consolidated annual report 2012...1) under ifrs, the item gains and losses on ﬁnancial assets and...

CONSOLIDATED ANNUAL REPORT

2012

KEY FIGURES

1) Under IFRS, the item Gains and losses on financial assets and liabilities also includes the valuation of securities whose risk is borne by shareholders of non-controlling interests. These securities are subject to substantial fair value fluctuations. In order to improve the comparability of the results, the valuation results attributable to shareholders of non-controlling interests have been excluded in the figures presented on this page. Compared to the Profit or Loss Statement presented in the Consolidated Financial Report according to IFRS, the item Gains and losses on financial assets and liabilities is EUR 26.3 million lower (2011: EUR 6.4 million higher). Accordingly, the item Profit after tax presented above is EUR 26.3 million lower (2011: EUR 6.4 million higher) than the Profit after tax presented in the Consolidated Financial Report according to IFRS.

2) Core Equity Tier I according to the 3rd Draft of the CRR by the Danish Council Presidency dated 2 April 2012 in relation to RWA according to Basel 2.5.3) Return on credit-RWA = profit after tax (without non-controlling interests) / average credit-risk-weighted assets (without non-controlling interests)4) Return on equity = profit after tax (without non-controlling interests and restructuring expenses) / average IFRS equity (without non-controlling interests)5) The cost-income ratio is calculated as follows:

Operating income: net interest income, income and expenses from fees and commissions, other income and expenses, gains and losses on financial assets and liabilities; Operating expenses: administrative expenses, amortisation and depreciation on intangible and tangible assets (without restructuring expenses).

6) The decrease in 2011 relates to the sale of Stiefelkönig with a total of 662 full-time equivalents.7) 2012: Thereof 461 branches of the new type operated in cooperation with Österreichische Post AG.

Statement of Financial Position (in millions of Euros) 2012 2011 Change in per cent 2010

Total assets 41,265 41,077 +0.5% 38,556Financial assets 10,050 10,574 -5.0% 10,855Receivables from customers 22,275 23,223 -4.1% 22,288Payables to customers 21,999 22,016 -0.1% 21,733Own issues 9,050 8,648 +4.6% 8,867Tier I capital 2,409 2,223 +8.4% 2,190Risk-weighted assets (total RWA) 20,618 23,223 -11.2% 24,694

Profit or Loss Statement (in millions of Euros) 2012 2011 Change in per cent 2010

Net interest income 597.4 677.9 -11.9% 649.9Net fee and commission income 194.7 175.9 +10.7% 159.4Core revenues 792.1 853.8 -7.2% 809.3Gains and losses on assets and liabilities adjusted for non-controlling interests1)

128.9

31.5

>+100%

155.9

Operating income 931.8 923.7 +0.9% 960.8Administrative expenses and depreciation and amortisation (without restructuring expenses)

-604.5

-592.9

-2.0%

-618.3

Restructuring expenses -43.2 -20.3 >-100% 0.0Bank levy -25.3 -20.2 -25.2% 0.0Provisions and impairment losses -150.1 -154.8 +3.0% -199.7Profit after tax adjusted for non-controlling interests1) 110.0 127.2 -13.6% 125.4Profit after tax attributable to owners of the parent (net profit) 107.3 122.5 -12.4% 121.8Profit after tax without restructuring expenses 153.2 147.5 +3.9% 125.4

Key figures (in percentages) 2012 2011 2010Core Equity Tier I capital ratio2) 11.0% 7.8% 7.2%Tier I capital ratio 11.7% 9.6% 8.9%Own funds ratio 13.8% 12.3% 11.8%Return on credit-RWA3) 0.55% 0.59% 0.60%Return on equity4) 6.83% 7.18% 6.19%Cost-income ratio5) 64.9% 64.2% 64.4%

Resources, as of 31.12. (in numbers) 2012 2011 2010Workforce (in full-time equivalents)6) 4,003 4,038 4,812Bank branches7) 506 431 150

Rating 2012 2011 2010Long-term senior unsecured debt Baa2 Baa2 Baa1Short-term liabilities P2 P2 P2Moody’s outlook June 2012 stable stable stableFinancial strength (BFSR) D D D

2

MANAGING BOARD

Byron Haynes Chairman of the Managing Board and CEO

Corporate OfficeCommunications & SponsoringHuman ResourcesRestructuring & StrategyLegal & Compliance

Remits of the Managing Board as a BodyCompliance OfficeInternal Audit

Wolfgang Klein Deputy Chairman/ Chief Operating Officer/Retail Banking & Small Business

Retail SalesRetail Innovation, Strategy & PlanningMarketing & ProductsE-CommerceInformation TechnologyOperationsPaymentsProcurement, Real Estate & Facility ManagementCustomer Care

Andreas Arndt Chief Financial Officer

Accounting / ParticipationsControlling & Investor RelationsALM & Capital Management

Jochen Klöpper Chief Risk Officer

Credit Risk Retail & SMELegal CollectionCorporate & Institutional RiskStrategic RiskMarket Risk

Corey Pinkston Corporate & Financial Markets

Austrian Corporate BusinessCorporates & Markets Business DevelopmentFinancial MarketsInternational Business

3

MANAGING BOARD

CONTENTS

Preface by the Chairman of the Managing Board 5

Group Management Report 11

The Economy 12

BAWAG P.S.K. in 2012 18

Key Events during the Financial Year 29

Explanations Regarding the Annual Financial Statements 36

Risk Management 51

Non-Financial Performance Indicators 51

Events after the Reporting Date 57

Outlook 59

Internal Control and Risk Management System 61

Consolidated Financial Report Prepared in Accordance

with the International Financial Reporting Standards (IFRS) 64

Consolidated Accounts 68

Notes 74

Risk Report 156

Statement of All Legal Representatives 182

Boards and Officers 183

Auditor’s Opinion 186

Supervisory Board’s Report 188

Glossary 192

5

PREFACE BY THE CHAIRMAN OF THE MANAGING BOARD


The Year 2012The last several years have been marked by fundamental structural changes to the global banking industry. These changes have been in response to the quickly escalating credit and sovereign debt crisis throughout the financial world triggered by the collapse of large banks particularly in 2008. The significant decline in economic growth across the majority of Europe as well as low market and base interest rates over the last three years have also posed further challenges for the industry.

Apart from the European Central Bank (“ECB”) providing liquidity to banks to facilitate investments and lower interbank lending rates, the regulators decided to put a clearer focus on bank regulations, particularly with regard to stricter capital and liquidity requirements, which has resulted in the pending introduction of the Basel III regulations. Further future initiatives include the implementation of the single rule book targeting maximum harmonisation between the EU countries including topics such as the joint

bank deposit guarantee schemes or bank resolution regimes.

The operating economic environment continued to deteriorate with little or no economic growth while interest rates fell to record low levels and costs of bank regulation increased. As in recent years, BAWAG P.S.K. proactively and successfully continued a disciplined capital and liquidity management, to ensure investment to and support for the sustainable growth of our core franchises in line with our business strategy.

Capital Optimisation

The first of these capital optimisation measures was successfully concluded in March 2012, when the Bank bought back the majority of hybrid preference shares from the holders (EUR 262 million nominal value; 65 per cent of issuance). The Financial Market Authority (“FMA”) approved the buyback of these hybrid instruments and requested the issuance of Basel III compliant replacement capital by the end of the year 2012. These actions improved the Bank’s core equity Tier I (“CET I”) ratio by approximately 50 basis points.

In addition, the Bank’s risk-weighted asset optimisation programme was continued in 2012, which further intensified the disciplined allocation of risk-weighted assets (RWA) in support of its customers in the Retail and Corporate franchises. Total RWAs were reduced by EUR 2.6 billion during 2012.

In the Austrian Corporate segment, the Bank has created even greater focus on its customers across Austria and continued the successful Business Solution Partner concept. The Austrian corporate banking business remains an integral part of the Bank’s business model and franchise. As in the past, however, the Bank’s responsibility is to ensure that the allocation of capital resources in support of its customers is in line with prudent business criteria. With this in mind, we will continue to invest our financial resources in the areas where we can establish and maintain long-term customer relationships that are stable and profitable. In order to better service our customers, the Bank merged its sales and product teams into one centralised organisation which is committed to delivering capital and financing solutions to its customers to address their full financing needs.


6

In September 2012, the Managing Board made the decision to substantially close the Bank’s proprietary trading activities as continued changes and incremental costs in the regulatory environment made the return of these activities less profitable despite the very consistent and strong performance of the trading desks in recent years. This freed-up capital is being reinvested in support of our customer franchises. The decision to close this business activity will also benefit our strategic lending and investing businesses, and it does not represent an exit from our overall trading activities, which remain critical for the Bank. Our remaining trading focus will be on balance sheet interest rate hedging and strategic rate activities, currency activities related to managing currency risk and especially the continued support of our corporate customers in their balance sheet, interest rate and currency management.

Capital Raise and Simplification of Holding Structure

On 28 December 2012, BAWAG P.S.K. announced an equity capital raise of EUR 200 million from current shareholders and investors. Cerberus Capital Management, L.P. and its affiliates (“Cerberus”) remain the controlling shareholders with 51.78 per cent. Cerberus underwrote the capital raise and provided the largest share of new cash equity to the Bank. GoldenTree Asset Management L.P. and its affiliates (“GoldenTree”, a U.S. based asset management company) also underwrote and participated in the capital raise and became a significant minority shareholder with 39.46 per cent. At the time of the capital raise, shareholders and investors in the BAWAG P.S.K. holding companies undertook to streamline and simplify the credit institution group’s capital structure which now fully complies with the forthcoming regulatory requirements under Basel III. Austrian investors, including Österreichische Post AG, Generali Holding Vienna AG and Wüstenrot Wohnungswirtschaft registrierte Genossenschaft mit beschränkter Haftung, continue to indirectly hold stakes in the Bank’s share capital at a reduced level.

This capital investment is a strong sign of the continued financial commitment of the shareholders and investors and demonstrates substantial confidence in BAWAG P.S.K.’s ability to further drive sustainable profitability in the future as it executes its business plans.

The capital injection of EUR 200 million to BAWAG P.S.K. was executed effective 31 December 2012 and therefore also served as the required replacement capital, thereby fulfilling the FMA’s requirements under the redemption of the hybrid instrument approval in March 2012.

This capital raise together with the capital optimisation measures further improved the Bank’s capital ratios. As at 31 December 2012 BAWAG P.S.K.’s CET 1 capital ratio based on RWAs according to Basel 2.5 is 11.0 per cent (2011: 7.8 per cent), the Tier I capital ratio (according to Basel 2.5) is 11.7 per cent (2011: 9.6 per cent) and the own funds ratio is 13.8 per cent (2011: 12.3 per cent). The Bank therefore already more than fulfils the Basel III requirements at all levels within the BAWAG P.S.K. credit institution group.

Subject to authorities’ approvals, BAWAG P.S.K. consequently plans to redeem participation capital from the Republic of Austria in a nominal amount of EUR 50 million by 30 June 2013. This would make BAWAG P.S.K. the first bank to partly pay back participation capital in Austria.

Core Businesses – Retail

The Bank successfully continued growing and investing in its retail franchise, including the optimisation and refurbishment of the branch network. Over 90 per cent of the planned joint branches with Österreichische Post AG have already been opened and launched. The branch initiative will be completed in the first half of 2013, resulting in the largest centrally steered multi-channel network of around 500 cutting-edge branches in Austria.

Tier I capital ratio at 11.7 per cent (2011: 9.6 per cent).

7


A strong focus of BAWAG P.S.K. remains the provision of transparent and understandable products and services for our retail customers, such as the popular KontoBox and the KreditBox and SparBox launched in 2012. In line with the innovative box concept, these products complement the Bank’s retail product line. In order to continue along the path towards becoming the leader in intuitive banking, BAWAG P.S.K. further invested in its e-banking services and mobile applications during 2012. easybank, the fully owned subsidiary of BAWAG P.S.K., had a record year with over EUR 2.2 billion of deposits.

Core Businesses – Corporates

The Austrian Corporate business faced a difficult and challenging economic environment in 2012. Customer demand for new loans was weak as investment programmes were postponed under the pending improvement in the economic environment while interest rates fell to exceptionally low levels. Funding costs, however, continued to rise throughout the year.

In light of these challenges the Austrian Corporate business was very successful in repositioning and refocusing on its customers, freeing up capital for future investment in support of these customers and aligning our coverage and product managers to further improve our services.

In 2012, the International Business lending portfolio expanded and was able to achieve record revenues while at the same time meeting stringent risk-adjusted return requirements.

During the year 2012, the Bank also continued to dispose of a number of non-core corporate businesses and assets including BAWAG Banka d.d. (Slovenian bank subsidiary) which was merged into BAWAG P.S.K. in December. Leasing businesses in CEE continue to be in run-off, such as the CEE leasing business in Poland which was sold in February 2013. The Bank has recently announced that it is in the process of selling its fleet management leasing business. Going forward the Bank will be focusing on its vehicle leasing business which originates attractive assets for the Bank with efficient operating resources.

Efficiency and Productivity Programme

Another part of the Bank’s strategy is proactive and prudent cost management as well as the creation of a flexible cost operating model to meet the ongoing needs and requirements of our customers. The efficiency and productivity programme, which started in 2010 and focuses on the reduction of operating and personnel costs, was accelerated during 2012 in response to the deteriorating economic environment and the fundamental structural changes in the banking industry over the past years. The streamlining of the organisation and end-to-end process optimisation remains the focus for 2013. In order to develop a more flexible business model, the Bank carefully evaluated the option of near shoring and found a reliable partner during 2012.

New Managing Board Structure

Christoph Raninger announced in September to leave the Bank by the end of the year (his Managing Board responsibilities ended as of 31 October 2012), and Sanjay Sharma announced in December to leave the Bank as of 31 March 2013 (his Managing Board responsibilities ended as of 31 December 2012). I would like to take this opportunity to thank Sanjay Sharma and Christoph Raninger for their support and contribution over the last years and wish them both all the best for the future.

On 21 December 2012, a new Managing Board structure was announced effective from 1 January 2013. The head of Strategy and Economics of BAWAG P.S.K., Corey Pinkston, was appointed as the new Managing Board member responsible for the Corporate & Financial Markets businesses (including International Business and Leasing). Wolfgang Klein took over the Chief Operating Officer (“COO”) duties on an interim basis and will be responsible for enhancing the end-to-end processes within his remit, focusing on service delivery front-end to back-office functions in support of the retail business.

Innovative “box” concept expanded successfully.


8

Furthermore, Wolfgang Klein was appointed Deputy Chairman with effect from 1 January 2013 reflecting the continued strategic importance of retail banking to BAWAG P.S.K.

This new Managing Board structure is very much in line with the simplification of our organisation and business model with focus on our core businesses including the delivery of improved services through end-to-end process efficiency and productivity.

I am very pleased to welcome Corey Pinkston and Wolfgang Klein with his additional responsibilities as Deputy Chairman and interim COO to the Managing Board of BAWAG P.S.K.

Operating Performance of BAWAG P.S.K.

In light of these challenging times, BAWAG P.S.K. has delivered solid results for 2012.

Profit before tax (without restructuring expenses and excluding minorities) for the financial year 2012 of EUR 153.4 million is in line with the profit before tax for 2011 of EUR 156.0 million (without restructuring expenses and excluding minorities). This shows BAWAG P.S.K.’s strength in realising solid profit considering the very difficult economic environment. Core revenues of EUR 792.1 million (comprising net interest income of EUR 597.4 million and net commission income

of EUR 194.7 million) decreased by 7.2 per cent (EUR 61.7 million) compared to 2011. Net interest income decreased due to significantly lower interest rates and RWA optimisation measures. Despite the lower core revenues, the operating income for 2012 amounted to EUR 931.8 million and was EUR 8.1 million higher than in 2011. This can be attributed to significantly higher income from gains and losses on financial instruments.

The Bank’s tight cost management continues to show satisfactory results. Total operating expenses (without bank levy and restructuring expenses) of EUR 604.5 million were only EUR 11.6 million or 2.0 per cent higher than the costs of the previous year, despite the significant continued investment made in 2012 in our core growth businesses including the “branch initiative”.

The cost-income ratio (excluding restructuring expenses and bank levy) is in line with the year-end 2011 at 64.9 per cent.

Restructuring expenses for 2012 amounted to EUR 43.2 million (2011: EUR 20.3 million) which represents a necessary key step for BAWAG P.S.K. to realise sustainable profits over the next years. These restructuring expenses will allow the Bank to substantially complete its restructuring programme by the end of 2013.

Provisions and impairment losses amounted to EUR 150.1 million, which is 3.0 per cent lower than the amount for the previous year (EUR 154.8 million). The decrease in loan loss provisions, despite the difficult economic environment, shows the continued relatively conservative risk profile of the Bank’s loan portfolio. An impairment

charge of EUR 26 million relating to our investment in MKB, a Hungarian bank, is included. Profit after tax 2012 of EUR 153.2 million (before restructuring expenses

of EUR 43.2 million) is EUR 5.7 million higher than the profit after tax for the full year 2011 of EUR 147.5 million (before restructuring expenses of EUR 20.3 million).

Total regulatory liquidity increased considerably to EUR 7.7 billion (31 December 2011: EUR 5.2 billion).

Increase of total regulatory liquidity by EUR 2.5 billion.

9


Outlook

We expect the economic environment to gradually improve over the coming years. The banking industry will remain very competitive, especially in Austria, and banks will continue to face an unfavourable market environment characterised by low interest margins, decreasing volumes and regulatory constraints.

Looking ahead to 2013, I am confident that BAWAG P.S.K. is on the right path for the future. The Bank’s capital and liquidity base is strong and stable, ready to serve as a basis for new business growth. Furthermore, BAWAG P.S.K. in early 2013 has already paid back the liquidity provided by the ECB through its long-term refinancing operations (“LTRO”) programme. In another important step, BAWAG P.S.K. plans to start the repayment of part of the participation capital provided by the Republic of Austria in the second quarter of the year.

The Bank’s focus in 2013 will remain on serving our customers and improving our processes and boosting efficiency and productivity in order to further improve services and to lower our cost base. In the current environment, one major challenge and opportunity for the Bank will be the successful optimisation of advanced end-to-end processes and the development of an even more flexible operating model.

The upcoming year will also be marked by the Bank’s next steps with regards to our legal case against the City of Linz. The Bank’s strong legal position remained unchanged over the last year. The Managing Board of BAWAG P.S.K. strongly believes that it is in the interests of all parties to find an acceptable solution to resolve this matter. If no acceptable solution can be found for BAWAG P.S.K., we will continue to actively pursue our claim through all legal proceedings.

The year 2012 has been challenging for the Bank and its employees. However, with all of the accomplishments of our employees, we enter 2013 with a very solid capital and liquidity position that will allow us to further develop our core franchises and to build further on our successful results. Therefore, I would like to take this opportunity to especially thank all of our employees for their dedication throughout the past year. The achievements outlined here would not have been possible without the constant support of BAWAG P.S.K.’s employees.

Byron Haynes m.p. Chairman of the Managing Board and CEO Vienna, March 2013

“Due to the successful capital raise and a comprehensive efficiency enhancement programme, BAWAG P.S.K. is now well above the market and regulatory capital requirements. Therefore, BAWAG P.S.K. has wider possibilities to expand its business in the future and serve its commercial and retail customers with superior products and services despite the current challenging market environment.”

Group Management Report


1212

GROUP MANAGEMENT REPORT


The EconomyEconomic Conditions in 2012

The Eurozone slipped into recession again in 2012. After the cyclical upswing that followed the 2008/2009 financial crisis had already weakened over the course of 2011, the economy succumbed to the loss of confidence triggered by the intensifying sovereign debt crisis during the reporting period. The measures to consolidate the budgets of many currency union members, debt reduction in the private sector and slowing economic activity around the world eventually caused overall economic demand to slide. The real gross domestic product of the Eurozone contracted by an average of 0.5 per cent in 2012, and we expect it to stagnate in 2013.

The development in the individual countries diverged widely. While the countries that are battling particularly high levels of public debt are suffering from a marked contraction, the economies in most central and northern European member states proved to be relatively robust until recently. But the turbulence on the financial markets and uncertainty with regards to the future of the currency union had negative impacts here, as well. The business climate and consumer confidence deteriorated steadily, sapping domestic demand. In Germany and France, for example, and also in Austria, the meagre gross domestic product increase in the third quarter of 2012 was due almost entirely to the positive contribution from foreign trade.

The expansion of the Austrian economy began to falter over the course of 2012. The confidence crisis and the recession in parts of Europe especially had an impact on the propensity of companies to invest, and gross capital formation declined from the spring onwards. Private consumption has not yet had a negative impact, but also did little to support economic growth with just a slight improvement in year-on-year terms. Consumer spending generally tracked the development of disposable household income, which was boosted by rising wages and salaries but also hit by higher inflation in 2012. The savings rate is estimated to have remained unchanged at 7.5 per cent.

Consumer caution brought another year of declining retail sales. The number of new car registrations for private households was also considerably lower than in the previous year.

Exports again proved to be a reliable pillar of the economy. Demand from Austria’s main trading partner, Germany, developed similarly as in the previous year, while exports to Italy fell. Exports to Switzerland and the USA rose. The strongest growth was seen in trade with Latin America and the emerging countries in Southeast Asia.

The slowing of the overall economy could also be seen in the manufacturing industry, where production virtually stagnated from the middle of the year 2012 onwards and the annual rate of change dwindled to -1.7 per cent at last count. The Purchasing Managers’ Index for the manufacturing industry fell below the growth threshold of 50 points in July, and reached its low for the year in October. November then brought a marked trend reversal, and signs are now pointing to a recovery in industry in the first quarter of 2013. The construction industry was relatively robust. Significant growth was especially seen in civil engineering, but building construction also increased marginally.

13


13


Growth divide in the Euro area Real GDP growth in 2012

The economic downswing became more and more apparent on the labour market as the year progressed. After two years of declining unemployment, the number of people seeking jobs increased again by around 14,000 in 2012. The seasonally adjusted jobless rate rose from 6.7 per cent to 7.0 per cent on annual average (according to the AMS calculation method; the unemployment rate according to the Eurostat method was 4.3 per cent). However, due to the growth of the overall workforce, the number of employed persons increased at the same time (for the third year in a row). Job growth slowed over the course of 2012, but was still relatively strong in year-on-year terms at an average of 1.4 per cent.

Consumer prices rose by 2.5 per cent in 2012, less than in the previous year (plus 3.3 per cent), but this level of inflation was atypically high given the weakness of the economy. Fuel, household energy, rent and food were the main price drivers during the period.

As in many countries in Europe, public budgets in Austria are undergoing a process of consolidation. However, a large share of the austerity measures that went into force at the beginning of 2012 will not have an effect until 2013. The total government deficit in the reporting period is estimated at 3.0 per cent of GDP, corresponding to the Maastricht limit. For 2013, a decrease of 0.5 per cent of GDP is predicted.

Private sector lending by domestic banks during 2012 expanded at a slightly slower rate than in 2011 (plus 2.0 per cent). In the retail loans segment, housing loans continued to grow rapidly thanks to the low interest rate level. In contrast, financing for consumer goods contracted again. Credit demand from non-financial corporations was relatively strong up to the third quarter, but then weakened through to the end of the year. Deposit business with private households and companies grew handsomely in the reporting period, increasing significantly compared with 2011 to 3.0 per cent.

4.0

3.0

2.0

1.0

0.0

-1.0

-2.0

-3.0

-4.0

-5.0

-6.0

-7.0

Source: EU Commission (Macrobond)

EE

Eurozone-Ø

LU SIIE BE PTSK FR ITAT NL GRMT FI CYDE ES


1414


Money and Capital Markets

The European Central Bank (ECB) cut the main refinancing rate to 0.75 per cent, its lowest level ever, in July 2012 in reaction to the continued worsening of the economic outlook in the Eurozone and the growing financial market turbulence. However, the so-called unconventional monetary policy measures played a much greater role, especially the new Outright Monetary Transactions (OMT) securities buying programme. The OMT programme is designed to restore the uniform effect of monetary policy throughout the Eurozone, which the ECB feels is disrupted because the risk premiums being demanded on government bonds from some countries as a result of the debt crisis are having a disproportionate impact on financing costs in the private sector.

Even though the new purchasing programme has not yet started because it is subject to certain preconditions that none of the candidate countries has been willing to meet to date, the announcement by the ECB alone was enough to boost sentiment on the financial markets. On the capital market, the risk premiums for a number of government bonds fell compared with German government bonds, with the greatest narrowing occurring at the short end of the maturity curve. This eased the financing pressure above all for Italy and Spain, which were at the focus of the markets recently. Ireland and Portugal, which are still in the Eurozone safety net, successfully returned to the international capital market. On the interbank market, the difference between the Euribor and the overnight index swap (for a term of three months) fell from around 40 basis points at the beginning of July to 10 basis points at the end of the year. The Markit iTraxx Europe Senior Financial Index (five years), a risk indicator for the banking sector, also recovered substantially. After listing at around 300 points in the summer, it fell to about 150 points by the end of 2012. The risk premiums on corporate bonds rated AA to BBB fell by more than 100 basis points over the course of the year.

Benchmark interest rates fell to record lows during the reporting period, both on the money market and on the capital market. As in 2009, the three-month Euribor fell below the key interest rate level at the end of February, and was only 19 basis points at year-end. Because the Euribor rates represent the (estimated) refinancing costs between banks with the highest ratings, the current level reflects the abundance of liquidity currently held by prime banks. The trading volume on the interbank market is still low. The majority of Europe’s banks are still covering their refinancing needs through the European System of Central Banks (ESCB). In total, the ESCB had claims against European banks from tender operations in the amount of EUR 1,130 billion at the end of 2012. There are also claims of national central banks from the emergency liquidity assistance programme of an unknown amount.

15


15


EUR money and capital market interest rates

On the capital market, Germany profited from investor risk aversion in connection with the sovereign debt crisis. A flight to safe investments caused yields on the ten-year German government bond to fall to below 1.2 per cent in July; yields on short terms were even temporarily negative. After tensions on the financial markets eased, the yields rose again. At the end of the year, the German ten-year benchmark listed at 1.3 per cent.

In the middle of January 2012, the Republic of Austria was downgraded to AA+ by the rating agency Standard & Poor’s. The other two international agencies maintained their highest rating. However, the downgrade had no negative effect on the risk premium. On the contrary, the premium over the German benchmark decreased from roughly 150 to 40 basis points over the course of the year.

The interest rate swap spreads over the German benchmark decreased steadily during the year. The premium was 16 basis points at the end of the year (IRS 10Y3M). The yield curve (IRS one to ten years) shifted down by about one percentage point compared with the start of the year.

6.0

5.0

4.0

3.0

2.0

1.0

0.0

Jan

08

Apr

08

Jul 0

8

Oct

08

Jan

09

Apr

09

Jul 0

9

Oct

09

Jan

10

Apr

10

Jul 1

0

Oct

10

Jan

11

Apr

11

Jul 1

1

Oct

11

Jan

12

Apr

12

Jul 1

2

Oct

12

Jan

13

Source: Macrobond

10-year Austrian Bund yield 10-year German Bund yield 3-month Euribor


1616


Foreign Exchange Markets

The ups and downs of the European sovereign debt crisis were also seen on the foreign exchange market. While the Euro fell in value compared with the Eurozone’s twenty main trading partners in the first half of 2012, the currency climbed sharply after the ECB announced that it would purchase an unlimited amount of government bonds.

The development versus the US dollar was similar: After fluctuating between USD 1.30 and 1.35 until May, the Euro softened markedly to below USD 1.25 by the end of August due to the growing problems in Spain and Italy in the summer. OMT (and the Federal Reserve’s QE3) caused a jump at the end of the summer. After this, the exchange rate fluctuated between USD 1.26 and 1.31 per Euro, and remained highly volatile. From a long-term view, the USD is still moderately weak.

EUR effective exchange rate index against 20 main trading partners

The Swiss National Bank announced a minimum exchange rate of 1.20 CHF/EUR in September 2011 and has successfully defended this level with interventional purchases since then. Here as well, the ECB’s announcement that it would buy bonds eased worries on the market and took pressure off the “safe haven” of Switzerland.

115

110

105

100

95

90

85

80

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Source: MacrobondNominal Real

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1818


BAWAG P.S.K. in 2012Continued Focus on Growth of Our Core Customer Business and Increased Efficiency

BAWAG P.S.K. is one of the leading banks in Austria, operating predominantly in Austria with additional activities in selected international markets. The Bank’s main business activities are Retail and Corporate banking supported by our Financial Markets division.

The Bank’s focus and its core strengths are in Retail banking and in its core Austrian corporate business. Delivering competitive, transparent and understandable products and services that meet our customers’ needs drives our Bank-wide strategy in each business area. With our multi-channel approach, we ensure that we can develop close, demand-oriented relationships with our customers. In 2012, BAWAG P.S.K. continued its branch offensive in the Retail business and is on its way to creating the largest centrally managed branch network in Austria. We will have around 500 branches of the new type – combined bank branches and post offices – by the end of the first half of 2013, supplemented by about 1,400 Postpartner outlets throughout Austria. BAWAG P.S.K.’s online banking and our direct banking platform, easybank, complete the Bank’s multi-channel service together with our self-service terminals in our branches and our customer care centre.

This year, we successfully achieved a large number of strategic milestones and also launched several new projects:1. We consistently continued investing in the optimisation and refurbishment of our branch network and our Retail

multi-channel services (more than 90 per cent of 506 planned joint branches with Österreichische Post AG already opened in our branch offensive) and the improvement of our e-banking services (such as introducing online credit products) and mobile applications.

2. Our web site (best banking web site in Austria according to the results of the German PASS Study) was further improved with a completely revised Investor Relations section. As part of our customer orientation, we are also enhancing our social media activities (for example on Facebook).

3. In our Austrian Corporate segment, we are focused on sustainable relationships with our customers and continuing our successful Business Solution Partner concept. Our primary objective is to deliver capital and financing to our customers to address their full financing needs. To better serve our customers, we merged our support and our product teams into one centralised, more effective organisational unit.

4. In our Financial Markets division, we have now integrated all capital-market-related activities in one division. Financial Markets provides demand-oriented solutions for our clients and manages a broad portfolio of Austrian and international investment securities.

5. The International Business division continued its strategy of investments in corporate and commercial real estate lending. The team focuses on strong risk-adjusted returns, a conservative risk profile and consequently diversifies geographically and across industries.

6. The Bank is continuing a strict approach to address costs and efficiency measures across all areas of the organisation, reflecting both the current market environment and the permanent changes in the banking industry.

7. The successful contribution of EUR 200 million in the form of a capital contribution subscribed by shareholders and investors at year-end 2012 was a strong sign of the continued financial commitment of the shareholders and demonstrates shareholders’ confidence in the Bank’s ability to drive sustainable and stable profitability. Due to the additional core equity capital as well as considerable measures to reduce risk-weighted assets (RWA), the Bank is now well above the market and regulatory capital requirements and has therefore widened its possibilities to expand its business in the future and serve its commercial and retail customers with superior products and services despite the current challenging market environment.

19


19


Segment Performance

Retail Banking and Small Business

The Retail Banking segment covers banking services provided through the branches, including alternative sales channels for collaboration with quality sales partners, the works council service for collaboration with works councils, the Small Business unit and the eCommerce sales line.

It also covers the subsidiaries easybank and BAWAG P.S.K. Invest.

The sales units are supported by the Marketing and Products and Retail Sales Support and Service units.

Key Developments during the Financial Year

The new sales strategy that was launched in 2011 was continued throughout 2012 with the goal of transforming BAWAG P.S.K. into the pioneer of intuitive banking in Austria. The focuses during the year were: the creation of a uniform and optimised branch network through which we can provide banking services to our

customers at any time and anywhere in Austria; the refinement of intuitive services through further channels such as self-service terminals, customer advice centres,

e-banking and mobile banking; understandable products and services that meet the needs of our customers; and the successful positioning of BAWAG P.S.K. through the “Mitten im Leben” campaign.

The fact that more than 75,000 satisfied new customers were attracted by the Bank’s services and advisory offerings in 2012 shows that BAWAG P.S.K. is on the right path.

A key driver of this encouraging development was the branch offensive, under which BAWAG P.S.K. is opening joint outlets together with Österreichische Post AG throughout Austria to offer customers in cities and rural areas a uniform range of attractive banking and postal services. A key feature of the branch offensive is the expansion of the products and services being offered in rural areas. The sales network will consist of roughly 500 joint outlets by the end of 2013, of which 461 were already open at the end of 2012. The expanded opening hours for individual customer advice at the new branches are unique in Austria.

The face-to-face services provided in the branches are supplemented by modern self-service areas with roughly 1,500 terminals in total that can be used to complete bank transactions, submit transfer slips and use other services around the clock. There are also 131 new deposit terminals that customers can use to deposit notes and coins and credit the amounts to their account immediately outside of business hours.

The integration of the alternative sales segment and the Small Business unit in the Retail Organisation, the better combination of the works council service with branch sales and the streamlining of the central retail service functions have resulted in substantially more efficient structures. These combined competences now allow us to provide optimal and targeted service to our customers.

Another focus in 2012 was the expansion of BAWAG P.S.K.’s online and mobile service offerings. Especially the mobile app for smartphones that was introduced at the end of 2011 has proven to be very successful and already has roughly 100,000 active users. Here, as well, additional innovative functions are being implemented on a continuous basis. Our customers are now also able to make payments with their smartphones using QR codes. The mobile app also functions with voice control so that it can be used by customers with visual impairments.


2020


On its way to becoming the leading multi-channel bank in Austria, BAWAG P.S.K. is investing further in expanding its online offerings. For example, our modern, improved e-banking platform allows customers to conveniently open savings accounts online at any time of the day or night. Our customers can also call up account statements online, and easily contact their advisor using the messaging function directly in the e-banking system.

These multi-channel efforts are also being supported by a further sales strategy focus: the establishment of simple, transparent and attractive products and services.

BAWAG P.S.K. succeeded in introducing such an attractive product onto the market in the form of the KontoBox. The sales figures speak for themselves: The number of new current accounts among retail and business customers increased to over 50,000 in the 2012 financial year. BAWAG P.S.K. has continued pursuing its goal of offering the best account in Austria by expanding the KontoBox with special additional services including a lost key service and travel insurance packages.

The successful KontoBox concept was expanded with the addition of financing products in the second half of 2012. Since September, BAWAG P.S.K. has been offering the KreditBox in three different variants throughout its entire sales network. The “Schnell” (quick), “Wohnen” (home improvement) and “Energie” (energy) KreditBox variants are tailored to specific customer needs and offer numerous advantages, including a best price guarantee, reduced processing fee and credit restructuring service.

In order to be able to offer customers who are interested in housing construction and energy saving financing competent advice and the best possible service, the “MEIN DAHEIM Filialen” (“My Home” Branches) sales concept was presented parallel to the introduction of the KreditBox. Over 160 of these branches throughout Austria offer focused credit competence for related financing needs. The lending product offensive has also brought success, with some 27,500 KreditBox loans granted in the first four months after introduction. This also made a substantial contribution to the increase in revenue, especially in the consumer loan segment.

BAWAG P.S.K.’s financing offerings have also included an online consumer loan since September 2012. Customers can apply for a loan through the web site of BAWAG P.S.K. around the clock, and receive the approval decision in a very short time.

Since the end of 2012, the product “box” concept has been rounded out by the BAWAG P.S.K. SparBox, the new, modern form of saving that covers all needs with fixed- and variable-interest options, that offers attractive terms and that can also be opened online.

The successful expansion of the sales network combined with the streamlining of the product and service portfolio made a major contribution to strengthening the BAWAG P.S.K. brand in 2012.

The “Mitten im Leben” advertising campaign that was launched in 2011 was again the lead campaign in 2012, and among other distinctions came in second place in the Gallup “BIG 3” awards for the new advertising campaigns with the greatest impact. The “Mitten im Leben” slogan was effectively implemented as part of the BAWAG P.S.K. Cup hobby football tournament and provided a unique opportunity to engage customers in a dialogue outside of the Bank.

In 2012, increased focus was placed on social media activities – with success, as demonstrated by a number of awards. The “Monsterhetz” campaign took the CCA Venus creative prize in bronze, the Columbus Awards in gold, silver and bronze as a distinction for Dialog Marketing, and the gold Effie Award from the International Advertising Association for efficient advertising.

*) Wenn Sie innerhalb von vier Wochen nach Abschluss Ihres KreditBox Kreditvertrages eine Finanzierungszusage einer anderen österreichischen Bank für einen identen Kredit mit günstigeren Konditionen (Bearbeitungsentgelt, Aufschlag auf den Indikator oder Fixzinssatz) vorlegen, passen wir auf Wunsch unsere Konditionen insgesamt an diese an. Finanzierungen über Bausparkassen sowie mit Wohnbauförderung ausgenommen.


Holen Sie sich die KreditBox mit Bestpreisgarantie.Haben Sie eine Finanzierungszusage einer anderen Bank für den gleichen Kredit mit günstigeren Konditionen, passen wir unsere daran an.

MIT BESTPREIS-

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WER SAGT, DASS SIE SICH FÜR BESTEKONDITIONEN ANSTRENGEN MÜSSEN?


2222


In addition to its strategic partnership with Österreichische Post AG, BAWAG P.S.K. is also continuing its collaboration with the product and sales partners Generali Versicherung AG and Bausparkasse Wüstenrot AG. It was agreed with both partners in 2012 to continue and intensify the successful cooperation in the coming years so that BAWAG P.S.K.’s customers have access to a broad product spectrum from a single source.

The direct bank easybank, a wholly-owned subsidiary of BAWAG P.S.K., continued on its ambitious course of growth in 2012. easybank is Austria’s first direct bank with a full bank’s spectrum of services.

