9.4 per cent. This equates to a CET I capital ratio including transitional capital of 14.4 per cent and a Tier I capital ratio of 15.3 per cent as of 31 December 2013. We have therefore delivered improved capital ratios under all measurements by over 3.0 percentage points over the last 12 months and 5.0 percentage points over the last 24 months
Capital ratios improved in 2013 through a significant reduction of over 22 per cent of our risk-weighted assets to EUR 16 billion as of 31 December 2013, which came from extensive measures to reduce non-core assets but also from the regulatory approval to use the Internal Ratings-Based (“IRB”) approach in our retail and corporate businesses.
Other measures strengthening our total capital levels during the year included the Bank raising EUR 343 million of Basel 3 compliant Tier 2 capital in well received institutional and retail offerings, which addressed any foreseen upcoming Tier 2 issuance requirements.
In 2013, the Bank redeemed EUR 200 million of participation capital which was held by the Republic of Austria and issued in 2009. One of our key objectives for 2014 is to repay the remaining EUR 350 million of participation capital in order to return this capital to the Austrian taxpayers and to eliminate this non-eligible Basel 3 capital element from the Bank.
Additionally, our liquidity position continues to be a source of strength for the Bank. Regulatory surplus liquidity remains solid at EUR 6.3 billion as of 31 December 2013. We have and will remain predominantly deposit funded for our business activities, as demonstrated by our customer loan-to-deposit ratio of 95 per cent as of 31 December 2013.
In 2013, we were also able to further decrease the risk costs despite the difficult environment. All risk indicators are lower compared to last year, which was mainly achieved through a proactive risk management approach and a continued deleveraging of non-core portfolios. In the first half of 2013, the Bank was approved as an IRB bank by the regulators, which underpins the high standards of the risk management tools and processes. Given the risk profile of our balance sheet and business strategy, we believe we are well prepared and positioned for the ongoing Asset Quality Review (AQR) in 2014.
We had a strong and transformative year in 2013 from a financial results perspective:
- Net profit more than doubled to EUR 229 million
- Operating income increased by 11 per cent to EUR 1,034 million
- Capital position substantially improved – fully loaded Basel 3 CET I capital ratio at 9.4 per cent
- Reduction of EUR 4.6 billion in risk-weighted assets through repositioning of the balance sheet, sale of
non-core assets, further de-risking actions and the IRB approval in 2013
- We spent EUR 75 million in order to effect the necessary cost restructuring in addition to the EUR 45 million we invested in IT as well as other retail distribution channels
2013 was an exciting and transformative year for us as we successfully repositioned the Bank by exiting non-core businesses and assets, increased cost efficiency and materially increased our capital base. At the same time, we maintained our primary focus on our Austrian-based retail and corporate businesses across every channel.
We are making certain adjustments to our business segment reporting this year and going forward reflecting the developments of our business strategy and management to increase the transparency of our business performance.
In 2014 and beyond, we as well as other banks in Austria and Europe will continue to face headwinds. Specifically, we plan for a persistently low interest rate environment, increased competition and regulatory challenges, including new requirements from the ECB under its Single Supervisory Mechanism. Throughout this difficult environment, we will continue to strongly position BAWAG P.S.K. as the most efficient bank on the Austrian market:
- We will aim to further develop our product and service range for our retail and corporate customers across digital and physical channels.
- We will continue to invest in businesses that meet the Bank’s overall profitability targets (Target 2014: Return on equity >10 per cent).
- We will continue to increase our operational efficiency Bank-wide (Target 2014: core operating expenses <EUR 500 million).
- We will retain a prudent and stable risk profile while achieving stable earnings through economic cycles (Target 2014: risk costs / loans and receivables <30 bps).
- We will focus and maintain our strong capital position, funding and liquidity, which remain at the very core of our entire business strategy (Target 2014: fully loaded Basel 3 CET I capital ratio >10 per cent).
We will also continue to take all necessary actions in the pursuit of a prominent material legal case pending at the Commercial Court of Vienna through all court instances based on our strong legal position.
Finally, I want to thank every employee of our Bank for their tireless efforts, service to our customers and support of the Bank’s strategy. We have executed a material restructuring program during the past year while also continuing to deliver excellent products and services to our customers. This has been extremely challenging, but we have come through the year-end with a Bank that is stronger than it has been over the past years by any measures. Our outlook is positive despite certain headwinds which continue to persist for financial institutions in Europe. I am grateful for the dedication of our employees and support of our customers.
Byron Haynes m.p.
CEO and Chairman of the Managing Board
Vienna, March 2014