The continued expansion of its role as a main bank for retail customers is a key goal for easybank, which offers its customers clear and simple solutions for their financial needs. Lean organisational structures make it possible to offer its products at extremely competitive terms. The business model of easybank, combining the advantages of a direct bank with the full services of a branch-based bank, has proven itself over the past years. Thanks to this flexibility, over 60 per cent of easybank’s customers have already shown that they are willing to recommend the services to others. This success is also borne out by the fact that over 400,000 accounts are already being managed after just a few years of business.

easybank’s outstanding service earned it the Recommender Award for “excellent customer orientation” for the second year in a row. The customer satisfaction survey of Finanz-Marketing Verband Österreich (FMVÖ) asks 7,000 people every year about the service provided by and whether or not they would recommend Austria’s banks, insurance companies and savings and loan associations.

And in the Austrian Chamber of Labour’s salary account survey, easybank was named the winner for the seventh time with its easy gratis account, the most inexpensive salary account in Austria.

The easy app was refined and expanded with additional functionality over the past year. easy app features a modern design with innovative content, simple functionality and maximum security, in up to seven languages.

Plans are in place to introduce a new cash service at Shell filling stations in the autumn of the current financial year under a cooperation agreement with Shell Austria. After a pilot test in the summer, at least 125 Shell stations will be equipped with special POS terminals with an ATM function that will allow all customers to withdraw cash with a debit or credit card starting in November.

easybank’s offerings are independent of our branch sales, and the vast majority of easybank’s new customer business comes from customers who are new to our Group.

The company again achieved the best result in its history in 2012 and enjoyed renewed solid growth in customer business.

BAWAG P.S.K. INVEST GmbH had a very successful year in 2012. Despite the low general interest rate level, the management company saw its fund volume grow by around 10 per cent to roughly EUR 4.2 billion. This growth came primarily from the BAWAG P.S.K. sales network, and went mostly into funds with high proportions of corporate and high-yield bonds. Growth was also achieved in the institutional segment in 2012.

The positive performance of BAWAG P.S.K.’s funds in all asset classes was also very gratifying. Numerous awards and several first-place distinctions in different investment categories were captured by BAWAG P.S.K. INVEST at the Alternative Investment Awards and the Umbrella Fund Awards of the financial journal GELD Magazin.


2424


Operating result

Retail & Small Business

The initiatives are also bringing concrete success. Despite the difficult market conditions, operating income rose by 2.4 per cent to EUR 481.8 million, offsetting the negative impact of the continuously low market interest rate levels. Slightly higher expenses (+1.3 per cent), reflect the substantial investment in the segment, which are recognised in current expenditures. Risk costs remained stable during the reporting period. This resulted in a profit before tax of EUR 19.3 million in the Retail and Small Business segment (EUR 15.9 million achieved in 2011).

Corporate and Financial MarketsIn Corporate business, the Bank focuses on sustainable lending and service relationships in Austria. BAWAG P.S.K. offers a broad range of financing and service products to meet customer needs for domestic and international activities. These include made-to-measure financing and investment solutions that make BAWAG P.S.K. a particularly valuable and reliable partner for Austria’s economy.


In 2012, we integrated our support and product teams into one centralised organisation. This and the use of regional on-site advisors ensures that we can continue fulfilling our service promise under our Business Solution Partner concept. This advisory concept enables our customers to benefit from our entire range of services for corporate customers. Corporate banking remains an integral part of the business of BAWAG P.S.K.’s core franchise. We will continue to be a reliable business partner for our corporate customers in future – always focusing on sustainable relationships.

Despite a challenging economic environment and highly competitive markets throughout the entire banking sector, we managed to maintain our market share of about 5 per cent in the corporate lending business.

Providing innovative solutions and services to our clients is our goal. The BAWAG P.S.K. Finance Cockpit that we introduced in 2011 (the first and only web-based solution for cash, liquidity, interest rate and currency management to be offered by a bank in Austria and which can be used within entire company groups, regardless of the number of different banks and accounts) won the INNOVATIONSPREIS-IT 2012 of the German Initiative Mittelstand as the most innovative financial solution in Austria. Our cooperation with the Republic of Austria in the handling of payment transactions was confirmed and represents an excellent basis for continuing our business relationships with the Republic of Austria.

431.9 470.3 481.8

46.3 69.2 74.3

-39.2

15.919.3

Operatingincome

Operatingincome before

risk costs

Profi t before tax

7,036

7,190

-19,322

-18,895

6,990 -19,232

Assets Liabilities

in millions of EUR

2010 2011 2012

Dr. Franz Semmernegg, CFOKapsch Group

Weltweit rund 5.000 Mitarbeiter

„Die Kapsch Group benötigt starke und !exibleFinanzpartner. Die BAWAG P.S.K. ist einverlässlicher und kompetenter Partner fürunsere Projekt"nanzierungen.“

Mitten im Leben. Mitten im Business.www.bawagpsk.com/!rmenkunden

Heute ist Kapsch führend in der Entwicklung von Mautsystemen undinternational erfolgreich mit innovativen Kommunikationstechnologien.Das braucht einen starken Partner. Die BAWAG P.S.K. stellt der Gruppe maßgeschneiderte Finanzierungslösungen zur Verfügung.

MITTEN IM BUSINESSHINTER JEDEM UNTERNEHMEN STECKT EINE GESCHICHTE.


2626


The BAWAG P.S.K. Leasing Group is one of the largest leasing companies in Austria, with over 60,000 active contracts and an outstanding financing volume of around EUR 1 billion. Going forward, the Leasing Group will place a much stronger focus on car leasing to deliver even better and more efficient products and expanded support in our dealer relationships. However, we will continue to support our non-automotive corporate clients with demand-oriented lease products. Based on the Bank’s focus on its activities in the core markets of Austria and Western Europe, the decision was made last year to reduce the leasing activities in Central and Eastern Europe.

The Financial Markets division conducts financial market transactions for our customers and was also responsible for trading for the Bank’s own account (proprietary trading). The trading activities are focused on the asset categories of foreign exchange, fixed income and credit. In the fourth quarter of 2012, we re-focused the business model of Financial Markets on acting as a service centre for our clients, subsidiaries and partners of the Bank. During this process, we also decided to substantially reduce our proprietary trading activities as incremental costs in the regulatory environment are expected to make the return of these activities less profitable despite the very consistent performance of proprietary trading over the past years. Therefore, our future trading activities will focus on the hedging and strategic positioning of interest rate and currency activities, but first and foremost on supporting the Bank’s customer business.

Financial Markets made excellent use of the opportunities that presented themselves under the volatile market conditions and achieved a very good result in 2012. As in 2011, a disciplined trading strategy based on a conservative risk profile brought success.

The activities in the investment books were focused less on new investments and more on optimisation for the upcoming introduction of the Basel III regulations. Even though the portfolio volume was lower than at the beginning of the year, the very strong performance of the financial bonds resulted in strong financial results.

Operating result

Corporates

The reduction of the profit for the period from EUR 131.7 million to EUR 62.9 million is the result of a decline in operating income mainly due to increased refinancing costs.

261.7287.0

223.1

145.8 167.2

99.1132.7 131.7

62.9

Operatingincome

Operatingincome before

risk costs

Profi t before tax

14,425

16,988

-3,888

-3,686

16,614 -4,214

Assets Liabilities

in millions of EUR

2010 2011 2012

27


27


Financial Markets

The Financial Markets segment boosted its operating income from EUR 34.8 million to EUR 84.6 million in the reporting period – in large part as a result of the significantly lower credit spreads in the investment books and the more positive development of the income generated by the trading books.

International BusinessThe International Business segment includes International Corporates and International Commercial Real Estate lending activities. In this segment, we carry out selective transactions with key international accounts within a pre-defined and conservative risk framework. In geographical terms, International Business focuses predominantly on Western European countries. In 2012, the International Business lending portfolio expanded and we were able to achieve a significant increase in revenue once again, while at the same time meeting stringent risk-adjusted return requirements. The share of investment-grade customers in the portfolio came to 79 per cent at the end of the year.

Credit and concentration risk limits that are significantly below the regulatory threshold address transaction and concentration risks. These measures are reflected in low risk costs: No loan loss provisions were needed in 2012.


Despite challenging market conditions, International Corporates remained diligently focused on quality corporate bonds and loans with more defensive business profiles, strong market positions and appropriate capital structures.

In 2012, International Corporates achieved significant growth in core revenue and profits with moderate growth of the portfolio. For 2013, International Corporates plans to maintain its investment strategy and investment areas with active portfolio management. International Corporates invests mainly in corporate bonds and loans denominated in Euros and, only to a limited extent, other currencies. The carrying value of this portfolio increased to EUR 2.4 billion.

International Commercial Real Estate continued to expand BAWAG P.S.K.’s existing core competence in commercial real estate financing to Western European markets and invested in senior secured debt to target the mainstream commercial real estate segments (office, retail, industrial, hospitality) on the primary and secondary market.

42.2 34.8

84.6

10.2

-7.8

38.1

10.2

-7.8

38.1

Operatingincome

Operating income before

risk costs

Profi t before tax

4,250

4,464

4,761

Assets

in millions of EUR

2010 2011 2012


2828


In 2012, International Commercial Real Estate continued a moderate expansion by increasing its portfolio to a total of EUR 1.0 billion, diversifying on a conservative risk basis and in line with the investment framework. International Commercial Real Estate is now recognised as a reliable partner in the European commercial real estate industry with key sponsors and developers.

In 2013, International Commercial Real Estate plans to continue with moderate growth in line with its investment limits and to focus on well-established sponsors.

Operating result

International Business

Für 2012 plant International Corporate Real Estate den Marktausbau weiter voranzutreiben und das Portfolio auf Grundla-ge einer konservativen Risikobasis und in Übereinstimmung mit den intern und extern fest gelegten Grenzen zu diversifizie-ren.

Das laufende Ergebnis

Internationales Geschäft

The credit portfolio of International Business was expanded in 2012, and operating income rose from EUR 87.2 million to EUR 97.1 million. The strict requirements for risk-adjusted yields were also met. Investment-grade customers currently make up 79 per cent of the portfolio. Increased refinancing costs were also a major factor in the 2012 financial year.

74.587.2 97.1

59.3 63.773.7

59.3 63.773.7

Operatingincome

Operating income before

risk costs

Profi t before tax

3,435

1,847

2,922

Assets

in millions of EUR

2010 2011 2012

29


29


Key Events during the Financial Year

Changes in the Managing Board

Jochen Klöpper was appointed as Chief Risk Officer of BAWAG P.S.K. effective 1 April 2012. Prior to this, he worked as the head of BAWAG P.S.K.’s Credit Risk Retail & SME division for more than three years.

Christoph Raninger, Managing Board member responsible for Corporate & Financial Markets at BAWAG P.S.K., resigned from the Managing Board as of 31 October 2012. His duties were performed by CEO Byron Haynes until the end of the year. In December, Sanjay Sharma announced his resignation from the Managing Board of BAWAG P.S.K. as of 31 December 2012.

Changes in the Supervisory Board

The Annual General Meeting appointed Christopher Brody to the Supervisory Board of BAWAG P.S.K. on 1 January 2012. Christopher Brody was appointed until the end of the Annual General Meeting approving the Annual Financial Statements for 2014.

The term of Rudolf Jettmar ended as of the Annual General Meeting on 15 March 2012. He was succeeded on the Supervisory Board of BAWAG P.S.K. by Walter Oblin. Walter Oblin was appointed until the end of the Annual General Meeting approving the Annual Financial Statements for 2014.

Strengthening of the Bank’s Equity Position and Simplification of the Shareholder Structure

A capital contribution of EUR 200 million was made into BAWAG P.S.K. effective 31 December 2012.

Cerberus Capital Management, L.P. and its subsidiaries (“Cerberus”) subscribed to the capital increase and also contributed the majority of the new capital. At the same time, GoldenTree Asset Management LP and its subsidiaries (“GoldenTree”), a U.S.-based asset management company, acquired a significant minority stake of 39.46 per cent. Cerberus remains the controlling shareholder with a stake of 51.78 per cent. The Austrian investors, including Österreichische Post AG, Generali Holding Vienna AG and Wüstenrot Wohnungswirtschaft registrierte Genossenschaft mit beschränkter Haftung, still hold stakes in the Bank’s share capital.

This capital injection and the holding structure, which was adjusted in 2012 and therefore now meets the requirements of Basel III, substantially improved the Bank’s already strong equity structure.

The increase also served as the procurement of replacement capital in fulfillment of the FMA requirements for the redemption of the hybrid instruments in March 2012.

Cerberus will appoint six members to the Supervisory Board of BAWAG P.S.K., including the chairman, and GoldenTree and Österreichische Post AG will each appoint one member. The works council of BAWAG P.S.K. will appoint four members to the Supervisory Board in the future.

Because of its strong equity base, BAWAG P.S.K. will repay participation capital from the Republic of Austria in a nominal amount of EUR 50 million by 30 June 2013, subject to government approval.


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Moody’s Rating for BAWAG P.S.K.

The successive review of European banks announced by Moody’s in February 2012 resulted in a number of banks being downgraded. In contrast, Moody’s confirmed the most important ratings for BAWAG P.S.K. in June 2012. The bank financial strength rating (BFSR) remains at D, and the rating for long-term debt (deposits and bonds) was affirmed at Baa2 based on the three notches of systemic support provided by the Republic of Austria. The outlook is seen as stable.

In its statement, Moody’s emphasised the Bank’s improved earnings position and refined risk management capability and took positive note of important strategic initiatives, especially relating to our branch network.

The Europe-wide review of the ratings for subordinated debt has been completed for the Austrian banks. Moody’s believes that the assumption of systemic support for this type of debt is no longer justified, and, as a result, this rating was adjusted from Baa3 to Ba3 in the case of BAWAG P.S.K. In line with the practice Moody’s is applying across Europe, it is now one notch below the bank financial strength rating.

Government-guaranteed issues by BAWAG P.S.K. have carried a negative outlook since February 2012 as a result of the change in the outlook for the Republic of Austria’s Aaa rating to “negative”.

Basel III (CRD IV / CRR I)

With Basel III and the CRD IV/CRR I proposal that was published by the European Commission and the ongoing trialogue between the Commission, Council and Parliament, one of the most important reform packages for financial regulations is in its final phase now. Along with the strengthening of the capital adequacy requirements, the introduction of a leverage ratio and the adoption of stricter requirements for counterparties, banks also plan to implement new liquidity rules. The new regulations will primarily be aimed at making the financial sector, and banks in particular, more resistant to crises by strengthening the key parameters of a bank, such as capitalisation. BAWAG P.S.K. is monitoring the developments regarding Basel III and the CRD IV / CRR I publications very closely and is developing appropriate implementation steps in the course of its planning process in order to integrate these regulations into the overall management of the Bank’s operations. The Bank is developing measures that will have to be implemented on the technical side and that will also shape its business model in the medium term. BAWAG P.S.K. has identified the challenges that are to be expected and has already started to implement measures in a timely manner.

IFRS 9

The IASB currently proposes that IFRS 9 should become mandatory for annual reporting periods beginning on or after 1 January 2015. The European Union has not yet endorsed IFRS 9 as the EFRAG has decided to take more time to consider the output from the IASB project aimed at improving accounting for financial instruments. In November 2012 the IASB published an Exposure Draft proposing limited amendments to the classification and measurement requirements for financial instruments.

BAWAG P.S.K. is constantly monitoring the developments regarding IFRS 9 and conducting appropriate impact analyses. The final regulation remains to be seen.

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3232


Legal Aspects

City of LinzOn 12 February 2007, the City of Linz and BAWAG P.S.K. concluded a forward financial transaction.

The swap transaction with a nominal volume of CHF 195 million was intended by the City of Linz to optimise a CHF loan in the same amount it had taken out with another bank. The transaction was approved by the Linz City Council and the City of Linz had at least one additional offer of the same sort by another credit institution at the date of conclusion.

Because of the then prevailing Swiss franc exchange rate, the City of Linz received payments from BAWAG P.S.K. in the first years, which it regularly accepted without objection. In autumn 2009, as the Swiss franc strengthened considerably, the situation changed and the City of Linz was obligated to make payments to BAWAG P.S.K. because the exchange rate fell below 1.54 Swiss francs/Euro.

BAWAG P.S.K. has regularly informed the city administration of the value of the position since 2007, already approached the administration in the middle of 2007 and has discussed winding down or restructuring the position several times. The City of Linz would have been able to exit the position with a profit as late as the middle of 2008. After this point, BAWAG P.S.K. also regularly urged that the position be hedged or wound down as the development of the financial markets began having a detrimental effect on the City of Linz’s position. The city administration never accepted these suggestions.

The Linz City Council decided on 13 October 2011 that it would make no more payments in connection with the swap. Because of this breach of a contractual obligation by the City of Linz, BAWAG P.S.K. was entitled for the first time to close out the swap transaction before its agreed maturity. BAWAG P.S.K. immediately exercised its right to close out the swap transaction. This step by BAWAG P.S.K. reduced the risks to which the City of Linz is exposed because of continued market volatility, and limited the associated costs.

The City of Linz filed a lawsuit against BAWAG P.S.K. at the Commercial Court of Vienna in November 2011 seeking payment of CHF 30.6 million (equalling EUR 24.2 million). BAWAG P.S.K. filed a (counter)suit against the City of Linz for the fulfilment of its contractual entitlements from the same transaction in the amount of EUR 417.7 million. It is expected that the two suits will be combined, and that the first verbal hearings will be held in 2013.

The mediation proceedings recommended by the Commercial Court of Vienna have been declared ended by the mediators. BAWAG P.S.K. is maintaining its previous assessment of the legal outlook and thus the accounting treatment of the claim. No accounting adjustments have been made in the 2012 Annual Financial Statements.

33


33


Changes in the Group’s Holdings

BAWAG P.S.K. Leasing and Leasing-CEEBased on the Bank’s continued focus on its activities in the core markets of Austria and Western Europe, the decision was made last year to reduce the leasing activities in Central and Eastern Europe. Corresponding provisions were formed where necessary. The efforts to rapidly reduce exposure in this segment are proceeding as planned.

For further information on BAWAG P.S.K. Leasing, please consult page 26.

BAWAG Capital Finance (Jersey) Ltd. (BCF), BAWAG Capital Finance (Jersey) II Ltd. (BCF II) and BAWAG Capital Finance (Jersey) III Ltd. (BCF III)BAWAG P.S.K. purchased part of the preference shares issued by BCF and BCF II as part of its buyback of hybrid instruments. All of the preference shares in BCF III were also purchased from the sole investor. After this, these preference shares were sold to BCF, BCF II and BCF III. This transaction eliminated the nominal value of these preference shares.

In exchange for the preference shares that were sold, BAWAG P.S.K. received subordinated securities of BAWAG Finance Malta Ltd. held by BCF and BCF II, and in the case of BCF III, securities of BAWAG Malta Bank Ltd. of the same nominal value.

In a final step, liabilities of BAWAG P.S.K. from subordinated deposits made by BAWAG Finance Malta Ltd. and BAWAG Malta Bank Ltd. at BAWAG P.S.K. were offset against the receivables from the subordinated securities mentioned above.

BCF III was also removed from the register of companies as of 12 September 2012 due to the conclusion of the liquidation process.

media.at GmbH (Formerly Omnimedia Werbegesellschaft m.b.H.)The former Omnimedia Group was restructured in April 2012. Following the restructuring, P.S.K. Beteiligungsverwaltung GmbH – a wholly owned subsidiary of BAWAG P.S.K. – directly owns a 26.30 per cent stake in media.at GmbH (holding company). media.at GmbH holds 100 per cent stakes in the operational companies of OmniMedia GmbH and MediaSelect GmbH.

MKB Bank Zrt.In February 2012, the share capital of MKB Bank Zrt. was increased by an equivalent of EUR 80 million from approved capital. BAWAG P.S.K. Group declined to participate in the capital increase through P.S.K. Beteiligungsverwaltung; as a result, its 9.77 per cent share of MKB Bank Zrt. was diluted to 4.61 per cent. In October 2012, two further capital increases with a total volume of just under EUR 230 million were completed for MKB Bank Zrt. Because BAWAG P.S.K. Group did not participate, its share decreased by another 2.75 per cent to 1.86 per cent. The shareholding in MKB was written off in its entirety in the 2012 fiscal year.

BAWAG banka d.d.In March 2012, the supervisory boards of BAWAG P.S.K. and BAWAG banka d.d. approved the merger of the Slovenian BAWAG banka d.d., which is wholly owned by BAWAG P.S.K., with BAWAG P.S.K. (cross-border upstream merger) effective 31 March 2012. The merger was the first cross-border business combination between a Slovenian and Austrian bank, and was officially completed with its entry into the Austrian register of companies in December 2012 after approval was granted by the Slovenian National Bank and the Austrian Financial Market Authority.


3434


PayLife Bank GmbHPayLife Bank GmbH spun off its debit issuing support and ATM acquiring activities into a company (NewCo), which was newly established for this purpose in 2011. The carve-out was entered into the register of companies on 19 June 2012. In addition, NewCo (which is now operating under the name PSA Payment Services Austria GmbH) was granted a Payment Services Act license, which it needs to engage in its business activities.

The efforts to sell the remaining Paylife Bank GmbH (PayLife neu) are at an advanced stage. After the balance sheet date, the current owners willing to sell accepted the notarial offer of purchase. The further procedure according to the shareholders’ agreement (pre-emption right and tag along right) has been commenced and remains to be seen.

The closing of the transaction is further conditioned upon clearance by the Austrian Cartel Court and the Austrian Financial Market Authority (FMA).

paysafecard.com Wertkarten AGThe agreement for the sale of paysafecard.com Wertkarten AG was signed at the end of June 2012. BAWAG P.S.K.’s stake totals 11.24 per cent. After having received all necessary approvals, the closing of the transaction took place on 8 February 2013.

ZEUS Recovery Fund S.A.BAWAG P.S.K. Jersey Capital Ltd. sold its 50 per cent stake in Zeus Recovery Fund S.A. to a party outside of the Group under the share and loan note purchase agreement dated 16 July 2012.

Other Changes in the Group’s HoldingsThe liquidation proceedings for Shrivenham Limited, Datchet Limited and Polestar Limited were finalised at the beginning of the year.

The agreements regarding the restructuring of the “Viennese Model” (Kapital-Beteiligungs AG [KABAG], Wiener Risikokapitalfonds GmbH [WRKF] and Wiener Kreditbürgschaftgesellschaft m.b.H. [WKBG]) were signed in June 2012. WRKF and WKBG were merged into KABAG, the absorbing company, upon entry of the transaction into the register of companies in September 2012. KABAG was then renamed WKBG Wiener Kreditbürgschafts- und Beteiligungsbank AG. BAWAG P.S.K.’s stake currently amounts to 16.44 per cent, and will be 14.71 per cent after all capital increases are completed.

uni venture Beteiligungs AG sold its 11.5 per cent stake in JSW Lifesciences GmbH to an entity outside of the Group under a share purchase agreement dated 9 August 2012.

BAWAG P.S.K. AG’s 0.094 per cent stake in IMS Nanofabrication AG was sold on 23 August 2012.

CARNI Industrie-Immobiliengesellschaft m.b.H. and PLATO Grundstückverwertung GmbH were put into liquidation as of the Annual General Meeting on 31 August 2012.

In September 2012, RF elf Realitätenverwertungsgesellschaft m.b.H. and BLH BAWAG Leasing Holding GmbH were merged into their single shareholder, BAWAG P.S.K. LEASING GmbH, retroactively as of 31 December 2011.

Ingebe Immobilienhandels- und Vermittlungs-GmbH was put into liquidation as of the Annual General Meeting on 8 October 2012.

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3636


Explanations Regarding the Annual Financial StatementsThe Group’s reports were prepared in accordance with the International Financial Reporting Standards (IFRS).

All reports were made using the Guidelines on Financial Reporting (FINREP) framework required for reporting to Oesterreichische Nationalbank (the Austrian National Bank, OeNB), which conforms to the framework recommended by the Committee of European Banking Supervisors (CEBS) for uniform financial reporting by internationally active banks. This framework clearly depicts the measurement categories stipulated in IAS 39.

The Group consists of 50 entities in Austria and abroad (2011: 54). The change in the scope of consolidation in 2012 results from the merger of BAWAG Banka d.d. into BAWAG P.S.K., the merger of B.L.H. BAWAG Leasing Holding GmbH into BAWAG P.S.K. Leasing GmbH, the deconsolidation of BAWAG CAPITAL FINANCE III LIMITED due to its liquidation and the deconsolidation of ZEUS Recovery Fund S.A. due to its sale.

Aside from BAWAG P.S.K., banks in the Group include easybank, which is one of the most important direct banks in Austria and manages the credit card business of BAWAG P.S.K. Group; and Österreichische Verkehrskreditbank, a special bank with the primary activity of freight payment deferral for Rail Cargo Austria, a subsidiary of Austrian Railways. Further banks in BAWAG P.S.K. Group are BAWAG P.S.K. Wohnbaubank, which issues convertible bonds and thereby serves as a refinancing vehicle for housing loans granted by BAWAG P.S.K.; BAWAG P.S.K. Invest GmbH, an investment firm that manages a large number of funds (such as equity funds, bond funds and money market funds) that invest in national and international securities; and BAWAG Malta Bank, which grants commercial loans to local major customers and a limited number of SMEs.

Material non-banks are the leasing group, which will concentrate its business model more strongly on vehicle leasing in line with the retail focus of the Bank; as well as the BAWAG P.S.K. real estate sub-group parented by BAWAG P.S.K. Immobilien GmbH (BPI), which is responsible for the management of the properties of BAWAG P.S.K. Group remaining after the sale of non-strategic real estate. Further non-banks include the four A.U.S. asset management companies, which are wholly owned indirect subsidiaries of BAWAG P.S.K. and that have held since 2009 the majority of the structured credit portfolio that is being wound down. BAWAG P.S.K. Versicherung is accounted for using the equity method after a majority stake in the company was sold in 2007.

37


37


Profit or Loss Statement (adjusted for valuation results attributable to non-controlling interests)

in millions of Euros 2012 2011 ChangeNet interest income 597.4 677.9 -80.5 -11.9%Net fee and commission income 194.7 175.9 18.8 +10.7%Core revenues 792.1 853.8 -61.7 -7.2%Gains and losses on financial assets and liabilities adjusted for non-controlling interests1)

128.9

31.5

97.4

>+100%

Other operating income and expenses2) 10.8 38.4 -27.6 -71.9%Operating income 931.8 923.7 8.1 +0.9%Personnel expenses -345.2 -335.8 -9.4 -2.8%Other administrative expenses -203.8 -192.5 -11.3 -5.9%Depreciation and amortisation on tangible and intangible non-current assets

-55.5

-64.6

9.1

+14.1%

Operating expenses (without restructuring expenses) -604.5 -592.9 -11.6 -2.0%Restructuring expenses -43.2 -20.3 -22.9 >-100%Operating profit before bank levy 284.1 310.5 -26.4 -8.5%Bank levy -25.3 -20.2 -5.1 -25.2%Operating profit before risk costs 258.8 290.3 -31.5 -10.9%Provisions and impairment losses -150.1 -154.8 4.7 +3.0%Share of the profit or loss of associates accounted for using the equity method

1.5

0.3

1.2

>+100%

Profit before tax adjusted for non-controlling interests1)

110.2

135.8

-25.6

-18.9%

Income taxes -0.2 -8.6 8.4 +97.7%Profit after tax (without gains and losses on financial assets attributable to non-controlling interests)

110.0

127.2

-17.2

-13.5%

Profit after tax without restructuring expenses 153.2 147.5 5.7 +3.9%

Profit after tax (without gains and losses on financial assets attributable to non-controlling interests)

110.0

127.2

-17.2

-13.5%

Gains and losses on financial assets attributable to non-controlling interests1)

26.3

-6.4

32.7

–

Profit after tax 136.3 120.8 15.5 +12.8%Thereof attributable to non-controlling interests 29.0 -1.7 30.7Thereof attributable to owners of the parent 107.3 122.5 -15.2 -12.4%

1) Under IFRS, the item Gains and losses on financial assets and liabilities also includes the valuation of securities whose risk is borne by owners of non-controlling interests. These securities are subject to substantial fair value fluctuations. In order to improve the comparability of the results, the valuation results attributable to owners of non-controlling interests are shown in a separate line. Compared to the Profit or Loss Statement presented in the Consolidated Financial Report according to IFRS, the item Gains and losses on financial assets and liabilities is EUR 26.3 million lower (2011: EUR 6.4 million higher). Accordingly, the item Profit before tax presented above is EUR 26.3 million lower (2011: EUR 6.4 million higher) than the Profit before tax presented in the Consolidated Financial Report according to IFRS.

2) In accordance with IFRS, the item Other operating income (expenses) also includes the bank levy in the amount of EUR 25.3 million. However, the Bank’s management sees the bank levy as part of the operating expenses. Accordingly, it is shown in the expense line and is not netted within the Bank’s operating income in the management report.


3838


Net interest income decreased by EUR 81 million or 11.9 per cent to EUR 597 million in 2012. This result is particularly influenced by continuously falling interest rates and rising margin pressure. Furthermore, the Bank made an important step in dealing with rising capital requirements through the optimisation of risk-weighted assets (RWA).

Net commission income increased by 10.7 per cent compared with the prior year, coming in at EUR 195 million, and contributed to the partial compensation of decreased net interest income.

Overall, core revenues, which comprise net interest income and commission income, decreased by EUR 62 million compared with the prior year to come in at EUR 792 million.

Core revenues

The item gains and losses on financial assets and liabilities was influenced primarily by our net trading income and the valuation of our investments, issued securities and derivative transactions for customers.

The Bank achieved a result of EUR 30 million (prior year: EUR 15 million) in the financial year 2012 by trading in securities and derivatives.

The decreased risk premiums on the capital market and pull-to-par effects caused an overall positive result from the structured credit portfolio in the amount of EUR 67 million, compared with a negative result of EUR 15 million in the 2011 financial year.

The other valuation results and realised earnings from securities, issued securities and derivative instruments led to a positive net profit contribution in the amount of EUR 32 million. This includes valuation losses on own issues designated at fair value through profit or loss in the amount of EUR 151 million, which were clearly compensated by realised gains on the sale of financial assets and valuation gains on investment books.

In 2011, the item Gains and losses on financial assets and liabilities includes valuation results from a derivative transaction between BAWAG P.S.K. and the City of Linz. However, as in the prior year no information will be disclosed on the amounts in light of the pending lawsuits.

FY 2010

* Average change from 2010 to 2012

809

650

159

854

678

176

792

597

195

FY 2011 FY 2012

NCI

NII

-1%*

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4040


Overall, gains and losses on financial assets and liabilities totalled EUR 129 million, an increase of EUR 97 million compared with the prior year. The increase in this item can primarily be attributed to realised gains and losses on financial assets and liabilities not measured at fair value through profit or loss (net) in the amount of EUR 105 million.

Other operating income and expenses fell by EUR 28 million during the year to reach EUR 11 million. This result includes profits from the sale of land and buildings that are not required for Bank operations in the amount of EUR 2 million. In the previous year, the other operating income and expenses included one-off income from the conclusion of legal proceedings in the amount of EUR 12 million.

The Bank’s tight cost management once again proved effective in 2012. Operating expenses totalled EUR 605 million in the financial year and were only EUR 12 million or 2.0 per cent higher than in the previous year. The restructuring expenses in the amount of EUR 43 million represent an important contribution to the future development of BAWAG P.S.K., aimed at realising sustainable profit in the years ahead.

Operating expenses (excluding restructuring expenses)

All in all, the operating expenses reflect the positive effects of our efficiency and productivity enhancement programme, which has been implemented on an ongoing basis since 2010. Although significant investments were made in 2012, including the opening of new BAWAG P.S.K. branches together with Österreichische Post AG to meet the new common requirements, operating expenses (excluding restructuring expenses) fell by EUR 13 million in the time span from 2010 to 2012.

The operating result before restructuring expenses and the bank levy including gains and losses on financial assets and liabilities in the amount of EUR 327 million (2011: EUR 331 million) remained at a stable level compared to the prior year and decreased only slightly by EUR 4 million or 1 per cent.

The operating result before the bank levy including gains and losses on financial assets and liabilities fell by EUR 26 million compared with 2011 to come in at EUR 284 million. This can be attributed to higher restructuring expenses, which increased by EUR 23 million compared to the previous year.

The operating result before risk costs in the amount of EUR 259 million is calculated by deducting the bank levy, which increased by 25 per cent compared to the prior year and reduced the operating result by approximately EUR 25 million.

FY 2010


618 593 605

FY 2011 FY 2012

-1%*

*) Versicherungsschutz bei Diebstahl, Raub, Einbruchsdiebstahl und Plünderung der versicherten Sache und Folgeschäden, die daraus entstehen (z. B. verbrauchte Telefon-Gebühreneinheiten bis ! 52,–). Maximale Versicherungssumme für Handy ! 256,–, für Laptop ! 1.000,–. Bitte um Beachtung des Selbstbehaltes und der Bedingungen für Elektronikversicherung. Versicherer: Lloyd’s of London. Stand 3.5.2012 / Änderungen vorbehalten.

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4242


Expenses for provisions and impairment losses (risk costs) fell by EUR 5 million to EUR 150 million in 2012. This 3 per cent decrease, which was achieved despite the difficult market conditions, reflects the conservative risk profile of our loans and investments. This position includes a full impairment relating to our investment in MKB, a Hungarian bank.

Risk costs

As in the prior year, no significant impairments had to be recognised on the structured credit portfolio in 2012.

The profit before tax amounts to EUR 110 million, which is EUR 26 million less than the profit for 2011. This can primarily be attributed to higher restructuring expenses (EUR +23 million), the bank levy in the amount of EUR 25 million (see footnote 2) and lower net interest income (EUR -81 million). These effects were partly offset by increases in gains and losses on financial assets and liabilities (EUR +97 million) as well as in net commission income (EUR +19 million) and a decrease in risk costs (EUR -5 million).

The EUR 8 million decrease in tax expenses was primarily caused by changes in deferred taxes resulting from differences in values according to Austrian tax law and IFRS.

Taking into account the profit after tax without restructuring expenses, the picture is gratifying. This position increased by EUR 6 million or 3.9 per cent compared to the previous year, coming in at EUR 153 million at the end of the year, and shows BAWAG P.S.K.’s strength in realising sustainable profit.

The losses on financial assets attributable to non-controlling interests pertain to fair value fluctuations that are borne by owners of non-controlling interests. The IFRS income statement in the Notes shows these fair value fluctuations under the item gains and losses on financial assets and liabilities (see footnote 1).

FY 2010


200155 150

FY 2011 FY 2012

-13%*

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4444


The net profit attributable to the owners of the parent company totals EUR 107 million for 2012, compared with EUR 123 million in 2011. This result reflects the difficult current market conditions, the restructuring expenses and the bank levy, which increased by 25 per cent compared to the prior year.

Net profit

FY 2010


122 143

123

20133

107

25

FY 2011 FY 2012

+4%*

after bank levy (EUR25 million)

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4646


Assets

in millions of Euros 2012 2011 ChangeCash reserves 481 616 -135 -21.9%Financial assets 10,050 10,574 -524 -5.0%

Fair value through profit or loss 1,401 1,749 -348 -19.9%Available for sale 6,810 6,482 328 +5.1%Held for trading 1,839 2,343 -504 -21.5%

Loans and receivables 29,744 28,887 857 +3.0%Debt instruments 2,283 3,250 -967 -29.8%Customers 22,275 23,223 -948 -4.1%Credit institutions 5,186 2,414 2,772 >+100%

Hedging derivatives 192 127 65 +51.2%Tangible non-current assets 181 191 -10 -5.2%Intangible non-current assets 173 193 -20 -10.4%Tax assets for current taxes 3 3 – –Tax assets for deferred taxes 218 280 -62 -21.9%Other assets 223 206 17 +8.3%Total assets 41,265 41,077 188 +0.5%

The Bank’s consolidated assets as at 31 December 2012 came to EUR 41,265 million, EUR 188 million or 0.5 per cent more than at the end of the previous financial year. This growth was primarily the result of higher business volume with credit institutions, partly compensated by lower business volume with customers as well as disposals and redemptions of not actively traded debt instruments. Furthermore, financial assets fell by EUR 524 million to EUR 10,050 million (-5.0 per cent).

The item financial assets recognised at fair value through profit or loss contains the securities and loans for which changes in fair value are recognised on the income statement. The financial instruments in this category decreased by EUR 348 million or 19.9 per cent to EUR 1,401 million in the financial year 2012, primarily as a result of planned redemptions and disposals.

The available-for-sale financial assets rose from EUR 6,482 million at the end of 2011 to EUR 6,810 million at the reporting date (+5.1 per cent). This increase is the result of new investments in securities in the available-for-sale category, which were only partially compensated by scheduled redemptions and disposals. The increase is also due to a reclassification of financial instruments from the category loans and receivables into available-for-sale in the financial year 2012, because the loans and receivables definition was no longer met. The carrying amount of the reclassified financial instruments is EUR 388 million as of 31 December 2012.

In addition to our securities portfolio, which consists primarily of investments in liquid bank, corporate and government bonds, this item also contains the carrying amounts of our non-consolidated equity investments in the amount of EUR 123 million (2011: EUR 161 million). The reduction in the carrying amounts predominantly relates to impairments recognised in 2012.

47


47


Held for trading covers not only the positions in the trading book, but also all positive fair values of derivative financial instruments, including those held to hedge positions in the banking book but for which hedge accounting is not applied. The decrease of EUR 504 million or 21.5 per cent to EUR 1,839 million can primarily be attributed to a reduction of derivatives in the trading book. A similar trend was seen for derivatives on the liabilities side. Repo transactions in the trading book decreased by EUR 157 million compared with 31 December 2011 to EUR 0 million.

The item loans and receivables, which contains the loans to customers and credit institutions that are valued at amortised cost, grew by EUR 857 million to EUR 29,744 million in the reporting period. This increase is due to a rise in loans to credit institutions in the amount of EUR 2,772 million partly compensated by a decrease of debt instruments and loans to customers in the amount of EUR 1,915 million.

As of 31 December 2012, the receivables from customers had decreased by EUR 948 million or 4.1 per cent to EUR 22,275 million due to lower business volumes with corporate and retail customers.

As a result of numerous planned redemptions and disposals of not actively traded securities during the reporting period, the carrying values of the debt instruments reported in this item decreased by EUR 967 million or 29.8 percent to EUR 2,283 million.

Our receivables from credit institutions rose by EUR 2,772 million compared with the previous year to reach EUR 5,186 million. This increase results primarily from short-term deposits due to low-risk investments of our liquidity and collateral for market volatilities of derivative transactions. The banking book repo transactions rose by EUR 731 million compared to 31 December 2011 (2011: EUR 0 million).

Tangible non-current assets totalled EUR 181 million on 31 December 2012, down from EUR 191 million at the end of 2011. This can be attributed to scheduled depreciation and the sale of properties.

The carrying values of the intangible assets also fell by EUR 20 million to EUR 173 million, primarily due to scheduled amortisation.

Other assets include, among other things, associates that are recognised using the equity method with a carrying value of EUR 20 million (prior year: EUR 18 million) which relate to BAWAG P.S.K. Versicherung AG.


4848


Liabilities

in millions of Euros 2012 2011 ChangeFinancial liabilities 37,195 37,853 -658 -1.7%

Fair value through profit or loss 4,324 4,468 -144 -3.2%Customers 43 110 -67 -60.9%Issued securities 4,281 4,358 -77 -1.8%

Held for trading 2,269 2,770 -501 -18.1%At amortised cost 30,602 30,615 -13 <-0.1%

Customers 21,999 22,016 -17 -0.1%Credit institutions 3,748 3,399 349 +10.3%Issued securities 4,769 4,290 479 +11.2%Financial liabilities associated with transferred assets

86

910

-824

-90.5%

Hedging derivatives 164 64 100 >+100%Provisions 484 413 71 +17.2%Tax liabilities for current taxes 2 2 – –Other obligations for deferred taxes 17 6 11 >+100%Other obligations 565 411 154 +37.5%Equity 2,445 1,962 483 +24.6%Non-controlling interests 393 366 27 +7.4%Total equity and liabilities 41,265 41,077 188 +0.5%

The item financial liabilities at fair value through profit or loss under Financial liabilities comprises the Bank’s issued securities and deposits that are reported at fair value and that are not assigned to the category held for trading. These liabilities totalled EUR 4,324 million on 31 December 2012, EUR 144 million or 3.2 per cent less than at the end of the prior year. This decline can be attributed largely to the redemption and repurchase of securities issued by BAWAG P.S.K., although these transactions were offset almost entirely by new issues. Investment products whose interest depends not only on the general interest rate level but also on other factors such as the inflation rate or the development of specific indexes decreased by EUR 67 million to EUR 43 million. Because these products are hedged against the relevant risks using derivative financial instruments, they are recognised at fair value through profit or loss to ensure that they are reported properly. No new products are being issued in this category.

The held for trading financial liabilities fell by EUR 501 million or 18.1 per cent to EUR 2,269 million in 2012. This decrease can be attributed primarily to a reduction of derivatives in the trading book. A similar trend was seen for derivatives on the asset side. Liabilities from repo transactions in the trading book fell by EUR 158 million.

Payables to customers remained nearly unchanged compared to the prior year. Savings deposits decreased by EUR 1,728 million, but this was nearly offset by a EUR 1,711 million increase in other deposits (including savings card accounts). Together with the investment products measured at their fair values mentioned above, savings and investment deposits totalled EUR 11,033 million as of 31 December 2012, which is approximately one fourth of the Bank’s consolidated assets. BAWAG P.S.K. was thereby able to once again refinance its receivables from customers in 2012 without making substantial use of the capital markets.

Payables to credit institutions increased by EUR 349 million to EUR 3,748 million over the reporting period. Of this increase, EUR 327 million concern payables to domestic credit institutions.

49


49


The issued securities recognised at amortised cost increased by approximately EUR 0.9 billion due to new issues and came to EUR 4,769 million (increase [net] of EUR 479 million) after scheduled redemptions and buybacks at the end of the reporting period.

The financial liabilities from asset transfers pertain to genuine repurchase agreements under which BAWAG P.S.K. has transferred financial assets in exchange for payment and under which it was agreed that the financial assets would be repurchased by BAWAG P.S.K. at a later date for an agreed amount. The decrease of EUR 824 million compared to the previous year is due to a reduction in business volume.

The increase in the amount of EUR 100 million in hedging derivatives can be attributed to higher market values of hedging instruments due to lower interest rates.

The provisions in the amount of EUR 484 million include EUR 433 million in social capital reserves, which increased by EUR 65 million compared to the previous year mainly due to the change of the interest rate used to calculate social capital.

The EUR 483 million or 24.6 per cent increase in IFRS equity to EUR 2,445 million results from the total comprehensive income for 2012 in the amount of plus EUR 334 million, the grandparent capital contribution of EUR 200 million, which is shown in the capital reserves, less the dividend payment for the government’s participation capital for 2011, which amounted to EUR 51 million. Total comprehensive income comprises the shareholders’ profit for the period in the amount of EUR 107 million and the other comprehensive income in the amount of plus EUR 228 million, which for the most part is influenced by changes in the AFS reserve. The increase is primarily due to positive market value changes of securities. Furthermore, actuarial losses in the amount of EUR -60.4 million were recognised in other comprehensive income due to the adjustment of the interest rate used to calculate social capital from 5.00 per cent in the previous year to 3.75 per cent in the current year.

Non-controlling interests increased by EUR 27 million to EUR 393 million, primarily due to positive valuation results from securities whose risk is borne by owners of non-controlling interests.


5050


Consolidated own funds of the BAWAG P.S.K. credit institution group pursuant to the Austrian Banking Act (BWG)

in millions of Euros 31.12.2012 31.12.2011Share and participation capital 800 800Reserves (including fund for general banking risks) after deduction of intangible assets and losses of subsidiaries

1,102

675

Less shareholdings held for investment purposes -39 -34Minorities 404 378Hybrid capital 142 404Tier I (core capital including minorities and hybrids) 2,409 2,223Reserve pursuant to § 57 BWG, revaluation reserve 44 59Supplementary and subordinated debt 405 537Additional items (Tier II) 449 596Less shareholdings held for investment purposes -39 -34Eligible own funds 2,819 2,785Tier III 16 80Own funds 2,835 2,865

Own funds are calculated on the basis of the results of the members of the credit institution group according to Austrian GAAP (UGB) and BWG. This scope of consolidation is different from the scope of consolidation according to IFRS and includes 67 companies.

Own funds requirement

in millions of Euros 31.12.2012 31.12.2011Credit risk 1,503 1,641Market risk 16 80Operational risk 130 136Capital requirements 1,649 1,857

The core capital ratio (Tier I ratio) based on total risk of 11.7 per cent (2011: 9.6 per cent based on total risk) and the own funds ratio of 13.8 per cent (2011: 12.3 per cent based on total risk) are well above the legally stipulated minimum requirements of 4 per cent and 8 per cent, respectively.

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Risk Management

With respect to the explanations on financial risks at BAWAG P.S.K. as well as the goals and methods of risk management, we would like to draw the reader’s attention to the information in the Notes to the consolidated financial statements.

Non-Financial Performance Indicators

Corporate Governance

Supervisory BoardAs of 31 December 2012, BAWAG P.S.K.’s Supervisory Board consisted of six national and international experts who are elected by the Annual General Meeting. An additional three members are nominated by the Works Council. The individual members of the Supervisory Board and the composition of the committees are presented in the Boards and Officers section.

The Rules of Procedure of the Supervisory Board comprise the rights and obligations of this board and also define the individual committees of the Supervisory Board and their responsibilities.

Risk and Credit Committee

Under the ultimate responsibility of the full Supervisory Board, the approval of loans and other forms of financing and credit to individual borrowers or groups of connected customers for the purposes of section 27 of the Banking Act (exposures that equal 10 per cent or more of the Bank’s eligible own funds) has been delegated to the Risk and Credit Committee. A report about the large exposures approved by the Risk and Credit Committee is submitted to the Supervisory Board at least once per year. The Risk and Credit Committee also approves transactions with the Bank’s affiliated parties (except for transactions with members of the Supervisory Board or Managing Board that are delegated to the Committee for Management Board Matters) and material credit policies. It also advises the Supervisory Board on the current and future risk-bearing ability and risk strategy of the Bank and monitors the effectiveness and efficiency of the risk management systems.

Audit and Compliance Committee

The Audit and Compliance Committee reviews the Bank’s accounts and the annual financial statements, and monitors the Bank’s internal control systems in particular. This committee is also in regular contact with the external auditor, the head of Internal Audit and the Compliance Officer. The annual audit plans and reports about the activities of the Internal Audit division and the Bank’s Compliance Office are also submitted to the Audit and Compliance Committee.

Nomination Committee

The Nomination Committee deals with succession planning and selecting suitable candidates for Managing Board posts, as well as preparations for the annual Supervisory Board meeting about its own performance and efficiency. This committee also approves the appointment of Managing Board members to boards in companies outside of BAWAG P.S.K. Group.


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Committee for Management Board Matters

The Committee for Management Board Matters deals mainly with the content of Managing Board contracts and transactions between the Bank and members of the Managing Board and Supervisory Board pursuant to section 28 of the Austrian Banking Act.

Remuneration Committee

The Remuneration Committee, which was established in March 2012, deals with the general principles of the Bank’s remuneration policy and with monitoring the remuneration policy, remuneration practices and remuneration-based incentive structures pursuant to section 39c of the Austrian Banking Act, except for those pertaining to Managing Board members.

Related Parties Special Audit Committee

The Related Parties Special Audit Committee reviews financing commitments and transactions above a certain amount involving companies with controlling influence as defined in IAS 24 or companies related to these controlling companies. The Related Parties Special Audit Committee is intended to ensure transparency in all transactions involving the Bank’s shareholders. This committee generally meets only when needed.

Managing BoardAt the end of 2012, the Managing Board consisted of five members.

The Rules of Procedure of the Managing Board define the responsibilities and tasks of this board. According to these Rules of Procedure, the Managing Board has the right to form committees and to issue statutes for these committees. The following executive committees have been formed:

The Credit Approval Committee, which decides on financing transactions above a certain threshold; The Asset Pricing Committee, which concentrates on pricing in lending; The Strategic Asset Liability Committee, which deals with strategic capital and liquidity planning issues as well as operational aspects of asset and liability management;

The Credit Policy Committee, which focuses on credit guidelines and strategies; and The Enterprise Risk Meeting for steering the total bank risk.

Austrian Code of Corporate Governance

In 2006, BAWAG P.S.K. made a voluntary commitment to adopt the Austrian Code of Corporate Governance (“Code”) for listed companies. In 2012, the amendments of the Code in January 2012 and July 2012 were incorporated into BAWAG P.S.K.’s declaration of commitment. The focus of the amendments in January 2012 was the refinement of the diversity rule, new rules to improve cooperation between the Supervisory Board and the external auditor, and a revised framework for fighting corruption. The second set of amendments in July, which resulted from changes to several provisions of the Austrian Stock Corporation Act (Aktiengesetz) and the Commercial Code (Unternehmensgesetzbuch), were aimed at strengthening the requirements for transparency in the remuneration of Managing Board members, placing further limitations on changing from the Managing Board to the Supervisory Board and increasing diversity in supervisory boards.

The Bank prepared annual Corporate Governance Reports for the financial years 2009 to 2011 and published them on its web site. A Corporate Governance Report will also be prepared for 2012.

Compliance with the Austrian Code of Corporate Governance was audited by independent third parties in 2012 and revealed that all key provisions of the Code were fulfilled. Reasons were provided for rules that are not followed because of the Bank’s closed shareholder structure (comply or explain principle).

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ComplianceThe Compliance Office reports directly to the Managing Board. Regular reports are also submitted to the Bank’s Audit and Compliance Committee.

The key responsibilities of the Compliance Office are preventing money laundering and combating terrorism, monitoring compliance with sanctions, securities compliance, as well as the prevention of insider trading, market abuse and conflicts of interest. A series of detailed guidelines have been put into place to ensure compliance with all legal requirements.

In addition to all relevant laws such as the Securities Supervision Act, all employees are also bound by a Code of Conduct that contains, among other things, guidelines for business conduct and customer service, for how conflicts of interest are to be handled and for preventing market abuse and money laundering. A detailed anti-corruption guideline governs the acceptance and award of gifts and keeps employees and management abreast of the valid anti-corruption regulations.

BAWAG P.S.K. has also been a member of the Austrian chapter of Transparency International since the end of November 2012. This non-profit organisation seeks to increase general awareness of the need to combat corruption and increase transparency in Austria, and works to facilitate the implementation of relevant measures and reforms.

Personnel Development

Management DevelopmentThe LEAD series of management development activities were continued in 2012.

LEAD – Erfolgreich Führen, the annual programme in which all managers deal with a core topic related to leadership, was held in January and February with the title My Network. The focus was on improving interdepartmental collaboration.

The eleventh run of the LEAD – Neue Führungskräfte programme, which has given support to around 160 managers in the first year of their management positions since its inception at the end of 2010, started in October.

The motto of the Lead Toolbox (the open training programme for experienced managers) in 2012 was “Leadership workshop”, an open platform that offers a forum for colleagues to exchange experiences and group coaching guided by experienced consultants.

Talent Development and Succession and Career PlanningThe Talent Days (Talente Tage), which are assessment centres for employees with management potential, were held for the first time in January and February.

The successful graduates of the Talent Days from retail sales took part in the third run of the TOP Team Vertrieb talent development programme. The high-potential employees from the central units were prepared for possible management roles in the newly launched forTalents programme. During the course of the curricula, these two target groups completed modules together in order to share the respective viewpoints of sales and the central units with one another and to deal with general bank, strategy and managerial topics.

The Sales Talent Management process, the annual computer-assisted review of skills, potential and succession scenarios for all retail sales employees and managers, was adapted to reflect the new job profiles defined in the new branch concept and to increase its focus on possible development measures in preparation for its launch in June 2012.


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TrainingThe new job profiles and sales approaches in the branches led to a reorganisation of the training concept for retail sales employees. The first milestone was the new introductory training programme called Retail Camp, which was launched in January. Along with banking and sales topics, the programme also focuses on the brand promise of BAWAG P.S.K. and its implementation in everyday sales operations. The programmes for high-frequency customer managers and existing customer managers have been completed and will be rolled out in January 2013.

Two additional major strategic training offensives were prepared or launched in the first half of 2012:

The managers and employees of the Customer Service Centre are going through a training offensive focusing on the alignment of their activities to the new brand positioning and an increased sales orientation.

The roll-out of the KreditBox product is being accompanied by a wave of training in the retail sales unit that incorporates the entire range of training methods.

Performance ManagementThe MbO (management by objectives) process has become fully established in the Bank in the third year after its introduction.

In addition to the joint targets for managers (financial targets of the Bank, cross-divisional Bank projects and regular performance feedback for employees depending on the hierarchical level), a Bank-wide target for all employees and managers of BAWAG P.S.K. was set in 2012. The goal is to bring everyone to work actively on the strategic positioning of the Bank as a pioneer in intuitive banking under the motto “the focus on the customer”.

BANK SurveyThe first Bank-wide employee survey at BAWAG P.S.K. was held from 3 to 24 May 2012. The survey included questions about the commitment of the employees and managers, their perception of the brand and the customers’ perception of the brand and the Bank. The results were communicated in a cascading form in summer and the Bank is working on the implementation of the defined measures.

Corporate Social Responsibility (CSR)

BAWAG P.S.K. is strongly committed to embracing and implementing its corporate social responsibility (CSR).

It is important for companies to find the right balance between economic, ecological and social objectives. The improvements to the “New Chance” Account, the continuation of the Volunteer Days and the creation of a programme for promoting women are three measures that BAWAG P.S.K. took in 2012.

New Chance AccountWith the “New Chance” Account, the Bank has been actively combating social exclusion since 1 April 2009. This account has no overdraft facility and corresponds to the most affordable account package of BAWAG P.S.K.

A key improvement was made to the “New Chance” Account in 2012: Effective from the middle of September, all newly opened “New Chance” Accounts automatically include a debit card. All customers who already hold a “New Chance” Account can also receive a debit card if desired. Consequently, all “New Chance” customers can now withdraw cash at cash dispensers and pay for purchases at POS terminals.

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Volunteer DaysSince the introduction of the Volunteer Days programme in June 2011, every employee has the possibility to spend up to two working days per year volunteering for charitable organisations and projects without having to use any of his or her entitlement to paid holiday leave. In the reporting period, bank trainees worked at the SOMA social market in Vienna, and employees of BAWAG P.S.K. Carinthia helped with renovation work at the Seebach integration centre. This actively promotes and rewards our employees’ personal commitment.

Promoting WomenIn coordination with the works council, BAWAG P.S.K. has prepared a programme for promoting women and agreed to its implementation in writing. With this, the Bank has taken another important step towards equality between women and men.

The creation of the women’s promotion programme focused on the following objectives in particular: Creating awareness for the topic of promoting women Providing information to employees before, during and after parental leave Promoting financial equality between women and men Increasing the number of women in leadership and expert positions Promoting a better balance between career and family for women and men

But the Bank’s work is not done with the creation of the plan. Now, it must be applied on a continual basis, and all specific measures and their implementation will be evaluated annually.

A complete overview of BAWAG P.S.K.’s CSR activities and facts and figures on our environmental impact and staff can be found in the CSR Report, which is available at www.bawagpsk-annualreport.com.

Sponsoring

The Arts, Education and Social Issues – Our Three Sponsoring FocusesSponsoring is part of BAWAG P.S.K.’s public relations work and is intended to support the communication and marketing activities of the Bank. It is also a way in which the Bank visibly lives up to its social responsibility. BAWAG P.S.K. is not only a “part of life”, but also a “part of society”. The Bank strives to improve its sponsoring image and general profile by focusing on the three core areas of the arts, education and social issues and by creating and using synergies between these areas. A prerequisite for all activities in this area is their relevance to our business and their ability to support the business and communication activities of the Bank. The goal is to remain involved in projects over the long term to ensure sustainability and continuity.

BAWAG P.S.K. currently operates the gallery BAWAG Contemporary and WAGNER:WERK Museum Postsparkasse, and is a sponsor of the Porgy & Bess jazz and music club, Volkstheater in Vienna, the Diagonale in Graz and the Haag Summer Theatre. BAWAG P.S.K. is also a partner of the Kunsthistorisches Museum and the Museum of Natural History in Vienna (for annual passes) and funds music and acting awards such as the Dorothea Neff prize and the Austrian Cabaret Prize.

In November 2012, BAWAG P.S.K. was awarded the maecenas 2012, the prize for the best art sponsoring project of a major company, in particular for the support provided to the Diagonale film festival and the espressofilm short film festival.


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In the area of education, BAWAG P.S.K. promotes competitions such as the Fidelio creative contest, funds schools and educational institutions and the school tours of the Vienna English Theatre, and is involved in humanitarian and charitable projects for Caritas, Licht ins Dunkel, the RED NOSES Clown Doctors, the Austrian Diakonie and others. The first PART OF LIFE Prize for Humanitarian Commitment, which is funded by BAWAG P.S.K., was also awarded in 2011 and is conferred to recognised figures for outstanding achievements in social and humanitarian endeavours.

Charitable organisations that are customers of the Bank can also use the www.meinespende.at platform, which supports their work with social media activities.

In all of these projects, BAWAG P.S.K. sees itself as an active sponsoring partner. We aim to establish long-term partnerships to jointly develop projects and ideas.

An overview of BAWAG P.S.K.’s sponsoring activities can be found at www.bawagpsk.com/sponsoring.

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Events after the Reporting Date

Changes in the Managing Board

Wolfgang Klein was appointed Deputy Chairman of the Managing Board of BAWAG P.S.K. effective from 1 January 2013. Wolfgang Klein has been responsible for Retail and Small Business since November 2010. This appointment reflects the continued strategic importance of retail business for the further growth and development of BAWAG P.S.K. Wolfgang Klein also took over the Chief Operating Officer (“COO”) duties on an interim basis, also with effect from 1 January 2013.

In December 2012, Corey Pinkston, head of Strategy and Economics of BAWAG P.S.K., was appointed as a member of the Managing Board responsible for Corporates and Financial Markets (including International Business and Leasing) with effect from 1 January 2013.

paysafecard.com Wertkarten AG

The sales process regarding paysafecard.com Wertkarten AG, which had been launched in June 2012 by signing the share purchase agreement, was successfully completed in February 2013. Along with BAWAG P.S.K., which owned an 11.24 per cent stake, the sellers included all of the other shareholders of paysafecard.com Wertkarten AG.

City of Linz

The mediation proceedings recommended by the Commercial Court of Vienna were declared ended by the mediators in February 2013.

Changes in the Group’s Holdings

MKB Bank Zrt.

In February 2013 MKB Bank Zrt. realised a further increase of the share capital with a volume of approximately EUR 125 million. BAWAG P.S.K. Group once again elected not to participate in the capital increase through P.S.K. Beteiligungsverwaltung GmbH, and its stake was consequently diluted from 1.86 per cent to 1.39 per cent.

BAWAG Leasing Fleet Sp. z o.o.

On 20 February 2013, the unconsolidated 100 per cent affiliate of BAWAG P.S.K. Leasing GmbH, GARA RPK Grund stücks-verwaltungsgesellschaft m.b.H., sold all of its shares in the Polish leasing subsidiary BAWAG Leasing & Fleet Sp. z o.o. In the course of this transaction, BAWAG P.S.K. sold all of its loan receivables related to BAWAG Leasing & Fleet Sp. z o.o. to the purchaser as well.


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Other

PayLife Bank GmbH

The efforts to sell the remaining Paylife Bank GmbH (PayLife neu) are at an advanced stage. After the balance sheet date, the current owners willing to sell accepted the notarial offer of purchase. The further procedure according to the shareholders’ agreement (pre-emption right and tag along right) has been commenced and remains to be seen.

The closing of the transaction is further conditioned upon clearance by the Austrian Cartel Court and the Austrian Financial Market Authority (FMA).

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OutlookThe outlook for the 2013 financial year is poor from an economic perspective, but the overall conditions at present are better than they were one year ago. Large parts of the European economy slipped into recession in 2012, while the financial and sovereign debt crisis intensified precariously; doubts about the continued existence of the European Monetary Union were widespread. But the turnaround seems to have come in the autumn. Concerted action by the European Central Bank to protect the common currency and combat the crisis as well as progress made at the political level in the European Union caused the tensions on the financial markets to abate substantially. Increased investor confidence is a prerequisite for improved business conditions and a higher level of consumer confidence. The slight upward trend seen in many leading indicators at the turn of the year is cause to be cautiously optimistic that the European economy will recover in the coming months. There is also positive impetus from the global economy, which has strengthened noticeably.

The recovery will of course be slow and will proceed at a very low level in many countries of the Eurozone because of the limited economic activity. The fiscal consolidation is still hampering demand; because of the high volume of distressed loans and the correction on the real estate market combined with the strict own capital requirements for banks, the deleveraging process is continuing and is constraining lending business. In addition, the resurgence of undesired feedback effects between the quality of the financial assets of banks and the country risk of various states could bring the budding upswing to a halt.

The Austrian economy has good chances of seeing growth in the spring. The recession that has hit many members of the Eurozone has not yet spread to Austria. The domestic economy grew steadily in the first three quarters of 2012. And while a slight contraction of overall economic demand was recorded in the fourth quarter, this was likely nothing more than an interruption in growth. The global economy has gotten back on its feet, and demand from the Eurozone for Austrian goods and services should gradually improve over the course of 2013. Domestic demand will primarily be carried by private consumption, but corporate demand for investment goods should also gain momentum as export demand rises. The most important leading indicators for the Austrian economy underwent a trend reversal in late autumn and are now pointing to increasing activity in the coming months. This of course depends on the confidence crisis in the Eurozone abating further and the economic reforms being continued.

We see the resurgence of crisis side effects – high volatility on the financial markets, doubts about the sustainability of public finances, rising refinancing costs, a lack of unity at the EU level and unstable governments – as the greatest risk. Aside from this, conditions will again be difficult for the financial services sector in financial year 2013. At the EU level, three important regulatory projects are scheduled to be completed in the first half of the year: the implementation of the new capital and liquidity regulations (Basel III) in the form of the CRD IV and CRR; the enactment of rules for common bank supervision in the Eurozone, to be executed by the European Central Bank; and a restructuring and liquidation system for banks. In this context, the Directive on Deposit Guarantee Schemes is expected to be adopted in 2013.


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The market interest rate level is an important indicator for the development of earnings in the banking sector. Interest rate conditions in Europe are unlikely to change to any great extent in 2013. Provided that the financial and debt crisis continues to improve, risk premiums for the peripheral countries should fall further, while yields for countries with strong credit ratings should climb somewhat as the “safe haven” effect wears off. Short-term interest rates will not move to any great extent until activity on the unsecured interbank market increases again. The low market interest rate level is making it difficult to offer sensible terms for customer deposits, and lending is being impacted by the relatively low demand for credit and the ongoing reduction of risks.

The lawsuits with the City of Linz which started in 2011 will continue in 2013. BAWAG P.S.K. is well prepared for the legal proceedings due to its strong legal position.

BAWAG P.S.K. believes itself to be in an excellent position to master the coming challenges thanks to its comfortable equity level and strong liquidity position. The focus on our core areas of business and our push to act in line with the needs of our customers in all regards are an excellent base on which to build a successful 2013.

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Internal Control and Risk Management System

Introduction

The designation “internal control system” refers to all processes designed by management and executed within the Bank to facilitate the monitoring and control of:

The effectiveness and efficiency of its operating activities (including protecting assets against losses resulting from damages or misconduct);

The reliability of the financial reports; and The Bank’s compliance with material legal regulations to which it is subject.

The risk management system covers all processes that serve to identify, analyse and measure risks and that serve to determine and implement appropriate measures that will ensure that the Bank can still reach its objectives when risks are incurred.

According to the internationally recognised COSO framework for the design of risk management systems, the internal control system is one part of an organisation-wide risk management system. Other aspects include the management and monitoring of risks that can affect the correctness and reliability of the accounting records.

The Bank’s management is responsible for the fundamental design, implementation and ongoing adaptation and refinement of the internal control and risk management system as well as for the alignment of these systems and processes with the existing requirements in a way that takes account of the Bank’s strategy, the scope of its business and other relevant economic and organisational aspects.

Characteristics of the Internal Control and Risk Management System

Control EnvironmentThe Code of Conduct that has been adopted by the Bank and the fundamental values described in it apply to every employee in the Group. The Code of Conduct creates a climate rooted in focus on the customer, achievement, mutual respect, teamwork and trust.

The Accounting/Participations division is responsible for maintaining the Bank’s accounting records. Material subsidiaries also operate their own accounting departments, which work in close cooperation with the Accounting/Participations division. The primary responsibilities of the Accounting/Participations division are preparing the annual and interim financial statements of BAWAG P.S.K. AG, the Group and certain subsidiaries, maintaining the financial and consolidated accounts, managing taxes and regulatory reporting.

The Accounting/Participations division is responsible for setting directives on all matters of accounting and exercises the power to ensure the application of uniform standards across the entire Group. To support the operational implementation, corporate guidelines were drawn up. This policy applies to all consolidated subsidiaries. For all other holdings, the adherence to these principles and standards is enforced and implemented as far as possible.


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Risk Assessment and Control MeasuresOur internal control and risk management systems contain instructions and processes for the accounting workflows:

To ensure the correct and appropriate documentation of business activities, including the use of Group assets; To record all information required for the preparation of the period-end financial statements; and To prevent unauthorised purchases or sales that could have a material effect on the financial statements.

The Accounting/Participations division is integrated into the Bank’s entire organisational, structural and operational workflows. Customer and transaction data is generally collected in the market and operating units, and supplementary information is entered by the risk units. The elements of this information that are needed for the accounting records are usually transferred automatically into the Bank’s electronic accounting systems. In this, the Accounting/Participations division fulfils a control and monitoring function to ensure that the automatically transmitted data is handled properly in accordance with the applicable accounting rules, and also completes the various booking entry and other steps needed to prepare the financial statements.

The accounting of BAWAG P.S.K. AG and the significant domestic subsidiaries of the Company are contained in SAP New GL. The preparation of the consolidated financial statements under IFRS is done in SAP-ECCS, which receives the values of the individual financial statements of consolidated companies through interfaces. The accounting and all upstream systems are protected by access permission, and automatic and obligatory manual control steps provided for in the process.

Information and CommunicationA comprehensive report about the Statement of Financial Position, the Profit or Loss Statement and other controlling and risk data is submitted to the Supervisory Board at least every quarter. Highly detailed reports about this information are also submitted to the Managing Board on a regular (monthly or more frequent) basis.

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MonitoringIn order to limit or eliminate operational risks and control deficiencies, risk identification is performed annually through Risk Control Self Assessments (RCSA). If measures to minimise risk are agreed upon, they are tracked proactively by the Operational Risk department in regard to implementation. Damage incidents are documented separately, and are also used to identify necessary improvements in the systems and in the monitoring and control measures.

The Group’s Internal Audit division conducts regular accounting system audits. The findings of these audits are also used to make ongoing improvements to the internal control and risk management systems as they pertain to the accounting process.

Vienna, 4 March 2013

Byron Haynes m.p.Chairman of the Managing Board and CEO

Wolfgang Klein m.p.Deputy Chairman of the Managing Board

Andreas Arndt m.p. Jochen Klöpper m.p. Member of the Managing Board Member of the Managing Board

Corey Pinkston m.p.Member of the Managing Board

CONSOLIDATED FINANCIAL REPORT PREPARED IN ACCORDANCE WITH THE INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)

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ContentsConsolidated AccountsConsolidated Statement of Financial Position as of 31 December 2012Consolidated Profit or Loss Statement for the Financial Year 2012Consolidated Statement of Comprehensive Income for the Financial Year 2012Consolidated Statements of Changes in Equity for the Financial Year 2012Cash Flow Statement

NotesKey Events during the Financial YearNotes to the Consolidated Financial Statements 1 | Accounting policies

Details of the Consolidated Statement of Financial Position

2 | Cash reserves 3 | Financial assets designated at fair value through profit or loss 4 | Available-for-sale financial assets 5 | Held-to-maturity investments 6 | Assets held for trading 7 | Loans and receivables 8 | Receivables from credit institutions and customers 9 | Asset maturities10 | Tangible non-current assets11 | Intangible non-current assets12 | Tax assets13 | Other assets14 | Financial liabilities designated at fair value through profit or loss15 | Liabilities held for trading16 | Financial liabilities at amortised cost17 | Issued bonds, subordinated and supplementary capital18 | Payables to credit institutions and customers19 | Liabilities maturities20 | Provisions21 | Tax liabilities22 | Other obligations23 | Hedging derivatives24 | Equity

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Disclosures Required by Austrian Law

53 | Fiduciary assets54 | Breakdown of securities pursuant to Austrian Banking Act (BWG)55 | Collateral received for contractual liabilities56 | Hybrid capital57 | Human resources58 | Other disclosures required by BWG and Austrian GAAP (UGB) including remuneration policy59 | Events after the reporting date

Statement of All Legal Representatives

Boards and Officers

Hinweis: Etwaige Differenzen in den Tabellen beruhen auf Rundungen.


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Consolidated Accounts

Consolidated Statement of Financial Position as of 31 December 2012

Assets

in millions of Euros (Notes) 31.12.2012 31.12.2011Cash reserves (2) 481 616Financial assets designated at fair value through profit or loss (3) 1,401 1,749Available-for-sale financial assets (4) 6,810 6,482Assets held for trading (6) 1,839 2,343Loans and receivables (7) 29,744 28,887

Securities 2,283 3,250Customers 22,275 23,223Credit institutions 5,186 2,414

Hedging derivatives (23) 192 127Tangible non-current assets (10) 181 191Intangible non-current assets (11) 173 193Tax assets for current taxes (12) 3 3Tax assets for deferred taxes (12) 218 280Associates recognised at equity (32) 20 18Other assets (13) 203 188Total assets 41,265 41,077

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Equity and liabilities

in millions of Euros (Notes) 31.12.2012 31.12.2011Financial liabilities designated at fair value through profit or loss (14) 4,324 4,468Liabilities held for trading (15) 2,269 2,770Financial liabilities at amortised cost (16) 30,602 30,615

Customers 21,999 22,016Credit institutions 3,748 3,399Issued bonds, subordinated and supplementary capital 4,769 4,290Financial liabilities associated with transferred assets 86 910

Hedging derivatives (23) 164 64Provisions (20) 484 413Tax liabilities for current taxes (21) 2 2Tax liabilities for deferred taxes (21) 17 6Other obligations (22) 565 411Equity (24) 2,445 1,962Non-controlling interests 393 366Total equity and liabilities 41,265 41,077


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Consolidated Profit or Loss Statement for the Financial Year 2012

in millions of Euros (Notes) 2012 2011Net interest income (25) 597.4 677.9Net fee and commission income (26) 194.7 175.9Gains and losses on financial assets and liabilities (27) 155.2 25.1Other operating income and expenses (28) -14.5 18.2Administrative expenses (29) -592.2 -548.6Depreciation and amortisation on tangible and intangible non-current assets

(30)

-55.5

-64.6

Provisions and impairment losses (31) -150.1 -154.8Share of the profit or loss of associates accounted for using the equity method

(32)

1.5

0.3

Profit before tax 136.5 129.4Income taxes (33) -0.2 -8.6Profit after tax 136.3 120.8

Thereof attributable to non-controlling interests 29.0 -1.7Thereof attributable to owners of the parent 107.3 122.5

Under IFRS, the item Gains and losses on financial assets and liabilities also includes fair valuation of securities whose risk is borne by shareholders of non-controlling interests. In financial year 2012, valuation gains of EUR 26.3 million that have been shown in the item Gains and losses on financial assets and liabilities have been passed on to non-controlling interests in the item Profit attributable to non-controlling interests. In 2011, valuation losses in the amount of EUR 6.4 million have been included in the item Gains and losses on financial assets and liabilities.

Excluding the valuation results borne by shareholders of non-controlling interests, the item Gains and losses on financial assets and liabilities would amount to EUR 128.9 million in 2012 (2011: EUR 31.5 million.). The item Profit before tax would amount to EUR 110.2 million (2011: EUR 135.8 million).

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Consolidated Statement of Comprehensive Income for the Financial Year 2012

in millions of Euros (Notes) 2012 2011Profit recognised in the Profit or Loss Statement 136.3 120.8Other comprehensive income

Foreign exchange differences 0.2 0.2Available for sale reserve 358.7 -158.6Actuarial gains (losses) on defined benefit obligations -60.4 -2.3Share of other comprehensive income of associates accounted for using the equity method

2.8

-1.0

Deferred taxes on items recognised directly in equity (33) -73.1 37.8Income and expenses recognised directly in equity 228.2 -123.9Total comprehensive income 364.5 -3.1

Thereof attributable to non-controlling interests 30.7 0.1Thereof attributable to owners of the parent 333.8 -3.2

The positive result from the Available for sale reserve is mainly due to positive market value changes of securities, which can be attributed to decreasing credit spreads and interest rates.

The actuarial losses in 2012 in the amount of EUR -60.4 million are due to the adjustment of the interest rate used to calculate social capital from 5.00 per cent in the previous year to 3.75 per cent in the current year.


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Consolidated Statements of Changes in Equity for the Financial Year 2012

in millions of Euros Subscribed capital

Participation capital1)

Capital reserves

Retained reserves AFS reserve

Foreign exchange

differences

Actuarial gains/ losses

Equity w/o non-

controlling interests

Non-controlling interests

Equity including

non-controlling interests

Balance as of 1.1.2011 250.0 550.0 1,247.4 -77.9 24.2 0.1 22.4 2,016.2 370.4 2,386.6Transactions with owners – – – – – – – – -4.5 -4.5

Dividends non-controlling interests – – – – – – – – -4.5 -4.5

Dividend on participation capital – – – -51.1 – – – -51.1 – -51.1

Change in scope of consolidation – – – 0.4 – – – 0.4 – 0.4

Total comprehensive income – – – 122.5 -124.2 0.2 -1.7 -3.2 0.1 -3.1

Balance as of 31.12.2011 = 1.1.2012

250.0

550.0

1,247.4

-6.1

-100.0

0.3

20.7

1,962.3

366.0

2,328.3

Transactions with owners – – 200.0 – – – – 200.0 -3.3 196.7

Dividends non-controlling interests – – – – – – – – -3.3 -3.3

Dividend on participation capital – – – -51.1 – – – -51.1 – -51.1

Change in scope of consolidation – – – – – – – – – –

Total comprehensive income – – – 107.3 271.6 0.2 -45.3 333.8 30.7 364.5

Balance as of 31.12.2012 250.0 550.0 1,447.4 50.1 171.6 0.5 -24.6 2,445.0 393.4 2,838.4

1) Participation capital according to section 23 (4) BWG.

For further details please refer to Note 24 Equity.

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Cash Flow Statement

in millions of Euros 2012 2011I. Profit (loss) (after tax, before non-controlling interests) 138 123

Non-cash items included in the profit (loss) and reconciliation to net cash from operating activities

Depreciation, amortisation, impairment losses, write-ups 117 212Changes in provisions 21 -16Changes in other non-cash items 127 -6Proceeds from the sale of financial investments, tangible non-current assets, intangible non-current assets and subsidiaries

–

-7

Other adjustments -747 -710Subtotal -344 -404

Change in assets and liabilities arising from operating activities after corrections for non-cash items

Loans and advances to customers and credit institutions -1,355 -2,742Other financial assets (not including investing activities) 752 15Other assets -15 -6Payables to customers and credit institutions -623 2,335Other financial liabilities (not including financing activities) 125 562Other obligations 160 -57

Interest and dividend receipts 1,426 1,476Interest paid -679 -766

II. Net cash from operating activities -553 413Cash receipts from sales of

Financial investments 1,881 2,811Tangible and intangible non-current assets 74 32

Cash paid forFinancial investments -1,475 -2,878Tangible and intangible non-current assets -44 -41

Cash receipts from sales of subsidiaries – 3III. Net cash used in investing activities 436 -73

Capital contributions 200 –Dividends paid to non-controlling interests -54 -56Subordinated liabilities (including those designated at fair value through profit or loss) and other financing activities

-164

-179

IV. Net cash from financing activities -18 -235Cash and cash equivalents at end of previous period 616 511

Net cash from operating activities -553 413Net cash used in investing activities 436 -73Net cash from financing activities -18 -235

Cash and cash equivalents at end of period 481 616

The Cash Flow Statement provides information about the current state and development of the Group’s cash and cash equivalents as of the reporting date. It shows inflows and outflows of cash broken down by operational activities, investing activities and financing activities. The amount of cash and cash equivalents reported comprises cash on hand and balances at central banks.

The Cash Flow Statement is of low significance for BAWAG P.S.K. Group. It is not a substitute for liquidity or financial planning and is not used as a management tool.


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Notes

Key Events during the Financial Year

Claim against the City of Linz

The City of Linz filed a lawsuit against BAWAG P.S.K. at the Commercial Court of Vienna in November 2011 seeking payment of CHF 30.6 million (equalling EUR 24.2 million). BAWAG P.S.K. filed a (counter)suit against the City of Linz for the fulfilment of its contractual entitlements from the same transaction in the amount of EUR 417.7 million. The outcome of these two pending lawsuits is uncertain. BAWAG P.S.K. bases its assessment on corresponding legal and other opinions, which support the amount of the gross claim and the valuation adjustments of the derivative. In February 2013, the mediators declared the mediation proceedings, which had started in 2012, ended. The first court hearing is expected to take place in 2013. For more information, please see the section “Latitude of Judgement and Uncertainty of Estimates – City of Linz” in these notes. No amounts are being disclosed at this time in application of IAS 37.92 (protective provisions for information in the notes).

Notes to the Consolidated Financial Statements

1 | Accounting policies

The consolidated financial statements were prepared applying section 59a BWG, according to Regulation (EC) No. 1606/2002 of the European Parliament and of the Council of 19 July 2002, and in accordance with the provisions of the standards (IFRS) published by the International Accounting Standards Board (IASB) and the interpretations by the IFRS Interpretations Committee (IFRIC/SIC) as applicable on the reporting date. All standards contained in the International Financial Reporting Standards published by the IASB and adopted by the EU and therefore mandatory with respect to the consolidated financial statements as of 31 December 2012 were applied.

These consolidated financial statements for BAWAG P.S.K. according to IFRS are based on the individual annual financial statements for all fully consolidated Group companies according to IFRS as of 31 December 2012. All material associates are accounted for using the equity method.

The preparation of consolidated financial statements according to IFRS requires that assumptions and estimates are made about factors that have a material influence on the Bank’s business operations. These assumptions are regularly reviewed and adjusted whenever needed. Such adjustments are taken into account in the current period and also for future periods when the adjustment has long-term effects. Material assumptions and estimates pertain, among other things, to BAWAG P.S.K.’s claim against the City of Linz.

The recognition and measurement principles described below have been applied uniformly with respect to all of the financial years stated in these consolidated financial statements.

We have maintained the accounting and valuation methods that were applied in the consolidated financial statements as of 31 December 2011.

The reporting currency is Euro. Unless indicated otherwise, all figures are rounded to millions of Euros. The tables in this report may contain rounding differences.

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All figures in foreign currencies are translated at the middle exchange rate on the reporting date. Financial statements from foreign subsidiaries are included in the consolidated financial statements using the functional currency method.

Scope of Consolidation and Consolidation Principles

The scope of consolidation includes all direct and indirect material equity investments of BAWAG P.S.K.

As of 31 December 2012, the consolidated financial statements included 49 (2011: 52) fully consolidated companies and 1 (2011: 2) company that is accounted for using the equity method. In the interest of materiality, the criteria for inclusion are both the amount of an entity’s assets and its relative contribution to the Group’s consolidated profit. All non-consolidated subsidiaries had only a minor influence on the Group’s assets, financial position and the results of its operations. Note 46 List of consolidated subsidiaries contains a list of all fully consolidated subsidiaries and associates accounted for using the equity method. The carrying amount of the associates that are not accounted for using the equity method totalled EUR 62 million (2011: EUR 66 million) on 31 December 2012. Controlled companies with a carrying amount of EUR 23 million (2011: EUR 26 million) were not consolidated because they did not have a material effect on the Group’s assets, financial position or the results of its operations.

In 2012, BAWAG Banka d.d., a fully owned subsidiary of BAWAG P.S.K., was merged into BAWAG P.S.K. AG (cross-border upstream merger). BAWAG CAPITAL FINANCE III LIMITED, Jersey was deconsolidated due to its liquidation. B.L.H. BAWAG Leasing Holding GmbH, a fully owned subsidiary of BAWAG P.S.K. Leasing GmbH, was merged into BAWAG P.S.K. Leasing GmbH. Furthermore, ZEUS Recovery Fund S.A., previously consolidated using the equity method, was deconsolidated due to its sale in July 2012.

The acquisition method according to IFRS 3 is used for capital consolidation. Under this method, the acquisition costs for the entity in question must be compared with the value of the net assets at the time of acquisition. The value of the net assets is the fair value of all identifiable assets, liabilities and contingent liabilities assumed at the time of acquisition.

All intragroup receivables and payables, expenses and income, and interim profits are eliminated unless they are insignificant.

Capitalised goodwill is recognised under Intangible non-current assets on the Statement of Financial Position. In accordance with IFRS 3 in conjunction with IAS 36 and IAS 38, the recognised goodwill of all cash generating units (CGUs) is subject to annual impairment testing in accordance with IAS 36.

Also, all equity investments were tested for indicators of a sustained or material impairment. Impairment tests were carried out if necessary due to the indicators.

All non-consolidated equity instruments are measured according to IAS 39 and categorised as available-for-sale financial assets.


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Financial Instruments

Financial instruments are recognised on the date of transaction.

a) Held-to-Maturity Investments

Since 31 January 2010 BAWAG P.S.K. has not held any securities of this category in its portfolio.

b) Financial Assets and Liabilities Recognised at Fair Value through Profit or Loss

Held for Trading

This category covers financial assets and liabilities held for trading purposes. These financial instruments are recognised at their fair value. All derivatives in the trading and banking book that are not part of a hedging transaction are assigned to this category. Financial liabilities include liabilities from derivative transactions, short positions and repurchase agreements.

Financial Assets and Liabilities Designated at Fair Value through Profit or Loss

Certain financial assets and liabilities that do not meet the definition of trading assets and liabilities are designated at fair value through profit or loss using the fair value option.

BAWAG P.S.K. exercised the fair value option in the following cases: To avoid an accounting mismatch – For fixed-income own issues, securities and loans whose fair value on the date of acquisition has been hedged with

interest rate derivatives; – Investment products whose fair value changes have been hedged with derivatives. Management on a fair value basis – The securities and loans that are managed on a fair value basis by the Asset Liability Committee, which also

prepares decisions on the extent of the open interest rate risk exposures. The Managing Board is informed about these positions regularly.

Presence of embedded derivatives – Structured financial instruments with embedded derivatives

c) Loans and Receivables

Receivables are recognised on the Statement of Financial Position at amortised cost inclusive of deferred interest following deduction of impairment allowances.

d) Available-for-Sale Financial Assets

This category covers financial assets which are not classified as Loans and receivables; Held-to-maturity investments; or Financial assets recognised at fair value through profit or loss.

In addition to the securities that BAWAG P.S.K. has assigned to the category Available-for-sale financial assets, this item also includes shares in non-consolidated subsidiaries.

The Available-for-sale financial assets are measured at fair value. Changes in the fair value are recognised directly in equity (AFS reserve) until the asset is sold or repaid. Impairments are recognised in the Profit or Loss Statement under Impairment provisions for financial assets.

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If a fair value for unlisted equity instruments cannot be measured reliably, it is measured at cost less impairments necessary according to IAS 39.

Premiums and discounts are recognised pro rata temporis via the effective interest rate. Expenses and revenues, respectively, were set off against interest income from the same securities.

e) Financial Liabilities

In accordance with IAS 39, financial liabilities not held for trading or designated as Financial liabilities at fair value through profit or lossare measured at amortised cost.

Reclassifications

Reclassification of Financial Assets into the Category Loans and Receivables

Financial assets can be reclassified from the category available-for-sale to the category of loans and receivables when the financial asset meets the requirements for inclusion in the category loans and receivables according to IAS 39

on the date of reclassification; and the entity has the ability and the management has the intention on the reclassification date to hold the reclassified

assets for the foreseeable future.

Financial assets are reclassified at their fair value on the reclassification date. The fair value of the financial instrument on the reclassification date is the new amortised cost of the instrument. The expected cash flows of the financial instrument are estimated on the reclassification date, and these estimates are used to calculate the new effective interest rate of the instrument. If the expected future cash flows of the reclassified instrument increase at a later date as a result of a value improvement, the effect of this increase is accounted for by adjusting the effective interest rate and not by adjusting the carrying amount of the instrument at the time that the estimates change. In the event of a subsequent decrease in the expected future cash flows, the instrument is subjected to an impairment test and measured in accordance with the measurement rules for the category loans and receivables.

When available-for-sale assets are reclassified into loans and receivables, the unrealised profit or loss that has been recognised in equity is distributed over the remaining term of the instrument using the effective interest method and recognised as interest income or interest expense. Should the instrument be discovered to be impaired at a later date, the unrealised loss of the instrument that is recognised in equity as of that date is recognised immediately in the Profit or Loss Statement under Impairment provisions for financial assets.

Details are presented in Note 7.

Reclassification of Financial Assets into the Category Available-for-Sale

The standard IAS 39 and its newer interpretations state that financial instruments that are classified as loans and receivables can be reclassified as available-for-sale assets when the financial instrument subsequent to its initial classification becomes traded in an active market and therefore the definition of loans and receivables is no longer met. BAWAG P.S.K. first applied this reclassification in 2012.

When an asset is reclassified as available-for-sale, it must be remeasured at its fair value, and any difference between its carrying amount and its fair value must be recognised directly in equity (AFS reserve).


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Hedge Accounting

In line with general regulations, derivatives are classified as assets held for trading purposes or liabilities from trading activities and are recognised at fair value. The valuation result is shown in the line item Gains and losses on financial assets and liabilities as gains (losses) on financial assets and liabilities held for trading. If derivatives are used to hedge risks of non-trading transactions, BAWAG P.S.K. applies hedge accounting if the conditions according to IAS 39 are met.

At inception of the hedge relationship, the relationship between the hedging instrument and the hedged item, the risk management objectives and the method used for assessing hedge effectiveness are documented. Furthermore, BAWAG P.S.K. documents at the inception of the hedge and on each reporting date whether the hedge is highly effective in offsetting changes in fair values of the hedged item and the hedged instrument attributable to the hedged risk.

BAWAG P.S.K. uses fair value hedge accounting for effective hedging relationships that reduce market risk. In a fair value hedge, a financial asset or financial liability is hedged against changes in its fair value, and changes in the value of the hedged item and the hedging instrument are recognised in the Profit or Loss Statement in the same period. Fair value changes of the hedging instrument as well as changes in fair value of the hedged item resulting from the hedged risk are recognised in profit or loss.

As soon as the hedging instrument is sold, exercised or comes due, or when the eligibility requirements for hedge accounting are no longer met, the hedging relationship is no longer recognised on the Statement of Financial Position. Any changes in the value of the hedged item are recognised through profit or loss distributed over the remainder of the term.

Loan Loss Provisions

The loan loss provisions cover provisions for potential loan defaults or counterparty risks and are formed as individual and general provisions on the basis of past experience. The loan loss provisions from lending are netted off against the corresponding receivables on the Statement of Financial Position. Provisions for off-balance-sheet loans are reported as provisions. The provisions are made according to the currently valid incurred loss model.

The loan loss provision for significant individual counterparty risks is based on expected future recoveries. Provisions for counterparty risks that were not individually of significance were accounted for generally, on a percentage basis, with regard to the amounts overdue and based on our historical loss experience.

Loan loss provisions are formed for material credit risks in accordance with the risk analysts’ estimates, and these estimates are based on the expected future repayments. The approval procedures for impairments and debt waivers are described in the handbook on competencies and authorisations. Receivables are derecognised in coordination with the respective divisions when all attempts to collect the debt have failed.

A loan loss provision was accounted for on a portfolio basis in accordance with IAS 39 AG 89 for losses incurred but not detected as of the reporting date. The amount of this provision is calculated on the basis of the Basel II Expected Loss Model. The actual loss that has been incurred is extrapolated from the expected loss, taking into account the duration from occurrence to detection of the loss (the loss identification period or the recognition period). Risks arising from loans backed by a repayment vehicle, which mainly includes loans in foreign currencies, are considered as well.

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Treatment of One-Time Fees

BAWAG P.S.K. charges a processing fee when awarding a loan to a customer. For the Bank, this is compensation for the costs incurred in awarding the loan. If substantial, processing fees are deferred over the term of the loan and recognised in the net interest income after deducting the directly attributable costs.

Methods for Determining the Fair Value of Financial Instruments

Derivatives

To measure exchange-traded instruments such as futures and options on futures, exchange prices are used. Details are presented in Note 34. Some basic information is presented here:

The basic valuation model used for plain vanilla OTC options was the Black-Scholes option price model, which varies according to the underlying instruments and hedged items. Currency options were measured using the Garman-Kohlhagen model (adapted Black-Scholes model), and interest rate options using the Black or Hull-White model.

For positions in the trading book, the closing costs of the open positions (bid/ask spreads) and the effects from the volatility smile are calculated on a regular basis.

The total value of an interest rate swap is derived from the present values of its fixed and variable rate legs. Similarly, the total value of a cross currency swap is derived from the present values of the two cash flows expressed in terms of the Group’s functional currency.

In the case of foreign currency forwards and futures, the agreed forward rate, which depends on movements in exchange and interest rates for both currencies, is compared with the forward rate on the reporting date and the result is used to calculate the instrument’s value.

Credit risks are calculated based on the net derivative exposure per counterparty for OTC derivatives if no cash collateral was agreed. For all material net receivables from derivative transactions, a valuation adjustment is calculated for the credit risk, taking the customer rating and available credit spreads into account. Valuation adjustments are also applied for the Bank’s own credit risk for all material net liabilities from OTC derivative transactions.

If the risk discount cannot be derived from market transactions, it is estimated by the management. This applies especially to non-payment risks arising from legal uncertainty that cannot be derived from the customer’s general credit spread. Provided that BAWAG P.S.K. believes that the transaction is legally enforceable, the Bank still reports an asset in the amount of the positive fair value of the transaction with the counterparty even if objections have been lodged.

To value financial assets whose parameters cannot be derived from market transactions, the expected cash flow (including interest on arrears, if contractually agreed) is discounted on the day of valuation and weighted according to the probability of its occurrence. If the legal validity or enforceability of the claim is contested on the basis of possible grounds for anullment or an appeal, these legal considerations are taken into account in the valuation.

In the case of the close-out of a derivative transaction with a customer, the type of claim changes for BAWAG P.S.K. Before the contract is terminated, the asset is a derivative, while after the contract is closed out, the asset is a contractual claim whose value no longer changes depending on market parameters. For this reason, the claim no longer satisfies the definition of a derivative according to IAS 39.9.


8080


In the event of the early termination of a derivative transaction, the variability of the payment flows in terms of amount and time of occurrence are materially changed by the close-out, and the original derivative is replaced with a new asset. This new asset is recognised at its fair value according to IAS 39.43. The fair value corresponds to the carrying amount of the derivative at the time that the agreement is terminated, including any valuation adjustments applied up to the time of termination. A claim arising from the termination of the agreement meets the criteria in IAS 39.9 for categorisation under loans and receivables.

This approach was chosen following IAS 39.40 and IAS 39.21, since IAS 39 contains no explicit rules for when a financial instrument first fulfils the characteristics of a derivative and then no longer exhibits these characteristics at a later time. According to IAS 8.10 to 8.12, such gaps in the standards must be closed by applying a similar provision in the IFRS and taking the framework into account.

The method described above was especially important in the transaction with the City of Linz in 2011.

Credit-Linked Notes

For credit-linked notes where no active markets exist, fair values are determined by applying a valuation model. Credit-linked notes (CLNs) are bonds with an embedded credit default swap (CDS) allowing the issuer to transfer a specific credit risk to investors. The valuation model for CLNs uses bond or CDS spreads of the issuer and the reference entity, as well as coupon and maturity.

Valuations by outside experts are also used when measuring complex structures. Appropriate tests and verifications are carried out.

Measurement for the Structured Credit Portfolio

Wherever an active market for a transaction exists, quoted market prices are used as fair values.

For structured credit transactions where no active markets exist, fair values are determined by applying a valuation model. The models are, however, calibrated to market data, e.g. liquid indices such as the ABX1), iTraxx2), CDX3) and LCDX4).

For ABS-CDOs (asset backed securities – collateralised debt obligations) with subprime exposure, no reliable market prices are available. The model assumptions on cumulative losses and discount rates are extracted from ABX prices (the only liquid market prices for comparable transactions). A cash flow projection model was developed coupled with collateral performance analyses using data on loan level and general market information (ABX indices, house price indices). The model generates forecasts on each ABS within a CDO, i.e. scenarios on future delinquencies, defaults (CDR – constant default rate), prepayments (CPR – constant prepayment rate) and severities (LGD – loss given default). These scenarios are obtained from historical ABS pool performances and are calibrated to ABX levels as of 31 December 2012, i.e. model prices for ABX indices reflect observed market prices and thus implicitly reflect the default rates and losses anticipated on the market. The applied discount rate is also derived from the ABX indices. BAWAG P.S.K. uses valuation models for its ABS-CDOs with subprime exposure that comply with market standards. Nevertheless, it should be noted that any model has inherent limitations.

1) ABX is a series of marketable indices, each of which references 20 residential mortgage backed securities of subprime loans.2) iTraxx is a marketable index composed of credit default swaps of the 125 most liquid investment grade rated European companies.3) CDX is a marketable index composed of credit default swaps of the 125 most liquid investment grade rated US companies.4) LCDX is a marketable index referencing 100 US first lien loans.

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The valuation model for (synthetic) corporate transactions (e.g. corporate CDOs) was developed in compliance with market standards. The model uses market information (iTraxx, CDX, CDS spreads, ratings, interest rates) as of 31 December 2012 to determine the value of a transaction. A single-factor Gaussian copula model is used to extract asset-value correlations from market data; the Monte Carlo method is applied to simulate default events and calculate expected cash flows. To obtain a fair value, the corresponding spot rates are used to discount the calculated expected cash flows of the transaction.

A valuation model for CLOs (collateralised loan obligations) was developed by analogy with the model for synthetic corporate transactions. Current market prices of the loans within the CLOs are used to determine market implied default rates (default intensities) and recovery rates (severities, LGD – loss given default) taking into account a discount margin. Based on these parameters, market consistent default scenarios are generated for every CLO transaction (Monte Carlo simulation) and the corresponding CLO cash flows are projected. The fair value of the CLO transactions is then derived by discounting the expected cash flows with the reference rate plus a discount margin, where the latter is derived from calibration of the model to actual current CLO trade levels. All market data that are used in the model (loan prices and spreads, LCDX prices, interest rates) are as of 31 December 2012.

Transfers of Financial Instruments

Financial instruments are derecognised as soon as the Group is no longer entitled to receive the financial rewards from the instruments. As a rule, this occurs when the rights and obligations of the financial instruments pass to a third party by exercise, lapse, sale or assignment or if the Group has lost its right of disposal.

When financial assets are transferred and BAWAG P.S.K. has significant continuing rights and obligations under them, such assets are still reported on the consolidated Statement of Financial Position.

Repurchase agreements, also known as “repos” or “sale and repurchase agreements”, are contracts under which financial assets are transferred to a transferee (lender) in return for a cash payment while also specifying that the financial assets must later be transferred back to the transferor (borrower) for an amount of money agreed in advance. The financial assets transferred out by BAWAG P.S.K. Group under repurchase agreements remain on the Group’s Statement of Financial Position and are measured according to the rules applicable to the respective Statement of Financial Position item. The cash received under repo arrangements is recorded, depending on the purpose of the contract, within liabilities held for trading or financial liabilities associated with transferred assets.

Conversely, under agreements to resell, known as “reverse repos”, financial assets are acquired for a consideration while at the same time committing to their future resale. Cash outflows under reverse repos are recorded within trading assets.

In securities lending transactions, the lender transfers ownership of securities to the borrower on the condition that the borrower will retransfer, at the end of the agreed loan term, ownership of instruments of the same type, quality and quantity and will pay a fee determined by the duration of the loan. Securities lent to counterparties are accounted for in the same way as repos: They are retained in the Group’s financial statements and are measured in accordance with IAS 39. Securities lending and borrowing transactions are generally collateralised. Collateral furnished by the securities borrower continues to be recorded in the borrower’s financial statements.

Intangible Non-Current Assets, Tangible Non-Current Assets

Intangible non-current assets consist mainly of acquired goodwill and other acquired intangible assets (in particular software) and projects recognised in accordance with IAS 38.


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Intangible non-current assets with an unlimited useful life are measured at cost. Intangible and tangible non-current assets with limited useful lives are measured at cost less straight-line amortisation or depreciation. Buildings are depreciated at an annual rate of between 2.5 and 4 per cent, while other tangible non-current assets are depreciated at annual rates between 5 and 20 per cent. Purchased and self-produced intangible assets (other than goodwill) are amortised at annual rates of 10 per cent and 20 per cent.

Land and buildings held for investment purposes (investment property) are measured at cost less straight-line depreciation which ranges between 2.5 and 4 per cent per year (IAS 40). In addition to reviewing the method of depreciation and useful lives, impairment tests are also performed as of each reporting date.

Impairment Testing

In accordance with IFRS 3 in conjunction with IAS 36 and IAS 38, the recognised goodwill of all cash generating units (CGUs) is subject to annual impairment testing in accordance with IAS 36. All other equity investments were also tested for impairment, provided that a preliminary examination has not ruled out impairment indicators.

To determine the value in use of the CGU or the single entity, the present value of the projected pre-tax profits was calculated by using the risk-weighted pre-tax discount rate in the market applicable to the CGU in question. As a rule, the planning horizon used for valuation purposes is five years. Shorter planning horizons are only used for non-controlling interests. Long-term growth rates used in the calculation are 1.0 per cent, applying the going-concern principle.

The discount rate is composed of the risk-free rate, the local market risk premium and the beta factor: The risk-free rate (2.44 per cent) is the 30-year spot rate calculated in accordance with the Svensson method, based

on the parameters published by Deutsche Bundesbank. The source for the country-specific market risk premium (6.00 per cent for Austria) is the web site Damodaran. The applied beta factor for banks (1.11) is the 2-year average beta of 12 banks listed on European stock exchanges.

The applied beta factor for non-banks is 1.0.

Based on the aforementioned assumptions, the value in use of the CGU or equity investment was calculated for the year under review in accordance with IAS 36. Value in use represents the present value of the estimated future cash flows expected from a cash generating unit.

The Bank’s interest in BAWAG P.S.K. Versicherung Aktiengesellschaft is assessed using the embedded value and an estimation of the future value.

In addition, intangible and tangible assets are tested at the balance sheet date to determine whether or not there is evidence that they are impaired. If there is evidence for impairment, the recoverable amount is calculated for the asset. This is the higher of the value in use or the net selling price. If the recoverable amount is lower than the carrying amount, an impairment loss in the amount of the difference is recognised according to IAS 36. On 31 December 2012, there was no evidence that intangible or tangible assets (other than some minor properties) are impaired.

In the case of real estate companies and own real estate, current estimated market values of the properties are taken into account. External appraisals are renewed every three years at the latest.

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Leasing

For finance leases, the rights of claims against the lessee are recognised in the amount of the present value of the contractually agreed payments, taking any residual value into account. By contrast, operating leases, where BAWAG P.S.K. Group retains all risks and rewards incidental to ownership of the leased asset, are reported under tangible non-current assets. Each leased asset is depreciated as appropriate. Lease payments received are recognised in the Profit or Loss Statement.

Income Taxes and Deferred Taxes

According to IAS 12, income taxes must be computed and reported using the liability method. The computation is based on the local tax rates that are legally binding at the time the consolidated financial statements are prepared.

Deferred tax assets and liabilities result from different methods used to measure assets and obligations on the Statement of Financial Position under IFRS and the respective tax code. This generally leads to positive or negative differences in the income tax to be paid for future periods (temporary differences). A deferred tax asset is recognised for the carryforward of unused tax losses when it is probable that future taxable profit will be generated by the same taxable unit. Deferred tax assets and liabilities are not discounted.

Tax expenses allocable to the taxable profit were recognised in Profit or Loss Statement under Income taxes and broken down into current and deferred income taxes. Other taxes that are not attributable to profit are recognised under Other operating income and expenses.

According to IAS 12.34, a deferred tax asset is recognised for tax loss carryforwards if it is probable that future taxable profit will be available against which the unused tax losses can be utilised. As of 31 December 2012 unused tax losses amounted to EUR 1,463 million at the level of BAWAG P.S.K., EUR 143 million at the level of members of the tax group included in the consolidated financial statements and EUR 73 million at the level of other companies included in the consolidated financial statements, hence a total of EUR 1,679 million.

The utilisability of unused tax losses by BAWAG P.S.K. was tested on the basis of the Bank’s long-term plan applying an additional contingency charge (planning period: five years). The expected utilisation of unused tax losses is projected to amount to EUR 990 million. In total, deferred tax assets for tax loss carryforwards in the amount of approximately EUR 244 million (2011: EUR 282 million) are recognised within BAWAG P.S.K. Group.

A tax group pursuant to section 9 KStG was parented by BAWAG Holding GmbH in the financial year. On 31 December 2012, the tax group consisted of the group parent and 26 domestic members (previous year: 25 members), as NAVENSIS Zahlungsverkehrsabwicklungs GmbH was included in the group in 2012. A tax collection agreement was concluded. The allocation method was chosen for determining the tax allocations. This method is based on the tax result of the group as a whole. The payable tax is allocated to each group member with a positive tax result on the basis of its proportionate share of the group’s tax result. An internal tax loss carryforward is taken into account for tax losses allocated to the group parent. If the head of the tax group has to pay a minimum corporate tax, the head of the tax group is able to burden the members of the tax group with a proportion of the minimum corporate tax following the principle of tax causation.


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A final settlement for uncredited tax losses must be effected upon dissolution of the tax group or when a member entity leaves the group. As of 31 December 2012, the exit of BAWAG P.S.K. from the tax group and the exit of all other group members, with the exception of the new member in 2012, would not result in a back corporate income tax payment for the years 2010 to 2012 because the minimum period of three years as required by section 9 paragraph 10 KStG was already fulfilled on 31 December 2012. The new group member would incur a marginal back tax payment.

Provisions

According to IAS 19, provisions for post-employment and termination benefits and for jubilee benefits are calculated using the Projected Unit Credit Method.

The present values of obligations outstanding as of the measurement date are calculated on the basis of actuarial assumptions applying an appropriate discount rate and taking into account the expected rates of increase in salaries and post-employment benefits. They are recognised as a provision in the consolidated Statement of Financial Position. Actuarial gains and losses are recognised in full in the year in which they are incurred in other comprehensive income.

The principal parameters underlying the actuarial calculations are:

For post-employment obligations: Interest rate 3.75% p.a. Yield growth 2% p.a. Fluctuation discount individual calculation

For severance payments and anniversary bonuses: Interest rate 3.75% p.a. Wage growth 4% p.a. Fluctuation discount individual calculation Retirement age 57–65 years*)

*) The earliest possible individual retirement age as per ASVG was assumed.

The interest rate used has been changed from 5.00 per cent in the previous year to 3.75 per cent in 2012.

The generation mortality tables Pensionsversicherung AVÖ 2008-P-Angestellte were used when calculating the long-term employee benefit provisions.

The existing post-employment benefit plans in BAWAG P.S.K. Group that are financed entirely through provisions because they are defined benefit obligations pertain primarily to post-employment benefit rights and future rights of employees of the parent company, BAWAG P.S.K. AG. The allocated assets disclosed by the pension fund are set off against the determined amounts of provisions for post-employment benefits.

The post-employment benefit rights of some employees are covered by BONUS Pensionskassen AG and Bundespensionskasse AG (defined contribution plans). The contributions that are made to these pension funds are recognised as expenses in the current period; there are no further obligations.

Other long-term employee benefits pertain to anniversary bonuses for which provisions have been recognised.

Other reserves for uncertain obligations to third parties are formed in accordance with the expected amount of the obligation.

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Contingent Liabilities and Unused Lines of Credit

For the most part, contingent liabilities are guarantees and unused lines of credit. Guarantees are used when BAWAG P.S.K. guarantees payment to the creditor to fulfil the obligation of a third party. Unused lines of credit are commitments from which a credit risk may occur. Loan loss provisions for contingent liabilities and unused lines of credit are reported under provisions for anticipated losses on pending business.

Non-Current Assets Held for Sale and Discontinued Operations

Non-current assets (or disposal groups consisting of assets and liabilities) must be classified as held for sale when the corresponding carrying amount is primarily the result of a sale transaction and not of continued use.

Immediately before the first-time classification as held for sale, the assets (or disposal groups) are measured according to the Group’s accounting policies. Then, the non-current assets (or disposal groups) are written down at the lower of their carrying amount or fair value less selling costs.

Impairments of assets (or disposal groups) are first offset against goodwill and then against the remaining assets and liabilities on a proportionate basis if the impairment does not pertain to inventories, financial assets, deferred tax assets or staff benefits. These must still be recognised in accordance with the Group’s accounting policies. First-time and subsequent impairment losses and reversals are recognised directly in income. Reversals of impairments may only be completed up to the amount of the cumulative recognised impairment losses.

Equity

Equity is the capital provided by the Bank’s owners (issued capital and capital reserves), participation capital and the capital generated by the Bank (retained earnings, reserves from currency translation, AFS reserve, actuarial gains and losses, profit brought forward and the profit for the period).

Revenue Recognition

Revenue is recognised to the extent that it is probable that the economic benefits will flow to the entity and the revenue can be reliably measured.

Net Interest Income

Net interest income consists primarily of interest income from loans and receivables and assets held for trading. Furthermore, regular income from equity investments, shares, fixed income securities, variable rate securities as well as fees and commissions similar to interest income are shown in this item. Interest income and interest expenses also include premiums on securities recognised in profit or loss using the effective interest rate method. Also, the interest proportion of interest-bearing derivatives, separated into income and expenses, is recognised in net interest income. Interest expenses consist mainly of interest for liabilities to credit institutions and customers, issued bonds, subordinated capital and supplementary capital. Interest income and interest expenses are recognised on an accrual basis.

Net Fee and Commission Income

This item consists mainly of income from and expenses for payment transfers, the securities and custody business, lending and payments to Österreichische Post AG for the use of their distribution network. Income and expenses are recognised on an accrual basis.


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Gains and Losses on Financial Assets and Liabilities

This item consists mainly of the valuations of our investments and issued securities and the result from trading in securities and derivatives. Moreover, hedging inefficiencies and foreign exchange differences are shown within this position.

Latitude of Judgement and Uncertainty of Estimates

The measurement of financial instruments and the related estimates in respect of measurement parameters, in particular the future development of interest rates, have a material effect on the results of operations. The parameter values applied by the Bank are derived largely from market conditions prevailing as of the reporting date.

The determination of fair value for financial assets and liabilities for which there is no observable market price requires the use of valuation techniques as described in Note 1 Accounting policies. For financial instruments that trade infrequently, calculation of fair value requires varying degrees of judgement depending on liquidity, uncertainty of market factors, pricing assumptions and other risks affecting the specific instrument.

Assessments as to whether or not cash generating units (CGUs) were unimpaired are based on planning calculations. These naturally reflect the management’s evaluations, which are in turn subject to a degree of predictive uncertainty. Similarly, assessments of the recoverability of long-term loans are based on assumptions regarding the borrower’s future cash flows, and these too are subject to a degree of predictive uncertainty.

In these consolidated financial statements for the period ended 31 December 2012, goodwill and deferred tax assets have been recognised, the value of which will depend crucially on the occurrence of projected results in the future. Amounts recognised in connection with the Allegro software system are based on estimates of its future value in use.

Latitude of Judgement and Uncertainty of Estimates – City of Linz

Uncertainties in estimations also apply to the claim of BAWAG P.S.K. against the City of Linz. On 12 February 2007, the City of Linz and BAWAG P.S.K. concluded a forward financial transaction. This transaction was intended by the City of Linz to optimise a CHF loan it had taken out with another bank.

Because of the development of the Swiss franc exchange rate starting in the autumn of 2009, the City of Linz was obligated to make increased contractual payments to BAWAG P.S.K. On 13 October 2011, the Linz City Council decided that it would make no more payments in connection with the derivative transaction. Consequently, BAWAG P.S.K. exercised its right to close out the derivative transaction.

The City of Linz filed a lawsuit against BAWAG P.S.K. at the Commercial Court of Vienna at the beginning of November 2011 seeking payment of CHF 30.6 million (equalling EUR 24.2 million). BAWAG P.S.K. filed a (counter)suit against the City of Linz for the fulfilment of its contractual entitlements from the same transaction in the amount of EUR 417.7 million. After the mediators declared the mediation proceedings ended in February 2013, it is expected that the two suits will be combined, and that the first verbal hearings will be held in 2013. It is assumed that the legal proceedings will take approximately 3.5 years.

The Bank has valued the derivative transaction until termination according to the general principles (see Note 1 Recogni-tion and Measurement Principles), and has adequately accounted for the risks associated with the claim arising from this derivative. In particular, management had to estimate the risks that are associated with the transaction, such as non- payment, legal, process and other operational risks and had to make judgments as part of the continuous valuation process; this resulted in the respective valuation adjustments.

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After the termination of the transaction, the derivative was derecognised and a receivable was recognised under Receivables from customers (classified under Loans and advances). The claim was valued at the carrying amount of the derivative upon termination of the agreement. We base our assessment on corresponding legal and other opinions, which support the amount of the gross claim and the valuation adjustments of the derivative.

Effects of Adopting Amended and New Standards

The following standards, amendments and interpretations to existing standards were mandatory for the first time for the 2012 consolidated financial statements:

The IASB issued amendments to IFRS 7 Financial Instruments: Disclosures – Transfer of Financial Assets as part of its comprehensive review of off-balance-sheet activities. The amendments will allow users of financial statements to improve their understanding of transfers of financial assets (for example securitisations), including the possible effects of any risks that may remain with the entity that transferred the assets. The amendments also require additional disclosures if a disproportionate amount of transfer transactions are undertaken around the end of a reporting period. The new requirements led to additional disclosures for repo transactions in the notes of BAWAG P.S.K.

The following standards, amendments and interpretations to existing standards were approved by the International Accounting Standards Board (IASB) and endorsed by the EU but are not yet mandatory for the preparation of IFRS financial statements for the period ended 31 December 2012:

The amendments to IFRS 7 Financial Instruments: Disclosures – Offsetting Financial Assets and Financial Liabilities lead to disclosures which will provide a reconciliation between gross and net positions of financial instruments. Disclosures have to be made for offset financial instruments as well as for financial instruments under master netting (or similar) arrangements. This is intended to provide information about the (potential) effect of netting agreements. The amendments to IFRS 7 are applicable to annual reporting periods beginning on or after 1 January 2013 and will lead to additional disclosures in the notes of BAWAG P.S.K.

IFRS 10 Consolidated Financial Statements establishes principles for the presentation and preparation of consolidated financial statements when an entity is in control of one or more other entities. IFRS 10 sets out how to apply the principle of control to identify whether an investor controls an investee and therefore must consolidate the investee and sets out the accounting requirements for the preparation of consolidated financial statements. IFRS 10 becomes mandatory for annual reporting periods beginning on or after 1 January 2014. IFRS 10 will have no major effect on the consolidated financial statements of BAWAG P.S.K.

IFRS 11 Joint Arrangements stipulates that a party to a joint arrangement determines the type of joint arrangement in which it is involved by assessing its rights and obligations. The party accounts for those rights and obligations in accordance with the determined type of joint arrangement. IFRS 11 becomes mandatory for annual reporting periods beginning on or after 1 January 2014. IFRS 11 is expected to have no effect on the consolidated financial statements of BAWAG P.S.K.

IFRS 12 Disclosure of Interests in Other Entities requires the disclosure of information that enables users of financial statements to evaluate the natures of and risks associated with its interests in other entities and the effects of those interests on its financial position, financial performance and cash flows. IFRS 12 becomes mandatory for annual reporting periods beginning on or after 1 January 2014. IFRS 12 will lead to additional disclosures regarding participations, non-controlling interests and structured entities.


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IFRS 13 Fair Value Measurement provides a definition of fair value and extends the disclosures about fair value measurement. IFRS 13 applies when another IFRS requires or permits fair value measurements or disclosures about fair value measurements. IFRS 13 is applicable to annual reporting periods beginning on or after 1 January 2013. IFRS 13 will lead to additional disclosures in the notes of BAWAG P.S.K.

The IASB issued amendments to IAS 1 Presentation of Financial Statements. It changes the disclosure of items presented in other comprehensive income in the statement of comprehensive income. The amended IAS 1 will still permit profit or loss and other comprehensive income to be presented in either a single statement or in two consecutive statements. The presentation of other comprehensive income is revised, now requiring separate subtotals for those elements which may be recycled in the Profit or Loss Statement (e.g. cash-flow hedging, foreign currency translation) and those elements that will not (e.g. fair value through other comprehensive income items under IFRS 9). The amended IAS 1 is applicable to annual reporting periods beginning on or after 1 July 2012 and will lead to an amended presentation of other comprehensive income of BAWAG P.S.K.

Amendments to IAS 12 Deferred Tax: Recovery of Underlying Assets provide a solution to the problem of assessing whether recovery of the carrying amount of the asset will be through use or through sale. IAS 12 introduces a rebuttable presumption that recovery of the carrying amount will normally be through sale. SIC 21 has been withdrawn and the remaining guidance is incorporated into IAS 12. The amendments are applicable to annual reporting periods beginning on or after 1 January 2013. The amended IAS 12 will have no effect on the consolidated financial statements of BAWAG P.S.K.

The amendment to IAS 19 Employee Benefits makes significant changes to the recognition and measurement of defined benefit pension expenses and termination benefits and to the disclosures for all employee benefits. The most significant adjustment is that actuarial gains and losses from provisions for severance payments and pension provisions will be recognised entirely in other comprehensive income (the present option is eliminated). Actuarial gains and losses from provisions for jubilee benefits will remain in the Profit or Loss Statement. The amended IAS 19 is applicable to annual reporting periods beginning on or after 1 January 2013. We do not expect major effects on the consolidated financial statements of BAWAG P.S.K., since BAWAG P.S.K. already recognises actuarial gains and losses directly in other comprehensive income.

IAS 27 Consolidated and Separate Financial Statements has been amended and reissued as IAS 27 Separate Financial Statements. Consolidation requirements previously included in IAS 27 have been revised and are now contained in IFRS 10 Consolidated Financial Statements. The amended IAS 27 is applicable to annual reporting periods beginning on or after 1 January 2014. This standard is not applicable to the consolidated financial statements of BAWAG P.S.K.

IAS 28 Investments in Associates and Joint Ventures includes the requirements for associates and joint ventures in order to be accounted for using the equity method following the issue of IFRS 11. The amended IAS 28 is applicable to annual reporting periods beginning on or after 1 January 2014. IAS 28 is expected to have no effect on the consolidated financial statements of BAWAG P.S.K.

In IAS 32 Financial Instruments: Presentation – Offsetting Financial Assets and Financial Liabilities the meanings of “currently has a legally enforceable right of set-off” and “simultaneous realisation and settlement” were clarified. The offsetting rules themselves remained unchanged. The clarifications to IAS 32 are applicable to annual reporting periods beginning on or after 1 January 2014. The clarifications to IAS 32 are expected to have no impact on the consolidated financial statements of BAWAG P.S.K.

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The following standards and amendments approved by the International Accounting Standards Board (IASB) have not yet been endorsed by the European Union:

The IASB has proposed limited amendments to IFRS 9 Financial Instruments: Classification and Measurement in November 2012, which is part of the wider project to replace IAS 39 Financial Instruments: Recognition and Measurement. The new IFRS 9 (including the proposed amendments) establishes three primary measurement categories for financial assets: in addition to the existing categories amortised cost and fair value, a new category – fair value through other comprehensive income. Furthermore, a clarified “hold to collect” business model and an improved contractual cash flow test were included.

The basis of classification depends on the entity’s business model and the contractual cash flow characteristics of the financial asset. A financial asset is measured at amortised cost only if the object of the entity’s business model is to hold the financial asset and the contractual cash flows are solely payments of principal and interest on the principal outstanding (simple loan feature). A financial asset is measured at fair value through other comprehensive income if the asset is held in a business model in which assets are managed both in order to collect contractual cash flows and for sale and the contractual cash flows are solely payments of principal and interest on the principal outstanding (simple loan feature). Financial assets that do not meet these criteria are measured at fair value. Furthermore, embedded derivatives will no longer be separated from the financial host asset. The financial instrument is assessed in its entirety and measured at fair value through profit or loss. There are a few exceptions, for example, for put, call, prepayment and extension options, and interest rate caps or floors.

The classification and measurement requirements for financial liabilities are only slightly changed compared to IAS 39, with fair value changes related to changes in the entity’s own credit risk recognised in other comprehensive income. There is an exception for cases in which this practice would lead to inconsistencies in the measurement of assets and liabilities. The assessment must be performed at the initial recognition. A retrospective recognition of other comprehensive income from changes in the entity’s own credit risk in the Profit or Loss Statement is not permitted.

In addition, the IASB has issued exposure drafts for the calculation of amortised cost and for the impairment of financial assets and hedge accounting. The exposure draft for the calculation of amortised cost states that impairment of financial assets is now based on an expected loss model. This model is based on a forward-looking approach, which takes into account loss expectations for future cash flows.

Regarding hedge accounting, the exposure draft proposes to eliminate the existing distinction between underlying financial and non-financial transactions. The guidelines for proving the effectiveness of hedges are to be simplified. Retrospective effectiveness tests are to be replaced by a principle-based approach. The effectiveness band is to be eliminated. The goal of this exposure draft is to effectively portray economic hedges as such in the financial statements.

The IASB decided that IFRS 9 will become mandatory for annual reporting periods beginning on or after 1 January 2015. The European Union has not yet endorsed the parts of IFRS 9 which were put into effect by the IASB up to now, as the EFRAG has decided to take more time to consider the output from the IASB project aimed at improving accounting for financial instruments.

The impact of IFRS 9 is expected to be material, but a reliable statement regarding the influence on future consolidated financial statements of BAWAG P.S.K. cannot be made at this point in time.


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The IASB issued amendments to IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements and IFRS 12 Disclosure of Interests in Other Entities to clarify the transition guidance in IFRS 10. The amended IFRS 10 clarifies that no retrospective adjustments need to be made for subsidiaries which were sold in the comparative period. In IFRS 10, IFRS 11 and IFRS 12 the requirement to present adjusted comparative figures was limited to the period immediately preceding the date of initial application. The requirement to present comparative information on unconsolidated structured entities for any period before the initial application of IFRS 12 was eliminated from IFRS 12.

The IASB currently proposes that the amendments to IFRS 10, IFRS 11 and IFRS 12 should become mandatory for annual reporting periods beginning on or after 1 January 2014. The amended IFRS 10 and IFRS 11 will have no major effect on the consolidated financial statements of BAWAG P.S.K. The amended IFRS 12 will lead to additional disclosures regarding participations, non-controlling interests and structured entities.

The IASB issued amendments to IAS 1 Presentation of Financial Statements, which clarify the disclosure requirements for comparative information when an entity discloses, voluntarily or on a compulsory basis, comparative information for a third accounting period. When the disclosure is voluntary, the associated notes have to be disclosed as well. For comparative information that is mandatory according to IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, it is not necessary to disclose notes for the previous period. The amended IAS 1 is applicable to annual reporting periods beginning on or after 1 January 2013 and is expected to have no effect on the consolidated financial statements of BAWAG P.S.K.

The amendments to IAS 32 Financial Instruments: Presentation clarify the accounting for tax effects from dividend payments and transaction costs from the issue or the buyback of equity instruments. Tax effects from dividend payments must be recognised in the Profit or Loss Statement. Impacts from the issue or the buyback of equity instruments must be recognised in equity. The amendments are applicable to annual reporting periods beginning on or after 1 January 2013. The amended IAS 32 is expected to have no major effect on the consolidated financial statements of BAWAG P.S.K.

The amended IAS 34 Interim Financial Reporting clarifies that the disclosure of total assets and total liabilities for a reportable segment is only necessary when the amounts are regularly provided to the chief operating decision maker and there has been a material change from the amounts disclosed in the last annual financial statements. The amendments are applicable to annual reporting periods beginning on or after 1 January 2013. The amended IAS 34 is expected to have no effect on the consolidated interim financial statements of BAWAG P.S.K.

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Details of the Consolidated Statement of Financial Position

2 | Cash reserves

in millions of Euros 31.12.2012 31.12.2011Cash on hand 267 291 Balances at central banks 214 325 Cash reserves 481 616

3 | Financial assets designated at fair value through profit or loss

in millions of Euros 31.12.2012 31.12.2011Bonds and other fixed income securities 686 857

Public sector debt instruments – 9Bonds of other issuers 686 848

Shares and other variable rate securities 77 79Investment certificates 71 70Other 6 9

Loans and advances to customers 638 813Customers 638 813

Designated at fair value through profit or loss 1,401 1,749

The category Financial assets designated at fair value through profit or loss contains all financial instruments that are carried at their fair value through profit or loss because the fair value option defined in IAS 39 has been exercised for them. Further information on the fair value option can be found in Note 1.

The maximum credit risk of loans and advances to customers equals book value.


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4 | Available-for-sale financial assets

in millions of Euros 31.12.2012 31.12.2011Debt instruments 6,687 6,321

Bonds and other fixed income securities 6,687 6,318Public sector debt instruments 1,022 1,109Bonds of other issuers 5,665 5,209

Other variable rate securities – 3Equity investments 123 161

Recognised at costInvestments in non-consolidated subsidiaries 23 26Interests in associates 63 66Other shareholdings 37 69

Available-for-sale financial assets 6,810 6,482

The following table shows key financial indicators for the Bank’s associates:

Associates not accounted for using the equity method

in millions of Euros Cumulated assets

Cumulated equity

Cumulated net profit

2012 1,169 135 92011 1,070 161 -3

The amounts presented in the table above are based on the latest available financial statements of the respective companies that have been prepared in accordance with the applicable accounting standards. At the time the annual financial statements of BAWAG P.S.K. as of 31 December 2012 were being prepared, financial statements as of 31 December 2011 were available for the majority of the respective entities (prior year: 31 December 2010).

For further details please refer to Note 36: Related parties.

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5 | Held-to-maturity financial investments

As of 31 December 2012 and as of 31 December 2011, BAWAG P.S.K. did not hold any securities of this category in its portfolio.

6 | Assets held for trading

in millions of Euros 31.12.2012 31.12.2011Bonds and other fixed income securities 1 22

Bonds of other issuers 1 22Positive fair values of derivative financial instruments 1,838 2,164

Derivatives in trading book 630 1,260Foreign currency derivatives 88 561Interest rate derivatives 542 676Credit related derivatives – 23

Derivatives in banking book 1,208 904Foreign currency derivatives 122 41Interest rate derivatives 1,069 814Credit related derivatives 17 49

Other trading assets – 157Thereof repurchase agreements – 157

Assets held for trading 1,839 2,343

The assets held for trading do not contain any positions related to the City of Linz as of 31 December 2012.


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7 | Loans and receivables

The following breakdown depicts the composition of the item Loans and receivables. The financial assets in this category are recognised at amortised cost.

31.12.2012in millions of Euros

Unimpaired assets

Impaired assets (total gross

carrying amount)

Allowances for individually

impaired financial assets

Allowances for collectively

impaired financial assets1)

Total net carrying

amount

Securities 2,283 – – – 2,283 Public sector debt instruments 203 – – – 203 Debt instruments of other issuers 2,080 – – – 2,080

Receivables from credit institutions 5,179 24 -17 – 5,186 Receivables from customers 21,793 1,131 -546 -103 22,275

Central governments 102 – – – 102 Corporates and other customers 14,911 583 -186 -3 15,305 Retail 6,780 548 -360 -69 6,899 Portfolio impairment provision – – – -31 -31

Total 29,255 1,155 -563 -103 29,744

1) Includes allowances for incurred but not reported losses.

31.12.2011 in millions of Euros

Unimpaired assets

Impaired assets (total gross

carrying amount)

Allowances for individually

impaired financial assets

Allowances for collectively

impaired financial assets1)

Total net carrying

amount

Securities 3,250 – – – 3,250 Public sector debt instruments 265 – – – 265 Debt instruments of other issuers 2,985 – – – 2,985

Receivables from credit institutions 2,407 24 -17 – 2,414 Receivables from customers 22,681 1,218 -558 -118 23,223

Central governments 200 – – – 200 Corporates and other customers 15,682 551 -164 -1 16,068 Retail 6,799 667 -394 -80 6,992 Portfolio impairment provision – – – -37 -37

Total 28,338 1,242 -575 -118 28,887

1) Includes allowances for incurred but not reported losses.

The Receivables from customers are broken down into the receivables classes specified in the OeNB reporting structure according to the requirements of Basel II.

The category Central governments includes receivables from central governments, primarily from the Republic of Austria in the case of BAWAG P.S.K.

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The Corporates category includes include larger enterprises with an exposure in excess of EUR 1 million or revenue of over EUR 50 million, and special financing agreements (project finance) as defined in Basel II. Other customers covers public sector entities, churches and religious groups, political parties, associations and securities trading houses without a banking license.

The Retail category covers receivables from retail banking. This segment comprises jobholders and small and medium-sized enterprises with an exposure of less than EUR 1 million or revenue of less than EUR 50 million.

The Portfolio impairment provision represents a provision for losses incurred but not detected yet.

Note on the Claim against the City of Linz

Information on the origin of the claim can be found under “Latitude of Judgement and Uncertainty of Estimates – City of Linz” in these Notes.

The claim of BAWAG P.S.K. against the City of Linz in connection with the transaction discussed was reported under Receivables from customers on 31 December 2011 and on 31 December 2012. The transaction with the City of Linz was originally a derivative categorised as held for trading and was therefore recognised at its fair value.

The derivative resulted from an agreement with the City of Linz, which entitled the City of Linz to receive a variable interest rate in Swiss francs (the six-month CHF Libor) and obligated the City of Linz to pay to BAWAG P.S.K. a fixed interest rate in Swiss francs in the amount of 0.065 per cent plus a premium that depended on the exchange rate between the Euro and the Swiss franc. The premium was based on the difference between a reference rate of 1.54 Swiss francs/Euro and the prevailing exchange rate: premium = {(1.54 – ECB exchange rate)/ECB exchange rate} x 100 in per cent.

The derivative (classified as Held for trading) was valued on a regular basis, and appropriate valuation adjustments were applied for legal, process and other operational risks as well as for time differences for the receipt of payments. The claim was recognised under Receivables from customers (classified under Loans and advances) after the termination of the agreement in 2011. The claim was measured at the carrying amount of the derivative upon the termination of the agreement. The carrying amount of the derivative upon termination included the valuation adjustments specified above.

For information about the recognition and measurement principles, please see Note 1 Recognition and Measurement Principles. In this case, the agreement included the payment of interest on arrears, which was also taken into account in calculating the expected cash flows. It was assumed that the legal proceedings will take 3.5 years.

As in the previous year, in light of the ongoing legal proceedings, no information will be provided on the current carrying value of the claim against the City of Linz or the applied valuation measures. This information is being withheld due to the pending litigation by applying IAS 37.92 in analogy.

In the information presented in this item in the notes, the claim against the City of Linz is reported under “impaired assets” in application of the regulatory reporting regulations of the BWG. According to IFRS, the acquisition costs of the claim correspond to the carrying amount of the derivative (taking valuation adjustments into account) upon termination of the transaction. Since the transfer of the claim to the category Loans and receivables, the Bank has not recognised any impairments on the claim against the City of Linz.


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Reclassifications

BAWAG P.S.K. transferred available-for-sale financial assets to the Statement of Financial Position item Loans and receivables at their fair values in the amount of EUR 1,897 million as of 1 June 2010.

These reclassified assets are structured loans and credit surrogates without derivative components. BAWAG P.S.K. is of the opinion that the intrinsic value of the reclassified assets offers relevant information for readers of the financial report.

As of 31 December 2012, the carrying amount of these reclassified assets amounted to EUR 1,153 million. Their fair value amounted to EUR 1,189 million.

As of 31 December 2012, an AFS reserve in the amount of EUR -18 million (2011: EUR -15 million) was recognised for reclassified financial assets. If the assets had not been reclassified, unrealised fair value changes in the amount of EUR +36 million (2011: EUR -1 million) would have been recognised directly in equity (in the AFS reserve) for available-for-sale financial assets.

After reclassification, the financial assets in question continued to make the following contribution to the pre-tax profit:

in millions of Euros 2012 2011Interest income 15.2 33.9Profits from disposals 1.4 6.2Impairments – –

In 2012 financial assets have been reclassified from loans and receivables into available-for-sale with their carrying amount. The financial assets have been remeasured at their fair value, and the difference between their carrying amount and their fair value has been recognised directly in equity (AFS reserve).

These reclassified assets are debt instruments without derivative components that have become traded in an active market subsequent to their initial classification. Therefore, the definition of loans and receivables was no longer met.

The new carrying amount of financial instruments after recognising the AFS reserve as of its reclassification date was EUR 383 million.

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Changes in loan loss provisions

in millions of EurosIndividual and

collective loan loss provisions

Loan loss provisions for incurred but

not reported lossesTotal

Balance as of 1.1.2012 657 36 693Additions Provisions created through profit or loss

139

–

139

Disposals Changes in the scope of consolidation

–

–

–

Used as intended -111 – -111Provisions released through profit or loss -50 -5 -55Reclassification – – –Balance as of 31.12.2012 635 31 666

in millions of EurosIndividual and

collective loan loss provisions

Loan loss provisions for incurred but

not reported lossesTotal

Balance as of 1.1.2011 718 37 755Additions Provisions created through profit or loss

147

–

147

Disposals Changes in the scope of consolidation

–

–

–

Used as intended -116 – -116Provisions released through profit or loss -92 -1 -93Reclassification – – –Balance as of 31.12.2011 657 36 693

The consolidated financial statements of BAWAG P.S.K. as of 31 December 2012 include a portfolio provision of EUR 31.3 million (2011: EUR 35.9 million). The calculation of these impairment provisions is explained in Note 1.

The loan loss provisions break down by region as follows:

in millions of Euros 31.12.2012 31.12.2011Austria 546 579Abroad 120 114

Western Europe 55 56Central and Eastern Europe 65 51North America – 7

Impairment provisions 666 693


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8 | Receivables from credit institutions and customers

The following breakdowns depict the regional distribution of the receivables from customers and credit institutions as of the reporting date, based on the location of the counterparty’s registered domicile. Receivables subject to forbearance measures represent only an immaterial part of the receivables from customers.

Receivables from credit institutions – Regional breakdown

in millions of EurosDesignated at fair value

through profit or loss At amortised cost Total

31.12.2012 31.12.2011 31.12.2012 31.12.2011 31.12.2012 31.12.2011Austria – – 2,560 1,155 2,560 1,155Abroad – – 2,626 1,259 2,626 1,259

Western Europe – – 2,446 1,026 2,446 1,026Central and Eastern Europe – – 55 77 55 77North America – – 28 56 28 56Asia/Pacific – – 83 73 83 73Rest of the world – – 14 27 14 27

Receivables from credit institutions – – 5,186 2,414 5,186 2,414

Receivables from customers – Regional breakdown



31.12.2012 31.12.2011 31.12.2012 31.12.2011 31.12.2012 31.12.2011Austria 638 813 17,501 17,663 18,139 18,476Abroad – – 4,774 5,560 4,774 5,560

Western Europe – – 3,010 3,281 3,010 3,281Central and Eastern Europe – – 1,080 1,484 1,080 1,484North America – – 277 457 277 457Asia/Pacific – – 6 6 6 6Rest of the world – – 401 332 401 332

Receivables from customers 638 813 22,275 23,223 22,913 24,036

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The following table depicts the breakdown of receivables from customers and credit institutions by credit type.

Receivables from credit institutions – Breakdown by credit type



31.12.2012 31.12.2011 31.12.2012 31.12.2011 31.12.2012 31.12.2011Demand deposits – – 102 168 102 168Time deposits – – 4,902 2,025 4,902 2,025Loans – – 173 212 173 212Other – – 9 9 9 9Receivables from credit institutions – – 5,186 2,414 5,186 2,414

Receivables from customers – Breakdown by credit type



31.12.2012 31.12.2011 31.12.2012 31.12.2011 31.12.2012 31.12.2011Current accounts – – 1,390 1,565 1,390 1,565Cash advances – – 1,460 757 1,460 757Loans 638 813 18,415 19,906 19,053 20,719

One-off loans 638 813 18,330 19,788 18,968 20,601Current account loans – – 3 4 3 4Other – – 82 114 82 114

Finance leases – – 1,010 995 1,010 995Receivables from customers 638 813 22,275 23,223 22,913 24,036


100100


9 | Asset maturities

The following table contains a breakdown of financial assets by remaining period to maturity. Assets without a defined maturity are classified as “Up to 3 months”.

Financial assets – Breakdown by remaining period to maturity 2012

in millions of Euros Up to 3 months

3 months up to 1 year 1–5 years Over 5 years Total

Designated at fair value through profit or loss 31.12.2012 Receivables from customers

6

16

502

114

638

Bonds and other fixed-income securities

36

10

510

130

686

Available-for-sale financial assets31.12.2012 Bonds

and other fixed-income securities

167

578

4,563

1,379

6,687Loans and receivables

31.12.2012 Receivables from customers

4,613

1,797

6,005

9,860

22,275 Receivables from credit institutions 5,030 8 66 82 5,186 Bonds


19

103

728

1,433

2,283Total as of 31.12.2012 9,871 2,512 12,374 12,998 37,755

Financial assets – Breakdown by remaining period to maturity 2011


3 months up to 1 year 1–5 years Over 5 years Total

Designated at fair value through profit or loss 31.12.2011 Receivables from customers

5

16

674

118

813

Bonds and other fixed-income securities

23

132

567

135

857

Available-for-sale financial assets31.12.2011 Bonds


87

266

4,407

1,558

6,318Loans and receivables

31.12.2011 Receivables from customers

4,883

2,086

6,380

9,874

23,223 Receivables from credit institutions 2,219 55 39 101 2,414 Bonds

and other fixed-income securities 3

386

1,056

1,805

3,250

Total as of 31.12.2011 7,220 2,941 13,123 13,591 36,875

101


101


10 | Tangible non-current assets

Changes in tangible non-current assets 2012

in millions of EurosCarrying amount

31.12.2011

Acquisition cost

01.01.2012

Change in scope of

consolidation Acquisition

cost

Change in scope of

consolidation Cumulative

depreciation

Change in foreign exchange

differences

Additions Disposals ReallocationsWrite- downs

cumulative

Carrying amount

31.12.2012

Depreciation (-), impairments (-) and reversal of impairments (+)

Financial year

Tangible non-current assets 191 741 – – – 25 -68 – -517 181 -21Land and buildings used by the enterprise for its own operations

121

218

–

–

–

–

-3

–

-98

117

-3

Investment properties 18 63 – – – – -27 – -30 6 -1Office furniture and equipment 52 459 – – – 25 -38 – -388 58 -17Plant under construction – 1 – – – – – – -1 – –

Changes in tangible non-current assets 2011


31.12.2010

Acquisition cost

01.01.2011

Change in scope of


cost

Change in scope of

consolidation Cumulative

depreciation

Change in foreign exchange

differences


cumulative

Carrying amount

31.12.2011

Depreciation (-), impairments (-) and reversal of impairments (+)

Financial year

Tangible non-current assets 225 841 -32 28 – 24 -93 1 -550 191 -29Land and buildings used by the enterprise for its own operations

133

237

-1

–

–

–

-18

–

-97

121

-4

Investment properties 33 83 – – – 1 -21 – -45 18 -1Office furniture and equipment 56 518 -31 28 – 23 -54 3 -407 52 -24Plant under construction 3 3 – – – – – -2 -1 – –

The line item Investment properties includes the real estate that meets the criteria for designation as investment property within the meaning of IAS 40.5. These properties are primarily held to earn rentals. To a limited degree, the Bank also uses some of these properties itself. However, because these portions cannot be sold separately and are insignificant for the purposes of IAS 40.10, the entirety of such properties is included in Investment properties.


102102


11 | Intangible non-current assets

The core banking system Allegro is one of the Bank’s most important intangible assets. Of the total carrying amount for all intangible non-current assets, EUR 76 million (2011: EUR 102 million) can be attributed to Allegro projects carried out in this context. Allegro’s remaining average useful life is 1.5 years.

Changes in intangible non-current assets 2012


31.12.2011

Acquisition cost

01.01.2012

Change in scope of


cost

Change in scope of

consolidation Cumulative amortisation


cumulative

Carrying amount

31.12.2012

Amortisation (-), impairments (+) and reversal of impairments (+)

Financial year

Intangible non-current assets 193 547 -1 1 20 -5 – -388 173 -35Goodwill 60 115 – – – – – -55 60 –Software and other intangible non-current assets

126

407

- 1

1

13

-1

1

-314

105

-34

Thereof purchased 90 267 - 1 1 13 -1 1 -201 78 -25Thereof internally generated 36 140 – – – – – -113 27 -9

Intangible non-current assets in development

5

5

–

–

2

-4

-1

–

2

–

Thereof purchased 5 5 – – 2 -4 -1 – 2 –Rights and redemption payments 2 20 – – 5 – – -19 6 -1

Changes in intangible non-current assets 2011


31.12.2010

Acquisition cost

01.01.2011

Change in scope of


cost

Change in scope of

consolidation Cumulative amortisation


cumulative

Carrying amount

31.12.2011

Amortisation (-), impairments (+) and reversal of impairments (+)

Financial year

Intangible non-current assets 229 546 -7 7 19 -10 -1 -354 193 -54Goodwill 77 115 – – – – – -55 60 -17Software and other intangible non-current assets

148

408

-7

7

12

-8

2

-281

126

-37

Thereof purchased 103 268 -7 7 12 -8 2 -177 90 -28Thereof internally generated 45 140 – – – – – -104 36 -9

Intangible non-current assets in development

3

3

–

–

5

–

-3

–

5

–

Thereof purchased 3 3 – – 5 – -3 – 5 –Rights and redemption payments 1 20 – – 2 -2 – -18 2 –

103


103


The following table shows the goodwill recognised:

Goodwill

in millions of Euros 31.12.2012 31.12.2011BAWAG P.S.K. Fuhrparkleasing GmbH, Vienna 1 1BAWAG P.S.K. Invest GmbH, Vienna 58 58easybank AG, Vienna 1 1Goodwill 60 60

12 | Tax assets

The deferred tax assets reported on the Statement of Financial Position are the result of temporary differences between the carrying amounts pursuant to IFRS and the valuations of the following items according to the tax requirements:

Net deferred tax assets on Statement of Financial Position

in millions of Euros 31.12.2012 31.12.2011Financial liabilities designated at fair value through profit or loss 61 –Financial assets designated at fair value through profit or loss – 30Available-for-sale financial assets – 9Loans and receivables 55 41Provisions 49 32Tax loss carryforwards 244 282Other 4 17Deferred tax assets 413 411Financial assets designated at fair value through profit or loss 13 12Available-for-sale financial assets 88 –Assets held for trading 70 70Hedging derivatives 7 17Internally generated intangible assets 7 9Tangible non-current assets 10 10Financial liabilities designated at fair value through profit or loss – 13Deferred tax liabilities 195 131Net deferred tax assets on Statement of Financial Position 218 280

For each Group member, the deferred tax assets and liabilities pertaining to the same local tax authority were offset against each other and reported under Tax assets or Tax liabilities.


104104


13 | Other assets

in millions of Euros 31.12.2012 31.12.2011Accruals 37 37Leasing objects not in operation 21 40Other items 145 111Other assets 203 188

The other items include suspense accounts from payment services in the amount of EUR 96 million (2011: EUR 30 million), deferred freight payments in the amount of EUR 11 million (2011: EUR 14 million) and miscellaneous other assets in the amount of EUR 38 million (2011: EUR 67 million).

14 | Financial liabilities designated at fair value through profit or loss

in millions of Euros 31.12.2012 31.12.2011Payables to customers 43 110

Investment products 43 110Issued bonds, subordinated and supplementary capital 4,281 4,358

Issued bonds (own issues) 2,244 2,285Subordinated capital 492 539Supplementary capital 29 30Other obligations evidenced by paper 1,516 1,504

Financial liabilities designated at fair value through profit or loss 4,324 4,468

The fair values of the investment products are hedged by derivatives.

The Issued bonds are listed issues, the Other obligations evidenced by paper are short-term notes and non-listed private placements.

The carrying amount of the securities issued by BAWAG P.S.K. and recognised at their fair value as of 31 December 2012 was EUR 244 million above their nominal value (2011: EUR 5 million below the nominal value). The carrying amount of the investment products recognised at their fair value was EUR 0 million above their nominal value (2011: EUR 6 million).

Regarding the buyback of the two hybrid capital issues designated at fair value through profit or loss (BCF I, BCF III) please refer to Note 17.

105


105


15 | Liabilities held for trading

in millions of Euros 31.12.2012 31.12.2011Negative fair values of derivative financial instruments 2,269 2,612

Derivatives trading book 791 1,795Foreign currency derivatives 316 899Interest rate derivatives 475 873Credit related derivatives – 23

Derivatives banking book 1,478 817Foreign currency derivatives 620 464Interest rate derivatives 837 285Credit related derivatives 21 68

Short positions – 158Liabilities held for trading 2,269 2,770

The trading liabilities also include hedging instruments for the transaction with the City of Linz that was closed out in October 2011. These hedging instruments were covered by offsetting transactions at the time that the transaction was terminated.

In 2011 short positions contained covered short sales of debt securities that were used to execute a hedging strategy.

16 | Financial liabilities measured at amortised cost

in millions of Euros 31.12.2012 31.12.2011Payables to credit institutions 3,748 3,399Payables to customers 21,999 22,016

Savings deposits1) 10,990 12,718Other deposits 11,009 9,298

Issued bonds, subordinated and supplementary capital 4,769 4,290Issued bonds 2,773 2,353Subordinated capital 186 260Supplementary capital 128 162Other obligations evidenced by paper 1,682 1,515

Financial liabilities associated with transferred assets 86 910Financial liabilities at amortised cost 30,602 30,615

1) Excluding investment products recognised at fair value which are disclosed in Note 14 (Financial liabilities designated at fair value through profit or loss).

The bonds issued by BAWAG P.S.K. were listed securities. The Other obligations evidenced by paper were short-term notes and unlisted private placements.

Financial liabilities from asset transfers pertain to genuine repurchase agreements (repo transactions). The utilisation of tender facilities is shown as part of payables to credit institutions.


106106


17 | Issued bonds, subordinated and supplementary capital

Issued bonds, subordinated and supplementary capital are shown in the category Financial liabilities designated at fair value through profit or loss and in the category Financial liabilities measured at amortised cost.

The total volume amounts to (IFRS book values):

in millions of Euros Recognised at fair value

Recognised at amortised cost Total

Type of issue 2012 2011 2012 2011 2012 2011Issued bonds (own issues) 2,244 2,285 2,773 2,353 5,017 4,638Subordinated capital 492 539 186 260 678 799Supplementary capital 29 30 128 162 157 192Other obligations evidenced by paper 1,516 1,504 1,682 1,515 3,198 3,019Total 4,281 4,358 4,769 4,290 9,050 8,648

The following table shows the main conditions of issued bonds exceeding a nominal value of EUR 200 million:

ISIN Type Currency Nominal value in millions of Euros

Type of interest payment Coupon Maturity date

XS0186452974 Covered EUR 960 Fixed 4.25% 18.02.2014XS0168852407 Senior unsecured EUR 741 Fixed 4.35% 28.05.2013XS0538703843 Covered EUR 500 Fixed 1.75% 02.09.2013XS0562155902 Covered EUR 500 Fixed 2.625% 26.11.2015XS0830444039 Covered EUR 500 Fixed 1.875% 18.09.2019XS0115996646 Senior unsecured EUR 350 Variable 0.203% 25.08.2015AT0000A0JR13 Senior unsecured EUR 280 Fixed 3.375% 09.08.2015XS0102864922 Senior unsecured GBP 255 Fixed 6.125% 20.10.2014AT0000A0JR21 Senior unsecured EUR 222 Fixed 4.00% 09.08.2017CH0011261168 Lower Tier II CHF 207 Fixed 4.50% 16.10.2015

107


107


Hybrid Capital

BAWAG P.S.K. has floated three hybrid capital issues in total (BCF, BCF II, BCF III). In the financial year 2012, BAWAG P.S.K. purchased part of the preference shares issued by BCF and BCF II as part of its buyback of hybrid instruments. All of the preference shares in BCF III were also purchased from the sole investor. After this, these preference shares were sold to BCF, BCF II and BCF III. This transaction eliminated the nominal value of these preference shares. There was no extraordinary income from the buyback recognised in the consolidated annual financial statements. The two remaining issues are reported as loans according to IFRS and are reported as subordinated capital in the overview above. These issues are included as part of the Tier I capital for the calculation of the Group own funds according to Basel II.

Of the two hybrid notes left after the buyback (BCF, BCF II), the terms of one (BCF) provide for a coupon step-up at its first calling date, whereas no changes in the terms of the other note (BCF II) are provided for during their tenor. In the case of the BCF note, the coupon will change from fixed to variable on the first calling date. Only the issuer has an ordinary right of redemption. The calling dates and current interest rates of the notes left after the buyback are as follows:

BCF: EUR 59 million nominal value, callable quarterly (shown in Financial liabilities designated at fair value through profit or loss), current interest rate 4.896 per cent (3 month EURIBOR plus 470 basis points)

BCF II: EUR 83 million nominal value, callable quarterly (shown in Financial liabilities measured at amortised cost), fixed interest rate 7.125 per cent

18 | Payables to credit institutions and customers

The following breakdowns depict the regional distribution of the payables to customers and credit institutions as of the reporting date, based on the location of the counterparty’s registered domicile.

Payables to credit institutions – Regional breakdown



31.12.2012 31.12.2011 31.12.2012 31.12.2011 31.12.2012 31.12.2011Austria – – 2,712 2,385 2,712 2,385Abroad – – 1,036 1,014 1,036 1,014

Western Europe – – 521 458 521 458Central and Eastern Europe – – 4 7 4 7North America – – 14 13 14 13Asia/Pacific – – – – – –Rest of the world – – 497 536 497 536

Payables to credit institutions – – 3,748 3,399 3,748 3,399


108108


Payables to customers – Regional breakdown



31.12.2012 31.12.2011 31.12.2012 31.12.2011 31.12.2012 31.12.2011Austria 43 108 21,626 21,615 21,669 21,723Abroad – 2 373 401 373 403

Western Europe 1 231 246 231 247Central and Eastern Europe 1 93 89 93 90North America – – 17 13 17 13Asia/Pacific – – 8 8 8 8Rest of the world – – 24 45 24 45

Payables to customers 43 110 21,999 22,016 22,042 22,126

The following table depicts the breakdown of payables to customers and credit institutions by sector.

Payables to customers – Breakdown by product class and sector



31.12.2012 31.12.2011 31.12.2012 31.12.2011 31.12.2012 31.12.2011Savings deposits – – 10,990 12,718 10,990 12,718

Savings accounts – – 4,527 4,428 4,527 4,428Savings associations – – 309 336 309 336Fixed-term investment savings accounts

–

–

6,154

7,954

6,154

7,954

Investment accounts 43 110 – – 43 110Other deposits – – 11,009 9,298 11,009 9,298

Central governments – – 278 361 278 361Non credit institutions – – 497 331 497 331Corporates – – 3,235 2,712 3,235 2,712Retail – – 6,999 5,894 6,999 5,894

Payables to customers 43 110 21,999 22,016 22,042 22,126

109


109


19 | Liabilities maturities

The following tables depict a breakdown of the financial liabilities by expected maturity.

Financial liabilities – Breakdown by remaining period to maturity 2012


3 months up to 1 year 1–5 years Over

5 years Total

Liabilities designated at fair value through profit or loss31.12.2012 Payables to customers

–

7

2

34

43

Bonds – 805 1,254 185 2,244 Subordinated capital – 28 258 206 492 Supplementary capital – – 29 – 29 Other obligations evidenced by paper 6 28 417 1,065 1,516

Liabilities at amortised cost31.12.2012 Payables to customers

12,889

2,078

2,301

4,731

21,999

Payables to credit institutions 963 115 2,389 281 3,748 Bonds 25 696 1,569 483 2,773 Subordinated capital – – – 186 186 Supplementary capital – – 112 16 128 Other obligations evidenced by paper 76 51 386 1,169 1,682 Financial liabilities associated

with transferred assets –

86

–

–

86

Total as of 31.12.2012 13,959 3,894 8,717 8,356 34,926

Financial liabilities – Breakdown by remaining period to maturity 2011


3 months up to 1 year 1–5 years Over

5 years Total

Liabilities designated at fair value through profit or loss31.12.2011 Payables to customers

9

9

6

86

110

Bonds – 72 1,973 240 2,285 Subordinated capital – 14 266 259 539 Supplementary capital – – 30 – 30 Other obligations evidenced by paper – 9 397 1,098 1,504

Liabilities at amortised cost31.12.2011 Payables to customers

10,771

5,593

1,370

4,282

22,016

Payables to credit institutions 1,149 126 1,754 370 3,399 Bonds 47 83 1,890 333 2,353 Subordinated capital – – – 260 260 Supplementary capital – 27 118 17 162 Other obligations evidenced by paper 15 79 450 971 1,515 Financial liabilities associated

with transferred assets

793

117 –

–

910

Total as of 31.12.2011 12,784 6,129 8,254 7,916 35,083


110110


20 | Provisions

in millions of Euros 31.12.2012 31.12.2011Provisions for social capital 433 368

Thereof for severance payments 104 88Thereof for post-employment benefits 295 250Thereof for jubilee benefits 34 30

Anticipated losses on pending business 14 5Credit promises and guarantees 14 5

Other provisions 37 40Provisions for pending litigation 37 39Other – 1

Provisions 484 413

The provisions for pending litigation concern primarily legal proceedings relating to Refco.

Changes in social capital

in millions of EurosProvisions for

post-employment benefits

Provisions for severance payments

Provisions for jubilee benefits

Total social capital

Defined benefit obligation as of 01.01.2012

261

88

30

379

Service cost – 4 2 6Interest cost 13 4 1 18Payments -14 -5 -2 -21Actuarial gain/loss as of 31.12.2012

47

13

3

63


307

104

34

445

Fair value of plan assets -11 – – -11Provision as of 31.12.2012 295 104 34 433

111


111


in millions of EurosProvisions for

post-employment benefits

Provisions for severance payments

Provisions for jubilee benefits

Total social capital


257

90

32

379

Service cost 1 5 3 9Interest cost 13 4 1 18Payments -14 -10 -4 -28Actuarial gain/loss as of 31.12.2011

4

-1

-2

1


261

88

30

379

Fair value of plan assets -11 – – -11Provision as of 31.12.2011 250 88 30 368

Assignable unit-linked pension fund assets

in millions of Euros 2012 2011Pension fund assets as of 1 January = as of 31 December 11 11

The Fair value changes contain expected returns on plan assets, actuarial gains and losses, contributions by the employer, contributions by plan participants and benefits paid.

The Pension fund assets consist of:

in per cent 2012 2011Bonds 80% 80%Equities 10% 10%Cash and cash equivalents 5% 5%Other 5% 5%


112112


Changes in other provisions

in millions of Euros Balance 01.01.2012 Added Used Released Balance

31.12.2012Other provisions 45 16 -6 -4 51Anticipated losses from pending business

5

13

-2

-2

14

Other items 40 3 -4 -2 37

in millions of Euros Balance 01.01.2011 Added Used Released Balance

31.12.2011Other provisions 56 7 -17 -1 45Anticipated losses from pending business

18

5

-17

-1

5

Other items 38 2 – – 40

21 | Tax liabilities

Provisions for deferred taxes

The deferred tax liabilities reported on the Statement of Financial Position are the result of temporary differences between the carrying amounts pursuant to IFRS and the valuations of the following items according to the tax requirements:

in millions of Euros 31.12.2012 31.12.2011Available-for-sale financial assets 12 –Loans and receivables 1 2Other 4 4Deferred tax liabilities 17 6Net deferred tax liabilities on Statement of Financial Position 17 6

Temporary differences for which no deferred tax liabilities were recognised, as permitted by IAS 12.39, came to EUR 268 million (2011: EUR 344 million). IAS 12.39 stipulates that, in the case of temporary differences associated with investments in subsidiaries, deferred tax liabilities do not have to be recognised if the parent is able to control the timing of the reversal of the temporary difference and it is probable that the temporary difference will be reversed in the foreseeable future.

113


113


22 | Other obligations

in millions of Euros 31.12.2012 31.12.2011Other liabilities 545 388Accruals 20 23Other obligations 565 411

The other liabilities include suspense accounts from payment services in the amount of EUR 276 million (2011: EUR 143 million), other accruals in the amount of EUR 172 million (2011: EUR 185 million) and miscellaneous other liabilities in the amount of EUR 54 million (2011: EUR 60 million).

Other liabilities include liabilities to employees resulting from restructuring in the amount of EUR 43.2 million (2011: 20.3 million). This item is presented within other liabilities because the amount predominantly pertains to already agreed payments.

23 | Hedging derivatives

in millions of Euros 31.12.2012 31.12.2011Hedging derivatives in fair value hedges

Positive market values 192 127Negative market values 164 64

BAWAG P.S.K. uses fair value hedge accounting to account for hedges of interest rate risk inherent in fixed-rate financial instruments. Hedging instruments are usually interest rate swaps. The hedged items are securities in the category Available-for-sale financial assets as well as the Bank’s own issues, savings accounts and loans to customers that are recognised at amortised cost.

in millions of EurosNotional of hedged items Net book value

of hedging instruments

Net result of hedged item and hedging instrument

recognised in the financial year

31.12.2012 31.12.2011 31.12.2012 31.12.2011 31.12.2012 31.12.2011Available-for-sale financial assets

2,180

1,562

-121

-47

-1

-1

Securities 2,180 1,562 -121 -47 -1 -1Financial instruments recognised at amortised cost

6,623

5,060

149

110

13

5

Securities 115 108 -11 -5 -1 –Own issues 3,304 2,666 182 117 14 8Savings deposits of customers 2,899 2,081 11 8 -1 -3Loans to customers 305 205 -32 -10 1 –

Total 8,803 6,622 29 63 12 4

The effects of changes in the value of the hedging instrument and the hedged item are shown under Note 27 Gains and losses on financial assets and liabilities.


114114


24 | Equity

Share Capital

BAWAG P.S.K. has share capital of EUR 250 million divided into 250,000,000 shares.

Participation Capital

Pursuant to the agreement in principle concluded with the Republic of Austria on the subscription of participation capital and the subscription agreement, the Republic of Austria subscribed 11,000 participation certificates with a nominal value of EUR 50,000 each, for total participation capital of EUR 550 million in 2009.

The holders of the participation certificates are entitled to a dividend of 9.3 per cent p.a., which will increase by 0.5 per cent in both 2014 and 2015, by 0.75 per cent in 2016 and by 1.0 per cent every financial year starting in 2017. This dividend is capped at the amount of the 12-month Euribor plus 10.0 per cent p.a.

A dividend may only be paid on participation certificates when it is covered by profit for the prior financial year after changes in reserves in accordance with Austrian GAAP (UGB) and a corresponding motion is passed by the Annual General Meeting of BAWAG P.S.K. The dividend shall be paid at the discretion of BAWAG P.S.K.; the presence of distributable profits does not obligate the Bank to pay a dividend.

The participation certificates are issued for an indefinite period of time, but can be redeemed by the issuer in accordance with the legal provisions. The holders of the participation certificates waive their right to the ordinary and extraordinary termination of the certificates.

The participation capital is reported as equity capital in BAWAG P.S.K.’s consolidated financial statements; dividend disbursements for the participation capital are reported as appropriation of profits. The participation capital is recognised as supervisory core capital for the purposes of calculating the Bank’s own funds pursuant to the Austrian Banking Act.

The Managing Board plans to suggest to the Annual General Meeting the payment of a dividend of EUR 51.2 million to the holders of the participation capital for the year 2012 in 2013.

Capital Contribution

Effective 31 December 2012, a capital contribution of EUR 200 million was made into BAWAG P.S.K. in the form of a grandparent capital contribution subscribed by shareholders and investors at year-end 2012. The capital contribution is shown in the capital reserves.

115


115


Changes in other comprehensive income

in millions of Euros Retained reserves

AFS reserve

Foreign exchange

differences


Equity w/o non-



Equity including


Total comprehensive income 2012 107.3 271.6 0.2 -45.3 333.8 30.7 364.5Consolidated profit/loss 107.3 – – – 107.3 29.0 136.3Income and expenses recognised directly in equity – 271.6 0.2 -45.3 226.5 1.7 228.2

Foreign exchange differences – – 0.2 – 0.2 – 0.2Changes in AFS reserves – 357.0 – – 357.0 1.7 358.7

Income and expenses recognised directly in equity (before taxes)

–

357.0

–

–

357.0

1.7

358.7

Reclassified due to realised profit/loss (before taxes)

–

–

–

–

–

–

–

Share of other comprehensive income of associates accounted for using the equity method

–

2.8

–

–

2.8

–

2.8

Actuarial gains (losses) on defined benefit pension plans

–

–

–

-60.4

-60.4

–

-60.4

Income taxes – -88.2 – 15.1 -73.1 – -73.1

in millions of Euros Retained reserves

AFS reserve

Foreign exchange

differences


Equity w/o non-



Equity including


Total comprehensive income 2011 122.5 -124.2 0.2 -1.7 -3.2 0.1 -3.1Consolidated profit/loss 122.5 – – – 122.5 -1.7 120.8Income and expenses recognised directly in equity – -124.2 0.2 -1.7 -125.7 1.8 -123.9

Foreign exchange differences – – 0.2 – 0.2 – 0.2Changes in AFS reserves – -160.4 – – -160.4 1.8 -158.6

Income and expenses recognised directly in equity (before taxes)

–

-180.8

–

–

-180.8

1.8

-180.8

Reclassified due to realised profit/loss (before taxes)

–

20.4

–

–

20.4

–

20.4

Share of other comprehensive income of associates accounted for using the equity method

–

-1.0

–

–

-1.0

–

-1.0

Actuarial gains (losses) on defined benefit pension plans

–

–

–

-2.3

-2.3

–

-2.3

Income taxes – 37.2 – 0.6 37.8 – 37.8


116116


Deferred income taxes recognised directly in equity

in millions of EurosBefore taxes Taxes

from incomeAfter taxes Before taxes Taxes

from incomeAfter taxes

1–12/2012 1–12/2011AFS reserve 359.8 -88.2 271.6 -161.4 37.2 -124.2Actuarial gains (losses) on defined benefit pension plans

-60.4

15.1

-45.3

-2.3

0.6

-1.7

Income and expenses recognised directly in equity

299.4

-73.1

226.3

-163.7

37.8

-125.9

117


117


Details of the Consolidated Profit or Loss Statement

25 | Net interest income

in millions of Euros 2012 2011Interest income 1,305.9 1,473.5

Cash reserves 1.9 4.7 Financial assets held for trading 202.1 246.8 Financial assets designated at fair value through profit or loss 65.6 86.2 Available-for-sale financial assets 215.0 226.1 Loans and receivables 821.3 909.7

Interest expenses -726.1 -800.9 Financial liabilities held for trading -132.8 -152.4 Financial liabilities designated at fair value through profit or loss -183.1 -199.4 Financial liabilities measured at amortised cost -410.2 -449.1

Dividend income 17.6 5.3 Available-for-sale financial assets 17.6 5.3

Net interest income 597.4 677.9

Interest income and similar income are recognised on an accrual basis. Interest income also includes premiums on securities classified as financial investments which are allocated in accordance with the accruals concept. Interest income on impaired receivables during 2012 amounted to EUR 4.3 million (2011: EUR 8.2 million).

26 | Net fee and commission income

Net fee and commission income can be broken down by BAWAG P.S.K.’s operations as follows:

in millions of Euros 2012 2011Payment transfers 140.9 145.7Lending 33.4 32.0Securities and custody business 43.5 36.7Foreign business, currency and notes-and-coin business -0.2 –Payments to Österreichische Post AG -57.9 -61.8Other services 35.0 23.3Net fee and commission income 194.7 175.9


118118


27 | Gains and losses on financial assets and liabilities

in millions of Euros 2012 2011Realised gains and losses on financial assets and liabilities not measured at fair value through profit or loss, net

104.9

1.3

Available-for-sale financial assets 45.7 -19.9 Loans and receivables (including finance leases) 40.0 11.2 Financial liabilities measured at amortised cost 16.5 -0.9 Gain from the sale of subsidiaries and associates 2.7 10.9 Gains (losses) on financial assets and liabilities held for trading, net 61.5 -3.6 Interest rate instruments and related derivatives 41.9 42.8 Foreign exchange trading 1.9 -36.0 Credit risk instruments and related derivatives 17.7 -10.4 Gains (losses) on financial assets and liabilities designated at fair value through profit or loss, net

-29.6

21.9

Gains (losses) from fair value hedge accounting 12.1 3.9 Fair value adjustment of hedged item 23.7 -56.6 Fair value adjustment of hedging instrument -11.6 60.5 Exchange differences revaluations, net 6.3 1.6 Gains and losses on financial assets and liabilities 155.2 25.1

The item gains and losses on financial assets and liabilities was influenced primarily by our net trading income and the valuation of our investments, issued securities and derivative transactions for customers.

The Bank achieved a result of EUR 30 million (prior year: EUR 15 million) in the 2012 financial year by trading in securities and derivatives.

The decreased risk premiums on the capital market and pull-to-par effects caused an overall positive result from the structured credit portfolio in the amount of EUR 67 million, compared with a negative result of EUR 15 million in the 2011 financial year.

The other valuation results and realised earnings from securities, issued securities and derivative instruments led to a positive net profit contribution in the amount of EUR 58 million. This includes valuation losses on own issues designated at fair value through profit or loss in the amount of EUR 151 million, which were clearly compensated by realised gains on the sale of financial assets and valuation gains on investment books.

In 2011, the item Gains and losses on financial assets and liabilities includes valuation results from a derivative transaction between BAWAG P.S.K. and the City of Linz. However, no information will be disclosed on the amounts in light of the pending lawsuits.

Overall, gains and losses on financial assets and liabilities totalled EUR 155.2 million, an increase of EUR 130.1 million compared with the prior year. In addition to the change in valuation results attributable to owners of non-controlling interests by plus EUR 32.7 million, the increase in this item can primarily be attributed to realised gains and losses on financial assets and liabilities not measured at fair value through profit or loss (net) in the amount of EUR 104.9 million.

119


119


28 | Other operating income and expenses

in millions of Euros 2012 2011Net income from investment properties 0.5 0.7Net income from the sale of tangible and intangible non-current assets 2.1 6.7Net income from retailing – -0.9Bank levy -25.3 -20.2Other income and expenses 8.2 31.9Other operating income and expenses -14.5 18.2

Income from investment properties amounted to EUR 1.6 million in 2012 (2011: EUR 3.1 million); expenses amounted to EUR 0.8 million in 2012 (2011: EUR 1.9 million). Vacancy costs amounted to EUR 0.3 million (2011: EUR 0.5 million).

In 2011, other income and expenses include, among other things, one-off income from the conclusion of legal proceedings in the amount of EUR 12 million.


120120


29 | Administrative expenses

in millions of Euros 2012 2011Staff costs -388.4 -356.1Wages and salaries -252.8 -248.1Restructuring expenses -43.2 -20.3Statutory social security contributions -62.5 -61.8Voluntary fringe benefits -3.8 -4.4Post-employment benefit costs -5.3 -5.1(Increase) decrease of pension provision -12.7 -12.9(Increase) decrease of provision for severance payments -2.6 -3.1(Increase) decrease of provision for jubilee benefits -4.1 0.8Contribution to severance fund -1.4 -1.2Other administrative expenses -203.8 -192.5Payments to Österreichische Post AG -12.0 -11.4Real estate -31.4 -31.5Chattels -38.3 -34.7Postage fees -12.7 -11.0Information/Communication -14.2 -13.2Advertising -38.9 -35.3Audit/Advisory/Consultancy -28.6 -21.1Other general expenses -27.7 -34.3Administrative expenses -592.2 -548.6

Post-employment benefit costs mainly include payments to pension funds under defined contribution plans.

Expenses for consultancy services in connection with the lawsuit with the City of Linz have been recognised in profit or loss.

30 | Depreciation and amortisation on tangible and intangible non-current assets

in millions of Euros 2012 2011Depreciation and amortisation

Intangible non-current assets -34.9 -36.8Tangible non-current assets -20.6 -27.8

Depreciation and amortisation -55.5 -64.6

121


121


31 | Provisions and impairment losses

in millions of Euros 2012 2011Changes in provisions for credit risk -8.3 -4.6Impairment losses on financial assets -141.8 -134.0Impairment losses on non-financial assets – -16.2Provisions and impairment losses -150.1 -154.8

Impairment losses on financial assets

in millions of Euros 2012 2011Financial assets measured at cost -28.2 -70.1Available-for-sale financial assets not measured through profit or loss -0.3 0.7Loans and receivables at amortised cost (including finance leases) -113.3 -64.6Direct write-downs and charges for losses on loans and advances to credit institutions and customers

-168.2

-158.3

Released from loan loss provisions for loans and advances to credit institutions and customers

50.7

91.8

Recoveries on loans previously written off 2.7 1.9Valuation of investments at amortised cost 1.5 –Impairment losses on financial assets not measured at fair value through profit or loss

-141.8

-134.0

This position does not contain expenses concerning the transaction with the City of Linz. Regarding our claim against the City of Linz please refer to the explanations in Note 7.

Impairment losses on non-financial assets

The following table depicts the impairments and reversal of impairments made on individual non-financial assets.

in millions of Euros 2012 2011Property, buildings and equipment – 1.1Investment property – -0.2Intangible non-current assets – -17.1

Goodwill – -17.1Impairment losses on non-financial assets – -16.2


122122


32 | Share of the profit or loss of associates accounted for using the equity method

The profit reported for the current year of EUR 1.5 million (2011: EUR +0.3 million) contains EUR 1.95 million related to ZEUS Recovery Fund S.A., mainly due to settlement payments and due to the proportionate share in BAWAG P.S.K. Versicherung AG.

The unrecognised share of the losses of entities that were accounted for using the equity method as provided by IAS 28.37 (g) came to EUR 0.0 million (2011: EUR 0.0 million).

The following table shows key financial indicators for the Bank’s associates:

Associates accounted for using the equity method

in millions of Euros Cumulated assets

Cumulated liabilities

Cumulated equity

Earned premiums (gross)

Cumulated net profit

2012 1,984 1,934 50 204 92011 1,844 1,815 29 207 6

The associate accounted for using the equity method is BAWAG P.S.K. Versicherung Aktiengesellschaft. For further details please refer to Note 36: Related parties.

33 | Income taxes

Income taxes recognised in profit or loss

in millions of Euros 2012 2011Current tax income / expense -0.6 0.1Deferred tax income / expense 0.4 -8.7Income taxes -0.2 -8.6

123


123


The following reconciliation shows the relationship between computed tax expenses and reported tax expenses:

in millions of Euros 2012 2011Profit before tax 136.5 129.4Tax rate 25% 25%Computed tax expenses -34.1 -32.4Reductions in taxDue to tax-exempt income from equity investments 0.6 0.8Due to gains and losses from the valuation of equity investments 9.3 1.3Due to other tax-exempt income 0.1 0.1Due to differing foreign tax rates 8.5 0.6Due to use of tax loss carryforwards without recognition of deferred taxes 14.3 32.0Due to other tax effects 4.9 2.5Increases in taxDue to gains and losses from the valuation of equity investments – -12.5Due to non tax deductible expenses -5.6 -1.7Due to other tax effects -0.2 -0.9Income tax in the period -2.2 -10.2Out-of-period income tax 2.0 1.6Reported income tax (expense) -0.2 -8.6

The Group’s assets included deferred tax assets accounted for on the grounds of the recognised benefits arising from as yet unused tax losses in the amount of EUR 244 million (2011: EUR 282 million). The majority of the tax losses could be carried forward for an unlimited period. The untaxed portion of the liability reserve was EUR 317.6 million (2011: EUR 317.6 million).


124124


Segment Reporting

This information is based on the Group structure as of 31 December 2012.

The segment reporting presents the results of the operating business segments of BAWAG P.S.K. Group. The following segment information is based on IFRS 8 Operating Segments, which follows the so-called management approach. In this, the segment information is prepared on the basis of the internal reports used by the Managing Board to assess the performance of the segments and to make decisions on allocating resources to the segments.

The breakdown of the net interest income and its allocation to the segments in the management report is based on the principles of the market interest rate method, also taking into account allocated liquidity costs and premiums. According to this method, it is assumed that asset and liability items are refinanced by means of money and capital market transactions with corresponding maturities, and that there is therefore no interest rate risk. The interest rate risk is managed actively through asset and liability management, and the results of this are reported by the Corporate Center. The remaining earnings components and the directly allocable costs are assigned to the respective units of the Company on the basis of where they are incurred. The overhead costs are assigned to the individual segments according to an allocation factor. The bank levy that was imposed for the first time in 2011 was allocated to the segments according to an allocation factor.

The segment reporting system was changed slightly compared with the previous year. The figures for the previous period were adjusted retrospectively. The segment structure is based on the corporate structure on the reporting date.

The operations are broken down into the following five segments, with the named subsidiaries being assigned as follows: Retail and Small Business, including easybank and BAWAG P.S.K. Invest Corporates, including the leasing sub-group, BV Holding GmbH and ÖVKB International Business Financial Markets, including BV Vermögensverwaltung GmbH Corporate Center/ALM, including equity investments which are not directly business field-related

125


125


The segments in detail:1)

in millions of EurosRetail

and Small Business

Corporates International Business

Financial Markets

Core activities

Corporate Center/

ALMTotal

Net interest income 2012 315.7 143.3 84.5 14.6 558.1 39.3 597.42011 327.2 187.3 75.7 15.6 605.8 72.0 677.9

Net fee and commission income 2012 148.4 80.1 16.7 2.1 247.2 -52.6 194.72011 132.1 89.2 9.2 2.7 233.1 -57.2 175.9

Core revenues 2012 464.1 223.4 101.1 16.7 805.3 -13.3 792.12011 459.3 276.5 84.9 18.3 839.0 14.9 853.8

Gains and losses on financial assets and liabilities

2012 17.6 -2.2 -4.1 67.9 79.1 49.8 128.92011 10.8 7.1 2.3 16.5 36.8 -5.3 31.5

Other operating income (expenses)

2012 0.2 1.9 – – 2.1 8.8 10.82011 0.2 3.4 – – 3.6 34.8 38.4

Operating income 2012 481.8 223.1 97.1 84.6 886.5 45.3 931.82011 470.3 287.0 87.2 34.8 879.3 44.4 923.7

Administrative expenses 2012 -374.2 -107.2 -19.9 -33.3 -534.6 -14.4 -549.02011 -367.2 -102.7 -20.5 -31.2 -521.6 -6.7 -528.3

Depreciation and amortisation on tangible and intangible non-current assets

2012

-29.1

-8.4

-1.4

-2.4

-41.3

-14.2

-55.5

2011 -30.9 -9.8 -1.8 -2.7 -45.2 -19.5 -64.6Operating expenses 2012 -403.3 -115.5 -21.4 -35.7 -575.9 -28.6 -604.5

2011 -398.1 -112.5 -22.3 -33.9 -566.8 -26.1 -592.9Restructuring costs 2012 – – – – – -43.2 -43.2

2011 – – – – – -20.3 -20.3Operating profit before bank levy 2012 78.5 107.6 75.7 48.8 310.6 -26.5 284.1

2011 72.2 174.5 64.9 0.9 312.5 -2.0 310.5Bank levy 2012 -4.1 -8.4 -2.0 -10.7 -25.3 – -25.3

2011 -3.0 -7.2 -1.3 -8.7 -20.2 – -20.2Operating profit before risk costs 2012 74.3 99.1 73.7 38.1 285.3 -26.5 258.8

2011 69.2 167.2 63.7 -7.8 292.3 -2.0 290.3Provisions and impairment losses 2012 -55.0 -36.3 – – -91.3 -58.8 -150.1

2011 -53.3 -35.6 – – -88.8 -66.0 -154.8Share of the profit or loss of associates accounted for using the equity method

2012

–

–

–

–

–

1.5

1.5

2011 – – – – – 0.3 0.3Profit (loss) before tax 2012 19.3 62.9 73.7 38.1 194.0 -83.8 110.2

2011 15.9 131.7 63.7 -7.8 203.5 -67.7 135.8Assets 2012 7,036.4 14,425.3 3,434.5 4,249.6 29,145.7 12,119.0 41,264.7

2011 6,990.4 16,613.6 2,922.3 4,760.6 31,286.9 9,789.7 41,076.6Refinancing of business 2012 19,321.5 3,888.4 0.3 – 23,210.2 18,054.5 41,264.7

2011 19,231.8 4,214.2 0.1 – 23,446.1 17,630.5 41,076.6Risk-weighted assets (total RWA) 2012 3,836.0 7,343.0 3,262.0 1,292.0 15,733.0 4,884.8 20,617.8

3,858.2 9,043.9 2,923.3 1,275.3 17,100.6 6,122.4 23,223.0

1) This table and the following tables contain year-end figures.


126126


Retail and Small Business

The Retail and Small Business segment covers banking services provided through the branches, including alternative sales channels, the business service, the Small Business unit and the new eCommerce sales line.

It also covers the subsidiaries easybank and BAWAG P.S.K. Invest.

BAWAG P.S.K. is striving to be the pioneer of intuitive banking in Austria, and is consistently implementing the associated retail strategy. The cornerstones of this strategy are a strong brand, the slogan “Mitten im Leben” and the orientation towards clear, fair and intuitive banking that is available anytime and anywhere.

The focus in 2012 was again on the expansion of the sales channels and the simplification of the product and service portfolio.

The branch offensive remains a fixed part of this strategy with the goal of establishing over 500 BAWAG P.S.K. branches all over Austria offering the full range of products and services by mid-2013. One focus in this is the optimisation of the existing branch network by combining the previously separate BAWAG and P.S.K. outlets. Another is the expansion of the services offered by the Bank, especially in rural areas. The key offerings of the new branches include unrivalled business hours, an expanded line of services and advisory, and well equipped self-service areas for transactions during and after business hours.

In the area of products and services, the extremely successful KontoBox model was expanded with the addition of financing products. The KreditBox for consumer and home improvement loans and energy saving financing has already been sold around 27,500 times since it was launched in September, in part thanks to the accompanying sales concept of the “MEIN DAHEIM” (“My Home”) branches with concentrated lending competence. The product “box” model was expanded at the end of 2012 with the SparBox, the first electronic capital savings account in Austria.

427.8 459.3 464.1

46.372.2 78.5

Core revenues

Operatingprofi t

7,036 -19,322

6,990

7,190

-19,232

-18,895

Assets Liabilities

in millions of EUR

2010 2011 2012

127


127


in millions of Euros 2012 2011 ChangeNet interest income 315.7 327.2 11.5 -3.5%Net fee and commission income 148.4 132.1 16.3 +12.3%Core revenues 464.1 459.3 4.8 +1.0%Gains and losses on financial assets and liabilities 17.6 10.8 6.7 +62.2%Other operating income (expenses) 0.2 0.2 0.0 -21.4%Operating income 481.8 470.3 11.5 +2.4%Administrative expenses -374.2 -367.2 -7.0 +1.9%Depreciation and amortisation on tangible and intangible non-current assets

-29.1

-30.9

1.8

-5.8%

Operating expenses -403.3 -398.1 -5.2 +1.3%Operating profit before bank levy 78.5 72.2 6.2 +8.6%Bank levy -4.1 -3.0 -1.1 +35.1%Operating profit before risk costs 74.3 69.2 5.2 +7.5%Provisions and impairment losses -55.0 -53.3 -1.8 +3.3%Share of the profit or loss of associates accounted for using the equity method

–

–

–

–

Profit before tax 19.3 15.9 3.4 +21.5%Assets 7,036.4 6,990.4 46.0 +0.7%Refinancing of business 19,321.5 19,231.8 89.6 +0.5%Risk-weighted assets (total RWA) 3,836.0 3,858.2 -22.2 -0.6%

The initiatives are also bringing concrete success. Despite the difficult market conditions, operating income rose by more than 2.4 per cent to EUR 481.8 million, offsetting the negative impact of the continuously low market interest rate levels. Slightly higher expenses (+1.3 per cent) reflect the substantial investment in the segment, which is recognised in current expenditures. Risk costs remained stable during the reporting period. This resulted in a profit before tax of EUR 19.3 million in the Retail and Small Business segment (EUR 15.9 million achieved in 2011).


128128


Corporates

In Corporates, the Group is following the same successful strategy that is has over the past years. Most of the customers in this segment are located in Austria, and BAWAG P.S.K. offers a broad range of products to meet their needs for doing business locally as well as expanding their international activities. These include standard products as well as made-to-measure financing and investment solutions that make BAWAG P.S.K. a particularly valuable and reliable partner for Austria’s economy.

The leasing sub-group, BV Holding GmbH and ÖVKB are assigned to this segment.

The Corporates segment has made considerable progress in expanding the commercial banking activities of BAWAG P.S.K. and (re-)positioning the Bank on the Austrian market in recent years. We will maintain this momentum by investing in growth and focusing on sustainable profitability.

The restructuring of our corporate banking operations allowed us to increase our focus on profitable and sustainable customer relationships. Our central service approach and the use of regional on-site advisors ensures that we can continue fulfilling our service promise under our Business Solution Partner concept. This advisory concept enables our customers to benefit from our entire range of services for corporate customers and our full selection of financial market products.

BAWAG P.S.K.’s goal is to create needs-oriented, holistic and individualised financial solutions and implement them in cooperation with its customers, with an eye to maintaining the competitive strength and sustainable growth of Austria’s companies. Corporate banking will remain an integral part of the business of BAWAG P.S.K. in future.

Despite the difficult overall economic environment, volatile markets and changed customer behaviour throughout the banking industry, we succeeded in retaining our market share in the Austrian lending business. This is the result of the product expertise that we have established over the past years as well as of the optimisation of internal structures and the improvement of our coordination processes in the interests of our customers.

We are focusing on our core competences and investing in the areas that will facilitate our long-term success for the benefit of our employees and customers. BAWAG P.S.K. continuously defines measures to actively address the strategic challenges in this business segment and to continue to be a reliable business partner for our corporate customers in future.

255.3 276.5223.4

145.8174.5

107.6

Corerevenues

Operatingprofi t

14,425 -3,888

16,614

16,988

-4,214

-3,686

Assets Liabilities

in millions of EUR

2010 2011 2012

129


129


in millions of Euros 2012 2011 ChangeNet interest income 143.3 187.3 -44.0 -23.5%Net fee and commission income 80.1 89.2 -9.1 -10.2%Core revenues 223.4 276.5 -53.1 -19.2%Gains and losses on financial assets and liabilities -2.2 7.1 -9.4 –Other operating income (expenses) 1.9 3.4 -1.5 -43.3%Operating income 223.1 287.0 -63.9 -22.3%Administrative expenses -107.2 -102.7 -4.5 +4.4%Depreciation and amortisation on tangible and intangible non-current assets

-8.4

-9.8

1.4

-14.8%

Operating expenses -115.5 -112.5 -3.0 +2.7%Operating profit before bank levy 107.6 174.5 -66.9 -38.3%Bank levy -8.4 -7.2 -1.2 +16.5%Operating profit before risk costs 99.1 167.2 -68.1 -40.7%Provisions and impairment losses -36.3 -35.6 -0.7 +2.0%Share of the profit or loss of associates accounted for using the equity method

–

–

–

–

Profit before tax 62.9 131.7 -68.8 -52.3%Assets 14,425.3 16,613.6 -2,188.3 -13.2%Refinancing of business 3,888.4 4,214.2 -325.7 -7.7%Risk-weighted assets (total RWA) 7,343.0 9,043.9 -1,700.9 -18.8%

The reduction of the profit for the period from EUR 131.7 million to EUR 62.9 million is the result of a decline in operating income mainly due to increased refinancing costs.


130130


International Business

The International Business segment covers credit activities in the areas of International Corporates and International Commercial Real Estate. Our spectrum here is rounded out by selective transactions with international key accounts under a pre-defined and conservative risk profile. International Business focuses primarily on Western Europe.

The credit portfolio of International Business was expanded in 2012, and core revenues rose from EUR 84.9 million to EUR 101.1 million. The strict requirements for risk-adjusted yields were also met. Investment-grade customers currently make up 79 per cent of the portfolio. Increased refinancing costs were also a major factor in the 2012 financial year.

Pre-defined, strict credit and concentration risk limits that are significantly below the regulatory threshold lead to reduced transaction and concentration risks. These measures are reflected in low risk costs: No loan loss provisions were needed in 2012.

74.284.9

101.1

59.3 64.975.7

Core revenues

Operatingprofi t

3,435

2,922

1,847

Assets

in millions of EUR

2010 2011 2012

131


131


in millions of Euros 2012 2011 ChangeNet interest income 84.5 75.7 8.8 +11.6%Net fee and commission income 16.7 9.2 7.5 +81.1%Core revenues 101.1 84.9 16.2 +19.1%Gains and losses on financial assets and liabilities -4.1 2.3 -6.4 –Other operating income (expenses) – – – –Operating income 97.1 87.2 9.8 +11.3%Administrative expenses -19.9 -20.5 0.6 -2.8%Depreciation and amortisation on tangible and intangible non-current assets

-1.4

-1.8

0.3

-19.2%

Operating expenses -21.4 -22.3 0.9 -4.1%Operating profit before bank levy 75.7 64.9 10.7 +16.5%Bank levy -2.0 -1.3 -0.7 +57.7%Operating profit before risk costs 73.7 63.7 10.0 +15.7%Provisions and impairment losses – – – –Share of the profit or loss of associates accounted for using the equity method

–

–

–

–

Profit before tax 73.7 63.7 10.0 +15.7%Assets 3,434.5 2,922.3 512.2 +17.5%Refinancing of business 0.3 0.1 0.1 +96.0%Risk-weighted assets (total RWA) 3,262.0 2,923.3 338.7 +11.6%


132132


Financial Markets

The Financial Markets segment boosted its operating profit from EUR 0.9 million to EUR 48.8 million in the reporting period – in large part as a result of the significantly lower credit spreads in the investment books and the more positive development of the income generated by the trading books.

BV Vermögensverwaltung GmbH is still assigned to this segment.

in millions of Euros 2012 2011 ChangeNet interest income 14.6 15.6 -1.0 -6.6%Net fee and commission income 2.1 2.7 -0.6 -21.3%Core revenues 16.7 18.3 -1.6 -8.7%Gains and losses on financial assets and liabilities 67.9 16.5 51.3 >+100%Other operating income (expenses) – – – –Operating income 84.6 34.8 49.7 >+100%Administrative expenses -33.3 -31.2 -2.1 +6.6%Depreciation and amortisation on tangible and intangible non-current assets

-2.4

-2.7

0.3

-9.9%

Operating expenses -35.7 -33.9 -1.8 +5.3%Operating profit before bank levy 48.8 0.9 48.0 >+100%Bank levy -10.7 -8.7 -2.1 +23.8%Operating profit before risk costs 38.1 -7.8 45.9 –Provisions and impairment losses – – – –Share of the profit or loss of associates accounted for using the equity method

–

–

–

–

Profit (loss) before tax 38.1 -7.8 45.9 –Assets 4,249.6 4,760.6 -511.0 -10.7%Refinancing of business – – – –Risk-weighted assets (total RWA) 1,292.0 1,275.3 16.7 +1.3%

16.8 18.3 16.710.2

0.9

48.8

Core revenues

Operatingprofi t

4,250

4,761

4,464

Assets

in millions of EUR

2010 2011 2012

133


133


The Corporate Center/ALM segment primarily covers asset and liability management, funding portfolios, equity capital investments, further central portfolios and the structured credit portfolio.

This segment includes equity holdings that do not directly support the Bank’s segments as well as consolidation effects and translation items to compensate for valuation and reporting differences between the segment accounts and the Profit or Loss Statement.

In addition, carrying amount write-downs, including the complete write-off of the remaining carrying amount of the stake in MKB, are assigned to this segment.

The increased administrative expenses include costs from restructuring, which are assigned to this segment.

in millions of Euros 2012 2011 ChangeNet interest income 39.3 72.0 -32.8 -45.5%Net fee and commission income -52.6 -57.2 4.6 -8.1%Core revenues -13.3 14.9 -28.1 –Gains and losses on financial assets and liabilities 49.8 -5.3 55.1 –Other operating income (expenses) 8.8 34.8 -26.1 -74.8%Operating income 45.3 44.4 0.9 +2.1%Administrative expenses -14.4 -6.7 -7.8 >+100%Depreciation and amortisation on tangible and intangible non-current assets

-14.2

-19.5

5.2

-26.9%

Operating expenses -28.6 -26.1 -2.5 +9.6%Restructuring costs -43.2 -20.3 -22.9 >+100%Operating profit before bank levy -26.5 -2.0 -24.5 >+100%Bank levy – – – –Operating profit before risk costs -26.5 -2.0 -24.5 >+100%Provisions and impairment losses -58.8 -66.0 7.2 -10.9%Share of the profit or loss of associates accounted for using the equity method

1.5

0.3

1.2

>+100%

Loss before tax -83.8 -67.7 -16.1 +23.8%Assets 12,119.0 9,789.7 2,329.2 +23.8%Refinancing of business 18,054.5 17,630.5 424.1 +2.4%Risk-weighted assets (total RWA) 4,884.8 6,122.4 -1,237.6 -20.2%


134134


The gains and losses on financial assets and liabilities are driven primarily by strategic positions and valuation results in the structured credit portfolio. Furthermore, this position includes valuation results for our issued securities.

The provisions and impairment losses include loan loss provisions in subsidiaries as well as impairments of equity investments. The segment’s administrative expenses include expenses accrued in subsidiaries allocated to this segment and central items such as from overall Bank projects.

The segment result is reconciled with the consolidated Profit or Loss Statement as follows:

in millions of Euros 2012 2011Gains and losses on financial assets and liabilities according to segment report

128.9

31.5

Gains and losses on financial assets attributable to non-controlling interests

26.3

-6.4

Gains and losses on financial assets and liabilities according to consolidated Profit or Loss Statement

155.2

25.1

in millions of Euros 2012 2011Other operating income and expenses according to segment report 10.8 38.4Bank levy -25.3 -20.2Other operating income and expenses according to consolidated Profit or Loss Statement

-14.5

18.2

in millions of Euros 2012 2011Profit before tax according to segment report 110.1 135.8Gains and losses on financial assets attributable to non-controlling interests

26.3

-6.4

Profit before tax according to consolidated Profit or Loss Statement 136.5 129.4

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Capital Management

The Austrian Banking Act (BWG) requires the Bank, in accordance with the recommendations of the Basel Committee and the applicable EU directive, to maintain a minimum amount of own funds that is calculated on the basis of its risk-weighted assets. The capital management system employed by BAWAG P.S.K. is based on own funds as defined by BWG and the Internal Capital Adequacy Assessment Process (ICAAP) capital management approach.

The ICAAP of BAWAG P.S.K. is modelled taking into account the Bank’s business and risk profile and is an integral part of the planning and control system. In the course of the ICAAP, the risk-bearing capacity of the Bank is ensured and the efficient use of capital for risk coverage monitored. Semi-annual stress tests based on regulatory and economic criteria round out the management process. As part of the JRAD (Joint Risk Assessment and Decision) process, the overall bank risk management process of BAWAG P.S.K. Group was reviewed in detail. The results of the analysis confirmed that BAWAG P.S.K. holds an appropriate level of own funds for its current financial situation and risk profile. This also included the specification of an SREP (Supervisory Review and Evaluation Process) ratio, which requires the maintenance of a minimum total capital ratio in pillar 1 to meet the requirements for pillar 2. The supervisory own funds are broken down into the three categories Tier I to III in accordance with their quality, and there are recognition limits for Tier II and III.

BAWAG P.S.K. continually monitors its compliance with the stipulated own funds ratios on the basis of the notifications sent to Oesterreichische Nationalbank (the Austrian national bank) at the end of every month and on the basis of current business developments.

The budgeted business volumes are also compared with the expected changes in the eligible own funds at the beginning of every financial year. In addition to the risk-weighted assets, the calculation also includes the own funds requirement for the securities trading book (using an internal value-at-risk model including stress) and the own funds requirement to cover operational risk. Besides regulatory capital management, capital limits are assigned to the business segments based on their planning as part of the ICAAP process.

The Bank employs a centralised capital management system. The main responsibilities of this function are to continuously monitor the development of the Bank’s business, to analyse changes in its risk-weighted assets and to reconcile these assets with the available regulatory own funds or the ICAAP limit and utilisations for each segment. In addition to adding FX and downgrade sensitivity analyses to the monthly reporting, an increased level of benchmark analyses is also being used. Another focus is the implementation of the CRR I regulations. CRR I (Capital Requirements Regulation) is an EU regulation that will define new regulatory requirements. It is directly legally binding without transposition into national law and therefore harmonised throughout the EU. In particular, CRR I includes regulations regarding components of the equity capital, capital requirements, large exposures, liquidity reporting, leverage, disclosure and transitional provisions. BAWAG P.S.K. has already included essential parts of the CRR I criteria in its capital management. The Capital Management Team gives recommendations to the Managing Board for increasing the own funds coverage when necessary and reports to the Enterprise Risk Meeting once a month. A structured process in the Bank ensures the continued proactive optimisation of capital adequacy. In particular, this includes a cross-division programme for the efficient claiming of RWA. This promotes systematic technical improvements and closely coordinates possible optimisation measures with the responsible operational units. The newly established RWA Desk also supports the business units with technical issues and provides well-founded individual analyses for large-scale credit applications.


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The following table shows the breakdown of the Group’s own funds and its own funds requirement pursuant to BWG:

in millions of Euros 31.12.2012 31.12.2011Share capital, participation capital 800 800Reserves (including fund for general banking risks, goodwill and deductions)

1,102

675

Less shareholdings held for investment purposes -39 -34Minorities 404 378Hybrid capital 142 404Tier I (Tier I capital including minorities and hybrids) 2,409 2,223Reserve under § 57 BWG, revaluation reserve 44 59Supplementary and subordinated debt capital 405 537Additional items (Tier II) 449 596Less shareholdings held for investment purposes -39 -34Eligible own funds 2,819 2,785Tier III 16 80Own funds 2,835 2,865

Our own funds compared with the following own funds requirement:

Credit risk 1,503 1,641Market risk 16 80Operational risk 130 136Capital requirements 1,649 1,857

The core capital ratio (Tier I ratio) based on total risk of 11.7 per cent (2011: 9.6 per cent based on total risk) and the own funds ratio of 13.8 per cent (2011: 12.3 per cent based on total risk) are well above the legally stipulated minimum requirements of 4 per cent and 8 per cent, respectively.

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Further Disclosures Required by IFRS

34 | Fair value

The following table depicts the fair values of the Statement of Financial Position items. These are the amounts for which assets could have been exchanged, or liabilities settled, between knowledgeable, willing parties in an arm’s length transaction on the reporting date. If market prices were available on a stock exchange or other functioning market, they were used.

If no current, liquid market values were available, generally accepted, standard methods of measurement were used. This applies to the category liabilities evidenced by paper (issued by BAWAG P.S.K.), structured credit transactions for which there are no active markets, and, in individual cases, other current financial assets in the Bank’s trading portfolio where the valuation of plain vanilla securities was performed on the basis of the yield curve plus the current credit spread.

The measurement to fair value of customers’ business was carried out by applying credit spreads for each customer category. The blanket credit spreads are applied per currency for the following customer categories: credit institutions, commercial customers, public sector and private customers, for which mortgage loans and other loans are considered separately. The credit spreads in customer business are derived by analysing both external data (market developments and OeNB statistics) and margin statistics.

Linear derivative financial instruments containing no optional components (such as interest rate swaps, currency forwards and futures) were also recognised using a present value technique (discounting of future cash flows applying the current swap curve).

Optional instruments were measured using option price models such as Black-Scholes (swaptions, caps, floors), Garman-Kohlhagen (currency options) or the Hull-White model (swaps with multiple cancellation rights), which were implemented and applied consistently in the front office systems.

The basic parameters on which the models are based (yield curves, volatilities and exchange rates) are input into the system by the Market Risk unit independently of the Treasury division, which ensures the separation of front office functions from back office processing and control.

For more complex derivatives that are held for hedging purposes and that are concluded back to back, external valuations are obtained by the Market Risk unit in isolated cases and input into the systems for correct processing.

Standard providers such as Bloomberg (spreads from benchmark bonds) and Markit (to evaluate the term structure) are used to evaluate the spreads of issued securities recognised at fair value through profit or loss. The securities prices for BAWAG P.S.K. issues are then calculated by discounting the swap curve adapted by the spread.

In 2012, the portion of change in fair values of securities issued by BAWAG P.S.K. accounted for solely by changes in our credit spreads (following the netting of asset and liability portfolios) was EUR -132 million (EUR +86 million as of 31 December 2011). As of 31 December 2012 the cumulative fair value change resulting from changes in our credit rating amounted to EUR 86 million (EUR 218 million as of 31 December 2011).

In the year thereafter, a one basis point narrowing of the credit spread is expected to change their fair value by EUR -0.6 million.


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The cumulative fair value change of receivables recognised at fair value through profit or loss that was recognised due to changes in our credit rating amounted to EUR +4 million as of 31 December 2012 (EUR -4 million as of 31 December 2011).

In the year thereafter, a one basis point narrowing of the credit spread is expected to impact their fair value by EUR +0.2 million.

Fair Values of Selected Items on the Statement of Financial Position

The following table depicts a comparison of the carrying amounts and fair values for selected items on the Statement of Financial Position.


12/2012

Fair Value 12/2012

Carrying amount

12/2011

Fair Value 12/2011

AssetsCash reserves 481 481 616 616Financial assets designated at fair value through profit or loss

1,401

1,401

1,749

1,749

Available-for-sale financial assets 6,810 6,810 6,482 6,482Assets held for trading 1,839 1,839 2,343 2,343Loans and receivables 29,744 29,872 28,887 29,048Hedging derivatives 192 192 127 127Tangible non-current assets 181 n/a 191 n/a

Thereof investment properties 6 8 18 24Intangible non-current assets 173 n/a 193 n/aOther assets 444 n/a 489 n/aTotal assets 41,265 41,077Equity and liabilitiesFinancial liabilities designated at fair value through profit or loss

4,324

4,324

4,468

4,468

Liabilities held for trading 2,269 2,269 2,770 2,770Financial liabilities designated at amortised cost 30,602 30,774 30,615 30,737Hedging derivatives 164 164 64 64Provisions 484 n/a 413 n/aOther obligations 584 n/a 419 n/aEquity 2,445 n/a 1,962 n/aNon-controlling interests 393 n/a 366 n/aTotal equity and liabilities 41,265 41,077

The Available-for-sale financial assets include equity investments in the amount of EUR 123 million (2011: EUR 164 million). The carrying amount was used as the fair value because a market value cannot be determined reliably.

The carrying value of the claim against the City of Linz is included under Loans and receivables in the table above and corresponds to the fair value.

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Fair Value Hierarchy

The following table depicts an analysis of the financial instruments recognised at their fair values on the basis of the fair value hierarchy in IFRS 7. The breakdown consists of the following groups: Level 1: The value of financial instruments is measured using a quoted price without adjustment. This includes

government bonds, bonds with quoted prices and exchange-traded derivatives; Level 2: The value is measured by using input factors (default rates, costs, liquidity, volatility, interest rates, etc.)

to derive values from quoted prices (Level 1). This pertains to prices that are calculated using internal models or using valuation methods, as well as to external price quotes for securities that are traded on markets with limited liquidity and that are demonstrably based on observable market prices. This category includes a large share of the structured credit portfolio. It also includes the majority of the OTC derivative contracts, corporate bonds and other bonds for which no quoted price is available, as well as the majority of the Group’s own issues that are recognised at their fair values;

Level 3: The measurement is based on unobservable input factors that have a material influence on the market value. This pertains primarily to illiquid structured securitisation instruments whose value is determined by unobservable assumptions (the outcome of litigation, investor decisions, trigger events, etc.) as well as own issues of BAWAG P.S.K. Wohnbaubank;

Other: This pertains to stakes in non-consolidated subsidiaries that are classified as available for sale.

in millions of Euros Level 1 12/2012

Level 2 12/2012

Level 3 12/2012

Other1) 12/2012

Total 12/2012

AssetsFinancial assets designated at fair value through profit or loss

149

1,152

100

–

1,401

Available-for-sale financial assets 6,656 31 – 123 6,810Assets held for trading 1 1,838 – – 1,839Hedging derivatives – 191 – – 191Total assets 6,806 3,212 100 123 10,241LiabilitiesFinancial liabilities designated at fair value through profit or loss

46

3,657

621

–

4,324

Liabilities held for trading – 2,268 – – 2,268Hedging derivatives – 164 – – 164Total liabilities 46 6,089 621 – 6,756

1) Investments in equity that are measured at cost in accordance with IAS 39.AG80-81 because their fair value cannot be measured reliably.


140140


in millions of Euros Level 1 12/2011

Level 2 12/2011

Level 3 12/2011

Other1) 12/2011

Total 12/2011

AssetsFinancial assets designated at fair value through profit or loss

241

1,418

90

–

1,749

Available-for-sale financial assets 6,258 63 – 161 6,482Assets held for trading 22 2,321 – – 2,343Hedging derivatives – 127 – – 127Total assets 6,521 3,929 90 161 10,701LiabilitiesFinancial liabilities designated at fair value through profit or loss

64

4,323

81

–

4,468

Liabilities held for trading 158 2,612 – – 2,770Hedging derivatives – 64 – – 64Total liabilities 222 6,999 81 – 7,302

1) Investments in equity that are measured at cost in accordance with IAS 39.AG80-81 because their fair value cannot be measured reliably.

The changes in financial instruments in the Level III category were as follows:

in millions of Euros Financial assets

Financial liabilities

Opening balance as of 1.1.2012 90 -81Gains and losses in profit and loss

for assets held at the end of the period 16 –for assets no longer held at the end of the period 1 –

Redemptions/Sales -17 81Foreign exchange differences -5 –Transfers into or out of Level 3 15 621Closing balance as of 31.12.2012 100 621

in millions of Euros Financial assets

Financial liabilities

Opening balance as of 1.1.2011 106 -90Gains and losses in profit and loss

for assets held at the end of the period -5 21for assets no longer held at the end of the period 3 –

Redemptions/Sales -63 –Foreign exchange differences 3 -11Transfers into or out of Level 3 46 –Closing balance as of 31.12.2011 90 -81

Movements in Level 3 Financial Instruments Measured at Fair Value

Holdings in the amount of EUR 17 million that were reported as Level 3 financial instruments on 31 December 2011 were disposed of in the financial year 2012. On the other hand, structured securities and own issues of BAWAG P.S.K. Wohnbaubank were assigned to Level 3 for which unobservable parameters were used in calculating fair values in 2012 because of changed market conditions for long-term bonds in 2012. The financial liabilities reported under Level 3 in 2011 were disposed of entirely.

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Sensitivity Analysis of Unobservable Parameters

If the value of financial instruments is dependent on unobservable input parameters, the precise level for these parameters could be drawn from a range of reasonably possible alternatives. If these unobservable parameters are moved to the outer range as of 31 December 2012, it could have increased fair value by EUR +35 million (31 December 2011: EUR +33 million) or decreased fair value by EUR -12 million (31 December 2011: EUR -18 million). The main factors that were varied in estimating these impacts were the probabilities of default and, in the prior year, also the expected redemption dates of own issues.

35 | Receivables from and payables to subsidiaries and associates

BAWAG P.S.K. Group’s receivables from and payables to non-consolidated subsidiaries and associates were as shown below. Business relationships with these entities were subject to normal banking terms and conditions.

Receivables from and payables to subsidiaries

in millions of Euros 31.12.2012 31.12.2011Receivables from customers 151 232Receivables from subsidiaries 151 232Payables to customers 22 23Payables to subsidiaries 22 23Other obligations 48 48

This table only depicts receivables and payables (no securities).

Interest income from business with subsidiaries in 2012 totalled EUR 6 million (2011: EUR 8 million) and interest expenses EUR 3 million (2011: EUR 1 million).

Receivables from and payables to associates

in millions of Euros 31.12.2012 31.12.2011Receivables from customers 177 262Receivables from associates 177 262Payables to credit institutions – 1Payables to customers 59 40Payables to associates 59 41

This table only depicts receivables and payables (no securities).


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36 | Related parties

Owners of BAWAG P.S.K.

99.62 per cent BAWAG Holding GmbH 0.38 per cent Pa-Zweiundsechzigste WT Beteiligungsverwaltungs GmbH

Pa-Zweiundsechzigste WT Beteiligungsverwaltungs GmbH is a 100 per cent subsidiary of BAWAG Holding GmbH. All shares in Pa-Zweiundsechzigste WT Beteiligungsverwaltungs GmbH are held for BAWAG Holding GmbH by a trustee. A company that is controlled by Cerberus Capital Management, L.P. (Cerberus) and a company that is controlled by GoldenTree Asset Management LP (GoldenTree) each directly hold one share in the Bank, which confers them the right to appoint six members (in the case of Cerberus) and one member (in the case of GoldenTree) to the Supervisory Board of the Bank.

BAWAG Holding GmbH is wholly owned by the Dutch financial holding company Promontoria Sacher Holding N.V., which is in turn wholly owned by the Dutch financial holding firm Promontoria Sacher Coöperatie U.A. as of the reporting date. The latter is wholly owned by BAWAG Investor Holdings Ltd., which is domiciled on the Cayman Islands.

The shareholder structure of BAWAG Investor Holdings Ltd. is as follows: (i) 51.78 per cent is held by various funds that are connected with Cerberus and that, like Cerberus, are under the ultimate control of Stephen A. Feinberg, (ii) 39.46 per cent is held by various funds and customer accounts that are managed by GoldenTree and that are under the ultimate control of Steven A. Tananbaum, and (iii) the remaining shares are held by other entities, including Österreichische Post AG, Generali Holding Vienna AG and Wüstenrot Wohnungswirtschaft registrierte Genossenschaft mit beschränkter Haftung.

It is planned to streamline the shareholder structure in the first quarter of 2013 by eliminating the intermediate holding companies Promontoria Sacher Coöperatie U.A. and BAWAG Investor Holdings Ltd.

The Bank also has business dealings with the following companies, which are related to Cerberus and/or GoldenTree: Ableco Finance LLC (syndicate relationship, consortium leader/collateral agent) Antoinette Holding Ltd. (contractual relationship) BAWAG Holding GmbH (current account, time deposit, master of tax group) Cerberus Operations and Advisory Company, LLC (consultant)

Subsidiaries, Joint Ventures and Equity Investments of BAWAG P.S.K.

BAWAG P.S.K. Versicherung AG

BAWAG P.S.K. indirectly holds 25 per cent plus one share of BAWAG P.S.K. Versicherung AG, Vienna. The majority of this company is owned by Generali Group. BAWAG P.S.K. Versicherung AG is accounted for using the equity method in BAWAG P.S.K. Group’s accounts. The business dealings between BAWAG P.S.K. and BAWAG P.S.K. Versicherung AG cover securities accounts and current accounts, all of which are offered at standard market terms. The business relations between BAWAG P.S.K. and Generali are governed by contracts with standard market terms, including a cooperation agreement, a license agreement, a commission agreement and others.

Omnitec Informationstechnologie-Systemservice GmbH

BAWAG P.S.K. holds 50 per cent of Omnitec Informationstechnologie-Systemservice GmbH, Vienna, through one of its subsidiaries. The remaining 50 per cent are owned by Österreichische Post AG. The business of this company is the planning, installation and operation of a uniform IT system for the BAWAG P.S.K. outlets offering postal services. The applications in this system can be used by the postal service and by BAWAG P.S.K. In addition to ensuring that the best possible support can be provided at all times, a key focus for Omnitec has been the branch offensive project.

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BAWAG Allianz Vorsorgekasse AG

Half of this company is owned by BAWAG P.S.K. Group and half by Allianz Elementar Versicherungs-Aktiengesellschaft. The assets under management totalled approximately EUR 757 million at the end of 2012, and are managed in equal parts by BAWAG P.S.K. Invest GmbH and Allianz Investmentbank Aktiengesellschaft at standard market terms.

Associated but Not Consolidated Companies in the Real Estate Group and in the Leasing Group

The following companies are indirect 100 per cent subsidiaries of BAWAG P.S.K., which are immaterial, individually and as a whole, to the consolidated financial statements: BAWAG Leasing & Fleet Kft, Budapest (Hungary) BAWAG Leasing & Fleet Sp. z o.o., Warsaw (Poland) BAWAG Leasing & fleet s.r.o., Prague (Czech Republic) BAWAG Leasing & Fleet s.r.o., Bratislava (Slovakia) BAWAG Leasing Zrt., Budapest (Hungary) BAWAG Real Estate Leasing s.r.o., Prague (Czech Republic) BAWAG Leasing s.r.o., Bratislava (Slovakia) BPLCZ One s.r.o., Prague (Czech Republic) Gara RPK Grundstücksverwaltungsgesellschaft m.b.H., Vienna PT Immobilienleasing GmbH, Vienna REAL ESTATE Leasing s.r.o., Bratislava (Slovakia) IDG Immobilien Development Gesellschaft m.b.H. & Co KG, Vienna Ingebe Immobilienhandels- und Vermittlungs–GmbH in Liqu., Vienna Plato Grundstücksverwertung GmbH in Liqu., Vienna

Each of the following leasing companies is held indirectly by BAWAG P.S.K. and one cooperation partner: Kommunalleasing GmbH, Vienna (50 per cent), Realplan Beta Liegenschaftsverwaltung Gesellschaft m.b.H., Vienna (50 per cent), HFE alpha Handels-GmbH, Linz (50 per cent), VB Real Estate Leasing Uriah GmbH, Vienna (45 per cent), Fides Leasing GmbH, Vienna (50 per cent) and Generali Leasing GmbH, Vienna (25 per cent).

The real estate company B.A.O. Immobilienvermietungs GmbH, Vienna, is held together with two cooperation partners; each owner has a one-third stake.

The leasing companies that are majority owned by BAWAG P.S.K. have been refinanced without risk premiums or profit margins so far. Administrative costs are assessed against their respective project companies by BAWAG P.S.K. Leasing GmbH and by BAWAG P.S.K. IMMOBILIEN GmbH for their management.

Foreign Companies

The liquidation proceedings for Polestar Limited, Dublin, and Shrivenham Limited, Dublin, were completed successfully. Both companies were deleted from the register of companies at the beginning of 2012.

The liquidation of BAWAG P.S.K. Capital Advisors Ltd., London, is still under way.

Among others, the following companies are not consolidated: Vindobona Alpha S.a.r.l. (Luxembourg, 100 per cent); this company was established to provide private health insurance

for foreign employees and for some Managing Board members of BAWAG P.S.K. and their family members. BAWAG P.S.K. Equity Finance Limited (Jersey, 100 per cent; is not conducting business at this time)


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Other Contractual Relationships with Related Entities

BAWAG P.S.K. has fully indemnified Plato Grundstücksverwertung GmbH, Vienna, against any damages resulting from third-party claims, lawsuits or financial losses; claims were asserted under this guarantee in 2012.

Private Equity and Venture Capital Companies

In addition to a number of non-controlling interests, this also includes the 50 per cent interest in Athena Wien Beteiligungen AG and the 100 per cent interest in uni venture Beteiligungs AG, Vienna.

The business dealings between these companies and BAWAG P.S.K. are conducted at arm’s length terms with the following exception: No personnel charges are assessed against uni venture for work completed by BAWAG P.S.K. employees for the company.

MKB Bank Zrt.

As of 31 December 2012, P.S.K. Beteiligungsverwaltung GmbH held 1.86 per cent of MKB Bank Zrt., Budapest (majority shareholder: BayernLB). In addition to this, Antoinette Holding Ltd., a company controlled by Cerberus Capital Management, L.P., held a stake of 0.06 per cent as of 31 December 2012.

paysafecard.com Wertkarten AG

BAWAG P.S.K. holds 11.24 per cent of paysafecard.com Wertkarten AG, Vienna, the parent company of the internationally active Paysafecard Group, which specialises in prepaid payment solutions. Androsch Privatstiftung holds approximately 35 per cent of the shares. An agreement for the sale of paysafecard.com Wertkarten AG was signed at the end of June 2012; all shareholders are selling their shares.

In February 2013 the sales process was finalised through the closing.

PayLife Bank GmbH

PayLife Bank GmbH spun off its debit issuing support and ATM acquiring activities into a new company (NewCo), which was newly established for this purpose in 2011. The carve-out was entered into the register of companies on 19 June 2012. In addition, NewCo (which is now operating under the name PSA Payment Services Austria GmbH) was granted a Payment Services Act license, which it needs to engage in its business activities.

The efforts to sell the remaining Paylife Bank GmbH (PayLife new) are at an advanced stage. After the balance sheet date, the former owners accepted the notarial offer of purchase. The further procedure according to the shareholders’ agreement (pre-emption right and tag along right) has been commenced and remains to be seen.

The closing of the transaction is further conditioned upon clearance by the Austrian Cartel Court and the Financial Market Authority (FMA).

BWA Beteiligungs- und Verwaltungs-Aktiengesellschaft

BAWAG P.S.K. has a 3.88 per cent interest in the company, which owns a 95 per cent stake in Bausparkasse Wüstenrot Aktiengesellschaft, Salzburg.

BAWAG P.S.K. exclusively sells building association savings products from Bausparkasse Wüstenrot AG through its distribution networks on the basis of a cooperation agreement.

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The Members of the Managing Board, the Supervisory Board and Key Management Personnel

Expenses for remuneration relating to active members of the Managing Board during the financial year amounted to EUR 7,546 thousand (2011: EUR 8,589 thousand), including allocations accrued in 2012 for retention plans that will possibly be paid out in the following years. No bonus payments will be paid out to the members of the Managing Board for the 2012 financial year. Expenses for post-employment benefits for former members of the Managing Board and their surviving dependants came to EUR 1,842 thousand (2011: EUR 1,659 thousand).

Expenditures for severance pay and post-employment benefits for the Managing Board and key management personnel came to EUR 16,633 thousand (2011: EUR 7,809 thousand). Expenditures with respect to other employees came to EUR 52,117 thousand (2011: EUR 30,332 thousand). In both categories, the changes compared to the prior year were mainly caused by a reduction in the discount rate for social capital.

At 31 December 2012, contractual agreements governing the payment of contributions to pension funds were in force for all Managing Board members.

As of the reporting date, there was no outstanding loan but one bank guarantee (lease deposit) to a member of the Managing Board in the amount of EUR 10 thousand (2011: EUR 44 thousand). Loans to members of the Supervisory Board totalled EUR 21 thousand (2011: EUR 25 thousand). Repayments of loans granted to board members took place as contractually agreed.

Furthermore, Managing Board members did not make use of current account limits as of the reporting date. In total, the current account limits made use of by members of the Supervisory Board amount to EUR 7 thousand (2011: EUR 26 thousand). Turnovers of credit cards guaranteed to third parties by the Bank that belong to Managing Board members amounted to EUR 11 thousand in December 2012 (2011: EUR 6 thousand). Turnovers of guaranteed credit cards that belong to members of the Supervisory Board amounted to EUR 3 thousand in December 2012 (2011: EUR 1 thousand).

A list of the Bank’s Boards and Officers can be found in an appendix to the Notes.

Not all managerial staff are entitled to post-employment benefits from the Bank. The managerial employees who are entitled to post-employment benefits from the Bank were awarded these entitlements under the provisions of the 1961 pension reform or on the basis of individual commitments by the Bank. All employees are entitled to pension benefits from a pension fund under the provisions of the collective bargaining agreement for pension funds.

The following breakdown depicts the business relations with related individuals and their family members. All business is conducted at standard industry and group terms for employees or at standard market terms.

in thousands of Euros 31.12.2012 31.12.2011Current account deposits 5,533 3,170Savings deposits 3,864 6,513Loans 2,385 2,255Leasing 144 107

The remuneration scheme for Supervisory Board members approved at the Annual General Meeting stipulates that the Chairman of the Supervisory Board shall receive EUR 60,000 per calendar year, the Deputy Chairman shall receive EUR 40,000 per calendar year and the members of the Supervisory Board selected at the Annual General Meeting shall each receive EUR 30,000 per calendar year. The chairmen of the Risk and Credit and Audit and Compliance Committees each receive EUR 20,000 and all other members of the Risk and Credit and Audit and Compliance Committees each receive EUR 10,000 (these additional compensation measures do not apply for the Chairman of the Supervisory Board). Remuneration of members of the Supervisory Board came to EUR 283 thousand in 2012 (2011: EUR 290 thousand). Works Council Delegates to the Supervisory Board do not receive any remuneration.


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Two members of the Supervisory Board have signed a consulting agreement with BAWAG P.S.K. AG which entitles them to remuneration of EUR 250 thousand per year in total.

On 28 July 2011, Managing Board members of BAWAG P.S.K. entered into a long-term incentive plan with BAWAG Holding GmbH, the direct majority shareholder of BAWAG P.S.K. The plan provides long-term incentive remuneration linked to the creation of shareholder value. The awards vest over a five-year period – 50 per cent linked to the Managing Board member’s continued employment and 50 per cent linked to the attainment of performance-based targets of BAWAG P.S.K. The conditions and ambitious objectives are such that the awards have no value at inception and as of the reporting date.

A similar plan was entered into in 2008 with BAWAG Holdings Coöperatie U.A., an affiliated company of BAWAG P.S.K. Group. This plan, which was transferred to BAWAG Holding GmbH in 2012, has largely vested and is currently considered to have no value.

37 | Assets pledged as collateral

in millions of Euros 31.12.2012 31.12.2011Receivables and securities assigned to Oesterreichische Kontrollbank AG 497 786Collateral pledged to the European Investment Bank 467 519Cover pool for trust savings deposits 32 38Cover pool for covered bonds 3,244 3,380Collateral for tender facilities 2,574 1,575Other collateral 28 28Assets pledged as collateral 6,842 6,326

38 | Total collateralised debt

The collateral listed in the table above corresponded to the following payables of BAWAG P.S.K.:

in millions of Euros 31.12.2012 31.12.2011Liabilities to Oesterreichische Kontrollbank secured with assigned receivables 497 786Payables arising due to refinancing by the European Investment Bank 482 462Trust savings deposits 25 30Payables secured by the cover pool for covered bonds 2,479 2,555Tender facilities 2,017 1,250Total collateralised debt 5,500 5,083

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39 | Genuine repurchase agreements

in millions of Euros 31.12.2012 31.12.2011Repurchaser – receivables from credit institutions 731 156Repurchaser – payables to credit institutions -86 -910Repurchase agreements 645 -754

40 | Transferred assets that are not derecognised in their entirety

in millions of EurosFinancial assets

designated at fair value through profit or loss

Total

Carrying amount of transferred assets1) 113 113Carrying amount of associated liabilities 86 86

1) All of the transferred assets are bonds.

Since BAWAG P.S.K. is still the owner of the transferred assets, it remains exposed to market, interest rate, currency and credit risk with regard to these assets. The transferred assets are blocked for sale and are not taken into account in the liquidity calculation.

41 | Subordinated assets

Line items on the assets side of the Statement of Financial Position included the following subordinated assets:

in millions of Euros 31.12.2012 31.12.2011Loans and receivables 9 26Subordinated assets designated at fair value through profit or loss 24 24Subordinated assets designated as available for sale 30 29Subordinated assets 63 79


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42 | Contingent assets, contingent liabilities and unused lines of credit

in millions of Euros 31.12.2012 31.12.2011Contingent assets 1 1Contingent liabilities 798 851Arising from guarantees 797 850Other contingent liabilities 1 1Unused lines of credit 5,815 6,773thereof terminable at any time and without notice 3,989 4,043thereof not terminable at any time 1,826 2,730

43 | Foreign currency amounts

BAWAG P.S.K. Group had assets and liabilities in the following foreign currencies on 31 December 2012:

in millions of Euros 31.12.2012 31.12.2011USD 1,546 2,050CHF 3,082 3,304JPY 136 225CZK 105 135Other 868 616Foreign currency 5,737 6,330EUR 35,528 34,747Total assets 41,265 41,077

in millions of Euros 31.12.2012 31.12.2011USD 741 1,180CHF 612 1,047JPY 491 527SKK - 43CZK 6 6Other 368 385Foreign currency 2,218 3,188EUR 39,047 37,889Total liabilities 41,265 41,077

This table includes only Statement of Financial Position items and provides no information about open currency positions due to off-balance hedging transactions.

149


149


44 | Leasing

The following table shows the reconciliation between gross investment value and present value, broken down according to maturity for all ongoing leasing contracts:


Up to 1 year 1–5 years Over

5 years Total

Total outstanding leasing instalments (gross investment value) 276 626 181 1,083As yet unrealised financial income 25 47 14 86Receivables from finance leases (net investment value) 251 579 167 997


Up to 1 year 1–5 years Over

5 years Total

Total outstanding leasing instalments (gross investment value) 283 591 213 1,087As yet unrealised financial income 32 62 19 113Receivables from finance leases (net investment value) 251 529 194 974

As of 31 December 2012 the non-guaranteed residual value amounts to EUR 63 million (2011: EUR 72 million).

Impairments recognised in respect of irrecoverable minimum lease instalments came to EUR 0.0 million (2011: EUR 0.0 million).


150150


45 | Derivative financial transactions

Derivative financial transactions as of 31.12.2012

in millions of EurosNominal amount/maturity* Fair value*

Up to 1year 1–5 years Over 5 years Total Positive NegativeInterest-rate related business 26,596 25,996 14,757 67,349 1,773 -1,420

Thereof interest rate swaps banking book 22,902 16,571 9,343 48,816 1,213 -929 interest rate options banking book 557 228 525 1,310 18 -16 forward rate agreements

banking book

23 –

–

23

–

–

interest rate swaps trading book 1,715 5,054 3,891 10,660 412 -350 interest rate options trading book 1,399 4,143 998 6,540 130 -125 forward rate agreements

trading book –

–

–

–

–

–

Currency related business 10,264 14,990 415 25,670 219 -964Thereof currency swaps banking book – 2,233 172 2,405 7 -473 foreign currency forward trans-

actions and options banking book

6,046

4,796

240

11,082

124

-175

currency swaps trading book – 1 3 4 – -1 foreign currency forward trans-

actions and options trading book

4,218

7,960 1

12,179

88

-315

Securities related business 417 1,718 362 2,497 37 -48Thereof securities related business

banking book

417

1,718

362

2,497

37

-48 securities related business

trading book –

–

–

–

–

–

Total 37,277 42,705 15,534 95,516 2,029 -2,432Thereof banking book business 29,945 25,547 10,641 66,133 1,399 -1,641 trading book business 7,332 17,159 4,893 29,384 630 -791

* Banking book derivatives include fair value hedging instruments.

The table above includes hedging transactions that were concluded for a derivative transaction with the City of Linz as well as transactions concluded to offset this position. The on-balance-sheet non-derivative claim of BAWAG P.S.K. against the City of Linz is not included in the table.

151


151


Derivative financial transactions as of 31.12.2011

in millions of EurosNominal amount/maturity* Fair value*

Up to 1year 1–5 years Over 5 years Total Positive NegativeInterest-rate related business 67,026 40,375 19,305 126,705 1,902 -1,459

Thereof interest rate swaps banking book 43,832 17,418 8,211 69,460 946 -581 interest rate options banking book 63 108 86 257 2 -2 forward rate agreements

banking book

20

100 –

120

1

-1

interest rate swaps trading book 6,197 13,088 8,253 27,539 764 -679 interest rate options trading book 15,943 9,468 2,755 28,166 190 -196 forward rate agreements

trading book

970

193 –

1,163

–

–

Currency related business 10,334 14,459 1,353 26,145 299 -1,098Thereof currency swaps banking book 287 1,030 166 1,483 6 -147 foreign currency forward trans-

actions and options banking book

1,581

12

302

1,894 9

-53

currency swaps trading book – 1,297 5 1,302 – -284 foreign currency forward trans-

actions and options trading book

8,466

12,120

881

21,466

284

-614

Securities related business 347 1,430 756 2,533 90 -120Thereof securities related business

banking book

197

844

476

1,517

67

-97 securities related business

trading book

150

586

280

1,016

23

-23

Total 77,706 56,263 21,414 155,383 2,290 -2,676Thereof banking book business 45,980 19,511 9,240 74,731 1,030 -881 trading book business 31,727 36,752 12,173 80,652 1,260 -1,795

* Banking book derivatives include fair value hedging instruments.


152152


46 | List of consolidated subsidiaries

The following table shows the consolidated subsidiaries of BAWAG P.S.K. Group:

Entities consolidated in accordance with IFRS as of 31.12.2012 Method of inclusion Stake

BanksBAWAG Malta Bank Limited, Sliema F 100.00%BAWAG P.S.K. Invest GmbH, Vienna F 100.00%BAWAG P.S.K. Wohnbaubank Aktiengesellschaft, Vienna F 100.00%easybank AG, Vienna F 100.00%Österreichische Verkehrskreditbank AG, Vienna F 100.00%

Real estateBAWAG P.S.K. IMMOBILIEN GmbH, Vienna F 100.00%BPI Holding GmbH & Co KEG., Vienna F 100.00%CARNI Industrie-Immobiliengesellschaft m.b.H., Vienna F 100.00%R & B Leasinggesellschaft m.b.H., Vienna F 100.00%RVG Realitätenverwertungsgesellschaft m.b.H., Vienna F 100.00%

LeasingBAWAG P.S.K. Fuhrparkleasing GmbH, Vienna F 100.00%BAWAG P.S.K. IMMOBILIENLEASING GmbH, Vienna F 100.00%BAWAG P.S.K. Kommerzleasing GmbH, Vienna F 100.00%BAWAG P.S.K. LEASING GmbH & Co. MOBILIENLEASING KG., Vienna F 100.00%BAWAG P.S.K. LEASING GmbH, Vienna F 100.00%BAWAG P.S.K. MOBILIENLEASING GmbH, Vienna F 100.00%BAWAG P.S.K. Vermietungs- und Leasing GmbH, Vienna F 100.00%CVG Immobilien GmbH, Vienna F 100.00%HBV Holding und Beteiligungsverwaltung GmbH, Vienna F 100.00%KLB Baulandentwicklung GmbH, Vienna F 100.00%M. Sittikus Str. 10 Errichtungs GmbH, Vienna F 100.00%P.S.K. IMMOBILIENLEASING GmbH, Vienna F 100.00%RF BAWAG Leasing Gesellschaft m.b.H., Vienna F 100.00%RF 17 BAWAG Immobilienleasing GmbH, Vienna F 100.00%RF fünfzehn BAWAG Mobilien-Leasing Gesellschaft m.b.H., Vienna F 100.00%RF sechs BAWAG P.S.K. LEASING GmbH & Co. KG., Vienna F 100.00%RF zwölf BAWAG Leasing Gesellschaft m.b.H., Vienna F 100.00%START Immobilienleasing GmbH, Vienna F 100.00%

153


153


Entities consolidated in accordance with IFRS as of 31.12.2012 Method of inclusion Stake

Other non credit institutionsA.U.S. Alpha Holding GmbH, Vienna F 100.00%A.U.S. Alpha Vermögensverwaltung GmbH, Vienna F 100.00%A.U.S. Beta Holding GmbH, Vienna F 100.00%A.U.S. Beta Vermögensverwaltung GmbH, Vienna F 100.00%A.U.S. Delta Holding GmbH, Vienna F 100.00%A.U.S. Delta Vermögensverwaltung GmbH, Vienna F 100.00%A.U.S. Gamma Holding GmbH, Vienna F 100.00%A.U.S. Gamma Vermögensverwaltung GmbH, Vienna F 100.00%BAWAG CAPITAL FINANCE II LIMITED, Jersey F 100.00%BAWAG CAPITAL FINANCE LIMITED, Jersey F 100.00%BAWAG Finance Malta Ltd., Sliema F 100.00%BAWAG Investments Ltd., Jersey F 100.00%BAWAG P.S.K. Jersey Capital Limited, Jersey F 100.00%BAWAG P.S.K. Versicherung AG, Vienna E 25.00%Bodensee Limited, Sliema F 51.00%BV Holding GmbH, Vienna F 100.00%BV Vermögensverwaltung GmbH, Vienna F 100.00%NAVENSIS Zahlungsverkehrsabwicklungs GmbH, Vienna F 100.00%P.S.K. Beteiligungsverwaltung GmbH, Vienna F 100.00%Rhein Limited, Grand Cayman F 51.00%Vindobona Finance Beta S.A., Luxembourg F 100.00%


154154


47 | List of subsidiaries and associates not consolidated due to immateriality

Entities not consolidated in accordance with IFRS as of 31.12.2012 Stake

BanksBAWAG Allianz Vorsorgekasse AG, Vienna 50.00%PayLife Bank GmbH, Vienna 20.82%

Real estateB.A.O. Immobilienvermietungs GmbH, Vienna 33.33%IDG Immobilien Development Gesellschaft mbH & Co KG, Vienna 100.00%Ingebe Immobilienhandels- u. Vermittlungs GmbH in Liqu., Vienna 100.00%Plato Grundstücksverwertungs GmbH in Liqu., Vienna 100.00%

LeasingBAWAG Leasing & fleet Kft, Budapest 100.00%BAWAG Leasing & fleet s.r.o., Bratislava 100.00%BAWAG Leasing & fleet s.r.o., Prague 100.00%BAWAG Leasing & fleet Sp. z o.o., Warsaw 100.00%BAWAG Leasing s.r.o., Bratislava 100.00%BAWAG Leasing Zrt., Budapest 100.00%BAWAG Real Estate Leasing s.r.o., Prague 100.00%BPLCZ One s.r.o., Prague 100.00%Fides Leasing GmbH, Vienna 50.00%Gara RPK Grundstücksverwaltungsgesellschaft m.b.H., Vienna 100.00%Generali Leasing GmbH, Vienna 25.00%HFE alpha Handels-GmbH, Linz 50.00%Kommunalleasing GmbH, Vienna 50.00%PT Immobilienleasing GmbH, Vienna 100.00%REAL ESTATE Leasing s.r.o., Bratislava 100.00%Realplan Beta Liegenschaftsverwaltung Gesellschaft m.b.H., Vienna 50.00%VB Real Estate Leasing Uriah GmbH, Vienna 45.00%

155


155


Entities not consolidated in accordance with IFRS as of 31.12.2012 Stake

Other non credit institutionsAI-ALTERNATIVE INVESTMENTS LTD., Jersey 100.00%Athena Burgenland Beteiligungen AG, Eisenstadt 38.30%Athena Vienna Beteiligungen AG, Vienna 50.00%Athena Zweite Beteiligungen GmbH, Vienna 33.33%AUSTOST ANSTALT, Balzers 100.00%BAWAG P.S.K. CAPITAL ADVISORS LTD. in Liqu., London 100.00%BAWAG P.S.K. Datendienst Gesellschaft m.b.H., Vienna 100.00%BAWAG P.S.K. Equity Finance Limited, Jersey 100.00%E-C-B Beteiligungsgesellschaft m.b.H., Vienna 50.00%Einlagensicherung der Banken und Bankiers Gesellschaft m.b.H., Vienna 61.68%LTB Beteiligungs GmbH, Vienna 25.10%MAP Handels GmbH, Vienna 95.84%media.at GmbH, Vienna 26.88%MediaSelect GmbH, Vienna 26.88%OmniMedia GmbH, Vienna 26.88%OMNITEC Informationstechnologie-Systemservice GmbH, Vienna 50.00%[email protected] GmbH, Vienna 26.88%P.S.K. Handel und Vermietung GmbH., Vienna 100.00%PSA Payment Services Austria GmbH, Vienna 20.82%uni venture Beteiligungs AG, Vienna 100.00%Vindobona Alpha S.à.r.l., Luxembourg 100.00%WBG Wohnen und Bauen Gesellschaft mbH Wien, Vienna 24.00%


156156


Risk Report

Introduction and Overview

Risk Management and the corresponding committees of BAWAG P.S.K. identify, measure, monitor and manage all risks to which BAWAG P.S.K. Group is exposed. At all organisational levels, Market and Risk are strictly separated. The Group is subject to the following risks that are addressed in risk management through clear monitoring and control processes:

Credit risk Market risk Liquidity risk Participation risk Operational risk

This risk report provides information on the Group’s positioning with regard to each of the risks listed above.

Risk Management – Risk Organisation

BAWAG P.S.K.’s Managing Board defines the Bank’s risk strategy, and the principles of risk management, limits for all material risks and procedures for monitoring these risks are documented in risk manuals and work guidelines. The Managing Board is informed of the overall risk situation and the situation regarding specific risks on a monthly basis, and quarterly risk reports are submitted to the Supervisory Board’s monitoring and control committees.

Risk management policies and systems are reviewed regularly to reflect changes in market conditions and in the products and services offered. Like last year, BAWAG P.S.K. Group’s risk management organisation consists of the following four units:

Corporate and Institutional Risk Credit Risk Private and Commercial Customers (includes operational risk) Market Risk (market-specific risks and liquidity risks) Risk Reporting (until 31 December 2012, Strategic Risk from 1 January 2013)

Specific Risks of BAWAG P.S.K. Group

48 | Credit risk

Credit risk is the general risk that a customer will not be able to meet its obligations. For risk management purposes, BAWAG P.S.K. considers and consolidates all elements of credit risk exposures, such as individual obligor or obligor group default risk, country risk and business segment risk. Risk concentrations such as a large number of loans denominated in foreign currencies and risk concentration in pledged collateral are also taken into account.

Operations in the divisions that are responsible for credit risk are set up to include a functional risk management specialisation for the commercial and institutional customer segment and the retail and SME segment. The aggregation of the individual risk indicators and periodic reporting are completed using a uniform process under the responsibility of the Risk Reporting division.

157


157


In the Retail segment, the creditworthiness of private customers and small and medium-sized enterprises is assessed by means of an automated scoring method. This consists of initial application scoring on the basis of proven and recognised mathematical and statistical models, and behavioural scoring on the basis of the customer’s account use that updates the customer’s credit rating every month.

No ratings are available from external agencies for the majority of BAWAG P.S.K.’s commercial customers. Before new commitments are made (or when existing commitments are to be expanded or risk assessments need to be updated), the borrower’s credit rating is assessed using an internal rating method for the customer’s specific business segment. The rating methods that have been developed by BAWAG P.S.K. for this are based on a broad spectrum of quantitative and qualitative factors. The specific risk categories from the uniform BAWAG P.S.K. master scale are assigned to the customer on this basis and represent its individual estimated probability of default.

All exposure components outside of the small-scale consumer segment that exist in BAWAG P.S.K. Group are aggregated at the customer and customer group level. Duties requiring that exposures be reported to the Managing Board and Supervisory Board are defined for customers/groups of affiliated customers by risk grades to identify the concentration of risk exposure.

Retail and Small Business Customers

Risk from new business is managed using clear, strict credit process guidelines. Decisions at the point of sale are mostly made on the basis of automated scoring systems that issue recommendations, or the decision is made in the back end by the risk division. A key focus in this portfolio is compliance with the process and ensuring high data quality. A central monitoring process ensures ongoing quality assurance.

The credit risk in retail business is measured monthly using the following methods: Portfolio trends in terms of risk class distribution Portfolio trends in terms of overdue/late payments Portfolio trends for defaulted credit facilities Portfolio trends in terms of losses Scorecard performance

– Approval rate – Manual decision cancellations of scoring

The findings of the analysis are reported monthly to the Enterprise Risk Meeting.

Independent of this process, risk-relevant data from standardised assessments at the regional level between market managers (sales directors) and risk management units (risk centres) are discussed and documented in monthly committee meetings. The recorded results are summarised and also discussed and analysed monthly in central committees.

This process ensures a regular and standard flow of information whilst also enabling the Bank to respond directly to changes in risk parameters and market conditions.

Valuation of Residential and Commercial Properties

The value of all residential properties in Austria is determined by the central real estate valuation department on the basis of a largely standardised method and using a valuation tool. Approximately 47,000 residential properties have been pledged to BAWAG P.S.K. as collateral. The periodic review and updating of the property values is automated on the basis of the changes in the real estate price index published by the Association of Real Estate and Asset Trustees of the Austrian Federal Economic Chamber (Fachverband der Immobilien- und Vermögenstreuhänder der Wirtschaftskammer Österreich).


158158


Commercial properties are appraised individually by experts in the central real estate valuation department, by selected external appraisers commissioned by the Bank or by a syndicate partner after an inspection of the property and completion of a full report. Approximately 2,700 commercial properties have been pledged to BAWAG P.S.K. as collateral.

Improvement and Refinement of the Scorecards and Rating Systems

After the improvements to the scorecards and rating systems in the previous period, the focus in 2012 was on the continuous application of the improved models, including the associated data collection.

No significant deviations between the expected and identified default rates were identified for the key PD estimation models, so no recalibrations were made.

Portfolio Development in 2012

The portfolio volume in the bank and public sector segments increased in 2012. The volume of loans to retail borrowers remained unchanged, while the portfolio volume in the remaining segments decreased.

Credit risk by customer segment as of 31.12.2012, in millions of Euros1)

SegmentBook value credits2) Bonds Off-balance

business Total risk

31.12.2012 31.12.2011 31.12.2012 31.12.2011 31.12.2012 31.12.2011 31.12.2012 31.12.2011

Banks 3,445 1,528 4,318 5,134 491 1,115 8,254 7,777 Public sector 7,532 6,182 1,225 1,383 568 510 9,325 8,075 Corporates 10,254 11,747 4,102 3,915 2,062 2,057 16,418 17,719 Small business 1,164 1,278 12 18 94 99 1,270 1,395 Retail private customers 5,704 5,703 – – 145 141 5,849 5,844 Others – 12 – – – – – 12 Total 28,099 26,450 9,657 10,450 3,360 3,922 41,116 40,822

1) Total risk includes book values and off-balance-sheet items like guarantees and committed but currently unutilised limits.2) Including fair value assets.

Number of customers by size (over EUR 100 thousand) as of 31.12.2012

24,000

22,000

20,000

18,000

16,000

14,000

12,000

10,000

8,000

6,000

4,000

2,000

0100–1,000 !5,000

1,375

!20,000 !50,000 !100,000 !500,000 "500,000

22,379

Exposure in thousands of Euros

414 178 72 60 4

Num

ber o

f cus

tom

ers

159


159


Total exposure by size (over EUR 100 thousand) as of 31.12.2012

Geographical distribution of the loan portfolio as of 31.12.2012, in millions of Euros

The overview shows the net exposure in each region by ultimate risk. The outstanding volumes are assigned to the actual country of risk (e.g. an export promotion loan that is guaranteed by the Republic of Austria is allocated to Austria).

30,000

25,000

20,000

15,000

10,000

5,000

0Austria Western Europe CEE North America Others

5,197

24,881

1,146 400 269

10,000

9,000

8,000

7,000

6,000

5,000

4,000

3,000

2,000

1,000

0100–1,000 !5,000 !20,000 !50,000 !100,000 !500,000 "500,000

4,931

Exposure in thousands of Euros

4,063

5,8115,106

9,406

4,531

Tota

l exp

osur

e in

mill

ions

of E

uros

3,020


160160


As shown in the chart above, the majority of BAWAG P.S.K. Group’s outstanding loans can be attributed to Austrian customers, followed by outstanding loans to Western European borrowers. Included within these are a small number of loans to borrowers in European countries with high budget deficits, which are shown in the following overview.

Credit portfolio in states with high budget deficits

in millions of EurosNet exposure Bank Non-bank Sovereign

31.12.2012 31.12.2011 31.12.2012 31.12.2011 31.12.2012 31.12.2011 31.12.2012 31.12.2011

Greece – 11 – – – – – 11 Ireland 141 70 10 40 132 30 – –Italy 445 729 334 585 94 144 17 –Portugal – – – – – – – –Spain 467 646 220 209 235 425 13 12

The decrease in the exposure to Greece can be attributed to the sale of Greek government bonds held by BAWAG P.S.K., which were classified as available for sale.

The credit portfolio in Central and Eastern Europe is not a focus of BAWAG P.S.K Group’s business operations.

Geographical distribution of the loan portfolio: CEE as of 31.12.2012

in millions of EurosNet exposure1) Bank Non-bank Sovereign

31.12.2012 31.12.2011 31.12.2012 31.12.2011 31.12.2012 31.12.2011 31.12.2012 31.12.2011

Slovenia 166 237 – 11 166 226 – –Slovakia 175 137 – – 97 100 78 37 Eurozone 341 374 – 11 264 327 78 37 Hungary 154 198 12 37 142 154 – 7 Czech Republic 110 184 2 6 70 135 38 43 Romania 8 62 – – 8 62 – –Poland 238 221 7 – 128 120 103 101 Latvia – – – – – – – –Estonia – 6 – – – 6 – –Bulgaria – – – – – – – –Non Eurozone 509 671 21 43 347 477 141 150 Russia 179 238 9 8 170 230 – –Croatia 84 111 – – 31 43 53 68 Turkey 127 98 36 42 91 56 1 1 Kazakhstan – – – – – – – –Serbia 2 8 – – 1 7 1 1 Montenegro – – – – – – – –Bosnia and Herzegovina 1 1 – – 1 1 – –Ukraine – – – – – – – –Non EU 393 457 45 50 294 338 54 69 Total 1,243 1,502 65 103 904 1,142 273 256

1) The net exposure values include equity investments in non-consolidated CEE subsidiaries.

161


161


Non Performing Loans (NPLs)

Exposures relating to all customers in default risk class “8” are categorised as non performing loans, regardless of whether a limit has been exceeded or a payment missed on an individual account or not. Once a customer exposure is more than 90 days past due or a customer-related criterion of default applies, the customer and all products with exposure are set to default and are assigned to default risk class “8”. The decline in the NPL volume continued in 2012, primarily for the following reasons:

An unexpectedly low level of new defaults Repayment and sale of individual larger NPL positions Sale of a small portion of the retail NPL book

The overall development of NPL and the volumes in the individual segments are shown in the following overview.

Development of and provision for NPLs

in millions of EurosBook value loan book

before provisions Provisions Collateral Net position Coverage*) NPL ratio

31.12.2012 31.12.2011 31.12.2012 31.12.2011 31.12.2012 31.12.2011 31.12.2012 31.12.2011 31.12.2012 31.12.2011 31.12.2012 31.12.2011

Banks 24 24 17 17 – – 6 7 73.0% 70.8% 0.3% 0.3%Corporates and other customers

807

753

189

165

117

86

501

501

37.9%

33.4%

3.1%

2.9%

Retail SME 208 272 125 153 58 64 25 55 88.1% 79.9% 16.4% 19.5%Retail private customers

439

493

303

321

91

90

46

82

89.6%

83.4%

7.5%

8.4%

Not related – – 31 36 – – -31 -36 – – – –Total 1,478 1,542 666 693 266 240 547 609 63.0% 60.5% 3.6% 3.8%

*) (Provisions+Collateral)/Exposure

Impaired Loans

Loan loss provisions are recognised for loans for which it can be assumed that the open claims will not be entirely fulfilled. These correspond to the estimated incurred losses in the credit portfolio. The primary components are:

specific loan loss provisions that are formed manually after detailed analysis based on the estimates of the Credit Risk unit together with the Workout Group and Legal Collection, and

loan loss provisions that are formed automatically by the core banking system in the case of more than two unpaid instalments, when limits are continuously exceeded on current accounts and when legal action is initiated.

IFRS Portfolio Impairments pursuant to IAS 39 AG 89

A general impairment provision is formed on a portfolio basis for incurred but not reported losses in the Group’s credit portfolio as of the reporting date. For this, it is assumed that a certain percentage of customers that have not been identified as being in default are in fact in default on the reporting date. Risks arising from loans backed by a repayment vehicle, which mainly includes loans in foreign currencies, are considered as well.

To calculate these loss provisions, the receivables are grouped into homogeneous portfolios with comparable risk characteristics. The provisions are quantified on the basis of the expected loss, taking into account the loss identification period. This is determined individually for each customer segment on the basis of the average time until the next expected payment. As of 31 December 2012, the IFRS portfolio impairment amounted to EUR 31.3 million, compared to EUR 35.9 million on 31 December 2011.


162162


Credit quality overview: Outstanding loan book amounts in different categories as of 31.12.2012

in millions of EurosBook value loan book

before provisions Provisions Book value Collateral

31.12.2012 31.12.2011 31.12.2012 31.12.2011 31.12.2012 31.12.2011 31.12.2012 31.12.2011

Outstandings with specific provisionsBanks 24 24 17 17 6 6 – –Corporates and other customers 575 549 186 164 389 385 81 59Retail SME 163 211 121 139 42 73 26 31Retail private customers 287 327 239 255 48 72 33 38Total 1,048 1,111 563 575 485 536 140 127

Outstandings with general provisionsCorporates and other customers 8 2 3 1 5 1 2 1Retail SME 10 26 4 14 5 12 4 7Retail private customers 89 103 64 66 25 37 10 13Portfolio provision – – 31 36 -31 -36 – –Total 107 131 103 118 4 13 16 21

Outstandings past due unprovisionedDays past due

30–60 days 41 28 – – 41 28 25 1260–90 days 6 7 – – 6 7 4 390–180 days 10 16 – – 10 16 7 9More than 180 days 59 50 – – 59 50 41 41

Total 117 101 – – 117 101 77 65Normal outstandings (not past due/not provisioned)

Not rated 5 9 – – 5 9 4 6Rating 1 6,668 5,198 – – 6,668 5,198 153 360Rating 2 2,550 2,223 – – 2,550 2,223 988 1,214Rating 3 4,096 3,260 – – 4,096 3,260 2,257 1,852Rating 4 6,995 7,332 – – 6,995 7,332 3,336 2,853Rating 5 5,075 5,299 – – 5,075 5,299 2,340 1,898Rating 6 1,325 1,506 – – 1,325 1,506 821 773Rating 7 525 738 – – 525 738 364 423Rating 8 254 234 – – 254 234 62 43Total 27,493 25,800 – – 27,493 25,800 10,325 9,421

Total book value 28,765 27,143 666 693 28,099 26,450 10,557 9,634

The claim against the City of Linz is reported under “outstandings with specific provisions”. This presentation results from the fact that the derivative transaction that existed during the year 2011 and for which a valuation adjustment was recognised was closed in October 2011 and was recognised as a receivable based on the contractual agreement. According to IFRS, the acquisition costs of the claim correspond to the carrying amount of the derivative (taking valuation adjustments into account) upon termination of the transaction. Since the transfer of the claim to the category Loans and receivables, the Bank has not recognised any impairments on the claim against the City of Linz.

163


163


Past Due Loans with No Provisions

No provisions are formed for past due loans when the creditworthiness of the customer appears to be stable, when sufficient collateral has been provided or when the outstanding amount will be paid in the near future.

Collateral

All types of collateral that are accepted by BAWAG P.S.K. are listed in the Group Collateral Catalogue. Conservative haircuts are defined for each type of collateral. The amounts in the table above show the recognised values of the collateral held by the Bank after application of these haircuts.

Workout Group and Legal Collections

The Workout Group and Legal Collections units are responsible for the processing and administration of troubled and defaulted credit commitments. The primary objective is to minimise losses by providing restructuring expertise and maximise the amount collected if collection is required.

Early Recognition of Troubled Assets

The Bank seeks to identify customers with credit problems at an early stage. Many factors are used to drive the monitoring process including declines in stock prices, a rise in CDS spreads, deterioration in creditworthiness, negative reports in the news or a decline in risk rating. Such customers are placed on a review list and are subject to review and monitoring at shorter intervals.

Particular Risk Concentrations in the Credit Portfolio

Risk concentrations refer to risks arising from high exposures with individual customers and groups of customers and to high overall exposures in individual industries, countries, foreign currencies or concentrations of loan collateral whose loss potential could put the core business of the Bank at risk or impair the Bank’s risk profile over the long term.

Corresponding limits have been set for individual borrowers and groups of affiliated customers as well as for industries, countries and currencies. All limits are monitored on an ongoing basis and in accordance with the estimated risk potential.

The current utilisation of these limits and the qualified risk assessment are reported regularly to the responsible committees and the management. When limits are exceeded or warning thresholds are reached, the risk management units and the Managing Board agree on suitable measures to limit or reduce the risk.

Structured Credit Portfolio

BAWAG P.S.K.’s securities portfolio includes a portfolio of structured credit instruments with a nominal value of EUR 997 million and a current book value pursuant to IFRS of EUR 610 million. The resulting risk position is detailed in the following tables by rating, maturity and origin. To further minimise the remaining risk, several transactions were restructured in 2012.

The reduced carrying amounts are an effect of scheduled and early repayments as well as sales.


164164


Structured credit portfolio as of 31.12.2012 – Breakdown by rating (IFRS book value)

in millions of Euros AAA AA A BBB BB and below Not rated Total

CDO-of-ABS – 4 4 1 4 – 13 CDO-of-ABS w/ subprime – 12 – – 40 – 52 CLO 112 59 119 4 – – 293 CMBS – – – 9 23 – 32 Corporate CDO – – 13 31 1 44 88 Corporate CPDO – – 35 – – 59 94 European RMBS 17 4 3 – 1 – 26 US RMBS – – – – 12 – 12 Total 129 79 174 45 80 103 610

Structured credit portfolio as of 31.12.2011 – Breakdown by rating (IFRS book value)

in millions of Euros AAA AA A BBB BB and below Not rated Total

CDO-of-ABS – 9 2 5 3 – 19 CDO-of-ABS w/ subprime – 9 – – 41 – 50 CLO 61 84 101 48 – – 294 CMBS 3 1 9 3 12 – 27 Corporate CDO – – 1 9 37 46 93 Corporate CDO! – – – – – 78 78 Corporate CPDO – – 35 – – 41 76 European RMBS 20 7 – 1 – – 28 US RMBS – – – – 13 – 13 Total 83 110 148 66 105 165 677

Structured credit portfolio as of 31.12.2012 – Breakdown by weighted expected maturity (IFRS book value)

in millions of Euros until end of 2013 2014– 2016 2017– 2019 2020 and later TotalCDO-of-ABS 2 10 – – 13 CDO-of-ABS w/ subprime 1 16 18 16 52 CLO 1 159 133 – 293 CMBS – 32 – – 32 Corporate CDO – 34 54 – 88 Corporate CPDO – 94 – – 94 European RMBS – 9 3 15 26 US RMBS – 3 5 4 12 Total 5 357 213 35 610

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165


Structured credit portfolio as of 31.12.2011 – Breakdown by weighted expected maturity (IFRS book value)

in millions of Euros until end of 2012 2013 – 2015 2016 – 2018 2019 and later TotalCDO-of-ABS – 16 2 – 19 CDO-of-ABS w/ subprime 1 2 13 33 50 CLO 27 85 183 – 294 CMBS 1 18 9 – 27 Corporate CDO 5 68 20 – 93 Corporate CDO! – 78 – – 78 Corporate CPDO – – 76 – 76 European RMBS – 13 – 15 28 US RMBS – 3 10 – 13 Total 33 282 313 48 677

Structured credit portfolio as of 31.12.2012 – Breakdown by origin (IFRS book value)

in millions of Euros USA Continental Europe UK TotalCDO-of-ABS – 10 3 13 CDO-of-ABS w/ subprime 36 1 14 52 CLO 85 130 78 293 CMBS 23 9 – 32 Corporate CDO 37 45 7 88 Corporate CPDO 44 45 5 94 European RMBS – 21 5 26 US RMBS 12 – – 12 Total 238 260 112 610

Structured credit portfolio as of 31.12.2011 – Breakdown by origin (IFRS book value)

in millions of Euros USA Continental Europe UK TotalCDO-of-ABS 3 12 4 19 CDO-of-ABS w/ subprime 34 1 15 50 CLO 106 124 64 294 CMBS 18 9 – 27 Corporate CDO 44 42 7 93 Corporate CDO! 43 29 6 78 Corporate CPDO 35 36 4 76 European RMBS – 23 5 28 US RMBS 13 – – 13 Total 296 276 105 677

Abbreviations:ABS Asset-backed securityCDO Collateralised debt obligationCDO2 Collateralised debt obligation on collateralised debt obligationCLO Collateralised loan obligationCMBS Commercial mortgage-backed securityCPDO Constant proportion debt obligationRMBS Residential mortgage-backed security


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BAWAG P.S.K. uses internal valuation models to determine the fair values of transactions for which there is no active market. Such models are used for CDOs of ABS with subprime exposure, corporate CDOs, corporate CPDOs, CLOs, US RMBS and corresponding micro hedges. All of BAWAG P.S.K.’s models are calibrated to actively traded instruments such as ABX, iTraxx, CDX and LCDX, and use all available market data (such as yield curves, CDS spreads, loan prices, etc.) as inputs.

Positive fair value changes in the amount of EUR +30 million were recognised in the Profit or Loss Statement under Gains and losses on financial assets and liabilities for the structured credit portfolio in 2012. In the same period, book gains of EUR +37 million were realised through redemptions and sales.

Because of restructuring, securities in the structured credit portfolio were reassigned to the category of available-for-sale financial assets in 2010. On 1 June 2010, the securities in the structured credit portfolio were transferred from the category “available-for-sale financial assets” to the category “loans and receivables”. The EUR -43 million in unrealised fair value changes that have been recognised in equity (AFS reserve) will now be distributed over the term of the securities. On 31 December 2012, the remaining AFS reserve for securities from the structured credit portfolio totalled EUR -15 million.

Stress Tests and Sensitivity Analysis of the Structured Credit Portfolio

Stress tests and sensitivity analyses for the structured credit portfolio are completed at least on a semi-annual basis. In this, the effects of various scenarios on the recovery value, fair value, IFRS book value and risk-weighted assets (RWAs) are analysed. The results are reported to the Managing Board.

For each asset class in the structured credit portfolio, the first step is the identification of material risk factors and the creation of a base case scenario for these risk values that reflects the current loss expectations. Individual or multiple risk factors are then worsened to simulate various stress scenarios.

The base case is the scenario that is based on the expected recovery value. The recovery value is defined as the present value of the expected cash flows (discounted with the risk premium specified upon conclusion of the transaction). A sub-par recovery value means that the expected cash flows are lower than the contractually agreed cash flows.

All assumptions apply in addition to the losses already incurred in the portfolio; downgrades that have already occurred are also considered.

To assess the effects that the stress scenarios could have on the fair values (and therefore on the book values of transactions recognised at fair value), the current implied discount margins are increased depending on the level of risk in the scenario and the expected market reaction.

The following tables show the effects that the stress scenarios have on the IFRS value and the recovery value of the portfolio. The difference between the value according to IFRS and the recovery value is due to the fact that the majority of the assets in the portfolio are measured at their fair values, which are lower than their recovery values because of the currently higher risk premiums.

The depicted stress scenarios are defined as follows: Scenario defaults: The default and arrears rates are increased by 30 per cent (50 per cent for non-investment grade corporate).

Combined scenario: the simultaneous worsening of default rates by 20 per cent (30 per cent for non-investment grade corporate), arrears, LGD and prepayment rates by 20 per cent and a 20 per cent worsening of the correlation.

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Effects of stress scenarios on the IFRS value of the structured credit portfolio

in millions of Euros Scenario p.d. Combined scenarioCDO-of-ABS -1 -2CDO-of-ABS w/ subprime -11 -12CLO -5 -5CMBS -7 -10Corporate CDO -7 -10Corporate CPDO -7 -10European RMBS -2 -3US RMBS – –Total -41 -51

Recovery value of the structured credit portfolio; effects of stress scenarios on the recovery value of the structured credit portfolio

in millions of Euros Recovery valueDiff. btwn.

recovery value and IFRS value

Change of recovery value

Scenario p.d. Combined scenario

CDO-of-ABS 19 6 -1 -1CDO-of-ABS w/ subprime 63 11 -8 -8CLO 343 49 -7 -11CMBS 38 6 -8 -8Corporate CDO 110 22 -6 -8Corporate CPDO 113 19 -1 -1European RMBS 31 5 – –US RMBS 16 4 – –Total 734 123 -31 -37

49 | Market risk

Market risk is the risk of loss caused by open risk positions in the market and the adverse development of market risk factors (interest rates, foreign exchange rates, equity prices, volatilities, credit spreads). Market risk can arise in conjunction with trading and non-trading activities.

At BAWAG P.S.K. particular emphasis is placed upon market risk identification, measurement, analysis and management performed by the Market Risk division for all market risks in the Group.

Market risk is bounded by the BAWAG P.S.K. Managing Board’s approved market risk limits, which consist of value-at-risk, sensitivity, volume and worst-case limits.

For risk management purposes, the Managing Board is informed of the Bank’s market risk position, the utilisation of limits and the profit and loss situation. These reports are provided on a daily basis for BAWAG P.S.K. as an individual institution and on a monthly basis for the Group.

All strategies, organisational procedures, principles of risk management and risk monitoring as well as market risk limits approved by the Managing Board are documented in an internal Group Market Risk Manual and in a specific BAWAG P.S.K. Financial Markets Manual.


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Market Risk in the Trading Book

The Managing Board decided in the second half of 2012 to reduce active proprietary trading considerably. This led to a significant reduction in risk limits and volumes in the trading book.

BAWAG P.S.K. uses the value-at-risk (VaR) of an internal model that has been audited by Oesterreichische Nationalbank (the Austrian National Bank) and approved by the Federal Ministry of Finance to control and limit the market risk arising from trading activities. It includes the risk categories interest rate, equity market and foreign exchange risk (there was no active equity desk in the trading book in 2011) and the linear and non-linear gamma and vega risks broken down by risk type.

CRD III requires the stressed value-at-risk (sVaR) to be taken into account in addition to the VaR in determining the minimum own funds requirements on 31 December 2011. sVaR is calculated using the same method as for VaR. The implementation of the expansion to the internal model was approved by the Financial Market Authority (FMA), and the expansion was successfully used.

Because of the uniform depiction of the market risk, the VaR results are used for internal risk control purposes and are also included in the reports to the supervisory authorities. The regulatory capital requirements for the specific risk in the trading book are calculated using the legally standardised measurement method.

The model is based on a variance-covariance approach in which the value-at-risk is calculated for all trading positions at a confidence level of 99 per cent taking into account the correlations for a holding period of one day and ten days using the computer system PMS. In order to test the reliability of the model, the trading book is also subjected to a Monte Carlo simulation, and the results of both analyses are compared.

The VaR limits are supplemented by sensitivity limits and worst-case limits.

On 31 December 2012, the value-at-risk (with gamma and vega risk included) was measured at EUR -0.385 million (31 December 2011: EUR -1.601 million), based on a confidence interval of 99 per cent and a holding period of one day.

The result of the aggregated VaR, which takes the diversification effect into consideration, differs from the sum of the individual VaR results of the risk categories as follows:

VaR (99 per cent, one-day holding period), financial year 2012, in millions of Euros

Risk class Minimum Maximum Average 31.12.2012FX risk -0.08 -2.00 -0.94 -0.09 Interest rate risk -0.27 -1.44 -0.62 -0.34 Total (without correlations) -0.38 -2.71 -1.56 -0.43 Total (with correlations) -0.31 -2.11 -1.23 -0.38 Diversification n/a n/a -0.33 -0.04 Total sVaR (with correlations) -0.54 -2.41 -1.48 -0.64

The accuracy and reliability of the model is verified by means of daily backtesting by comparing the hypothetically realised gains and losses for two consecutive trading days with the value-at-risk of the first day. If a negative backtesting result is lower than the VaR, this is designated as an “exception”.

There were no exceptions at BAWAG P.S.K. during the reporting period, which confirms the high quality of the model and which means that the best-possible multiplier of 3 for the calculation of own funds as specified by the Federal Ministry of Finance (which has been applied continuously since 1998) can be maintained.

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169


The daily VaR (99 per cent, one-day holding period) values are compared with the backtesting results (delta) for the reporting period in the following chart.

VaR (99 per cent, one-day holding period) compared with the backtesting results (delta), financial year 2012, in thousands of Euros

As a measure of risk, the value-at-risk quantifies the potential loss under normal market conditions. VaR methodology is based on the assumption that the price data from the recent past can be used to predict future market events. If market conditions differ substantially from past market developments, then the risk predicted by value-at-risk may be too conservative or too liberal. It is not intended to assess losses in conjunction with unexpected market developments. The valuation is covered by additional stress tests.

In the course of such stress tests, the trading book is stressed by scenarios simulating extreme market conditions which are not covered by the confidence interval. The results of these tests are compared with the worst-case foreign exchange, interest rate and CDS limits.

A distinction is made between time-based and event-based stress tests, and statistical methods (changes in correlations, higher confidence level, etc.) and extreme market movements of risk factors are assumed and applied. The results are reported to the Managing Board, the Strategic Asset Liability Committee (ALCO), trading management and the responsible group heads.

Market Risk in the Banking Book

The primary components of market risk for BAWAG P.S.K. Group result from interest rate risk, credit spread risk, foreign currency risk and liquidity risk.

3,000

2,000

1,000

0

-1,000

-2,000

-3,000

Jan

12

Feb

12

Mar

12

Apr

12

May

12

Jun

12

Jul 1

2

Aug

12

Sep

12

Oct

12

Nov

12

Dec

12

VaR Delta


170170


Interest Rate Risk in the Banking Book

Interest rate risk in the banking book is the potential loss resulting from net asset value changes and the future development of net interest income due to adverse interest rate shifts.

The Strategic Asset Liability Committee (ALCO) has assigned interest rate risk limits to the Financial Markets division to manage the interest rate risk in terms of an optimal risk/return ratio at the Group level. The Market Risk division reports to the ALCO on a daily basis for some areas and monthly at the Group level on limit utilisation as well as on the distribution of risk.

The Strategic ALCO meets once a month. In addition to the members of the Managing Board, the meetings are also attended by the heads of the divisions/staff departments Financial Markets, Market Risk, Controlling, ALM and Accounting.

On the basis of the risk reports and also using the scenario analyses and stress tests, the market risk and its effects are analysed and steering measures are decided to reduce risk and optimise earnings for the Bank as a whole.

The risks are also presented to the Managing Board as part of an overall risk report submitted to the Enterprise Risk Committee on a monthly basis.

For the purpose of interest rate analysis, all interest-bearing instruments are assigned to corresponding time buckets based upon their contractual repricing periods (in the case of fixed and variable rate instruments) or assumptions regarding these (in the case of accounts with undefined maturity profiles or when interest rate and minimum commitment periods are not contractually agreed).

Interest rate risk is measured using the present value of a basis point (PVBP) concept. The PVBP is an absolute value that is derived from the duration of interest-bearing financial instruments. It indicates in monetary units the change in the net cash value due to a shift of the yield curve by one basis point (0.01 per cent).

The following table depicts the Group’s interest rate risk as of 31 December 2012 on the basis of the PVBP concept. The net asset value changes of all financial positions in the Group’s banking book due to an increase in the yield curve of one basis point are assigned to the corresponding time buckets as follows:

PVBP

in thousands of Euros < 1Y 1Y–3Y 3Y–5Y 5Y–7Y 7Y–10Y > 10Y TotalEUR -35 104 265 -10 26 276 625USD -2 -20 -21 14 -11 -28 -68CHF 4 -9 -8 -9 -15 -34 -70JPY 4 -2 1 1 2 4 10Other currencies – 3 – 6 3 -23 -11Total 31.12.2012 -29 76 237 2 6 194 485

Total 31.12.2011 56 121 455 -97 114 193 843

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171


The PVBP of all positions whose fair value changes arising from interest rate changes impact the Profit or Loss Statement is calculated, limited and monitored separately. The PVBPs of the Group by time bucket are as follows:

P&L and equity-relevant PVBP

in thousands of Euros < 1Y 1Y–3Y 3Y–5Y 5Y–7Y 7Y–10Y > 10Y Total31.12.2012 161 -32 393 -407 -750 216 -419

31.12.2011 24 -27 368 177 -315 157 384

In addition to the traditional approaches to measuring interest rate risk, a value-at-risk calculation for the Group is conducted within the framework of the Internal Capital Adequacy Assessment Process (ICAAP) on a monthly basis.

For a particular portfolio, the value-at-risk measures the worst expected future loss (in terms of market value) over a given time horizon with a specific confidence level. The calculation of value-at-risk is based on the variance-covariance approach and uses a confidence level of 99 per cent and a time horizon of ten days. As of 31 December 2012, the value-at-risk for interest rate risk in the Group’s banking book amounted to EUR 15.4 million (compared to EUR 25.4 million as of 31 December 2011).

Net interest income is one of the key parameters in periodic income management and consists of the difference between interest income and interest expenses in a given period. To determine the net interest income for a specific future period, the average volume and average interest rates of all interest-bearing assets and liabilities that are subject to interest rate risk are compared. A software-based model for the dynamic interest rate simulation is used to determine the interest income and expense at the individual contract level using the interest rate characteristics extracted from the core banking system.

Additional inputs required for this model are expected future product margins as well as estimates concerning the volume of new contracts and the extension of existing contracts. The market yield curve is kept constant in the model for the entire simulation period, and plays a key role in determining future interest rates for the individual products. This base projection is known as the “stable rates scenario”.

The possible effects of shifts in the yield curve (both standardised interest rate scenarios as well as forward rates and internal interest projections from the Strategy & Economics division) are calculated using this base projection. The results of these simulations are analysed and presented on a monthly basis to the Asset Liability Committee and to the Enterprise Risk Meeting as part of the overall risk report.

In 2012, the Riskpro interest rate risk assessment tool was moved to a new technical platform to allow its scope to be expanded and to facilitate a further improved integrated overall bank management process.


172172


Credit Spread Risk in the Banking Book

The credit spread risk in the banking book refers to the risk of decreasing fair values of securities and derivatives due to changes in the credit spreads. The volatility of credit spreads has increased significantly in recent years. At BAWAG P.S.K., the risk management models have been continuously refined to account for this. A majority of the credit spread risk arises from investments in Austrian government bonds and in bank bonds.

The credit spread risk is measured on the basis of the sensitivities (basis point value), taking all securities and credit derivatives in the Group into account. The risk indicators “value at risk” and “expected shortfall” are also calculated and scenario calculations are run, both on a monthly basis. The results are included in a credit spread report broken down by portfolios, sectors, countries and ratings and presented to the ALCO.

The credit spread risk is also taken into account and limited for the Bank as a whole in the ICAAP process, and is part of the Bank-wide stress tests.

All employed models are calibrated regularly and validated at least once per year by assessing the assumptions and backtesting.

Alternative Investments

As of 31 December 2012, approximately USD 8 million were still invested in alternative investments.

FX Risk in the Banking Book

The extent of the open foreign exchange positions in BAWAG P.S.K.’s banking book is constrained by conservative limits to ensure that only marginal FX risks are carried in the banking book.

Compliance with these limits is observed by means of a daily process. Another reconciliation routine compares the outstanding FX positions according to Treasury applications with the accounting position and initiates analysis and clearing activities in case of differences.

50 | Liquidity risk

The Liquidity group in the Asset Liability Management department, which reports to the CFO, is responsible for central liquidity management for BAWAG P.S.K. Group.

Liquidity risk management has two important goals: Securing the Bank’s solvency and Managing the risk resulting from increases in refinancing costs.

1. Securing the Bank’s solvency

a) Short-term operational liquidity management A 30-day liquidity preview is prepared for the accounts every day for daily liquidity position management

by Asset Liability Management.

b) Medium- and long-term liquidity management A liquidity preview for the next 12 months is prepared every month by the Bank’s Controlling division and presented

to the Strategic ALCO. It also takes scenario calculations for planned measures and various assumptions about customer behaviour into account. Regulatory and internal liquidity indicators are also projected.

173


173


Limits have been defined for the Bank’s regulatory liquidity and liquidity buffer and may not be underrun in any current or planned scenarios for the coming six months. The Group’s overall liquidity position is managed on the basis of this report.

The planned measures are implemented in accordance with the decisions made by the Strategic ALCO.

Liquidity tests that calculate the outflow of liquidity that will be incurred under different stress scenarios (systemic stress, idiosyncratic stress, mixed stress) are also completed to calibrate the liquidity buffer.

Long-term liquidity management is conducted for the coming five years as part of the annual planning process. Strategic measures are also analysed during the year.

c) Management of the liquidity buffer The maintenance of a liquidity buffer is a precautionary measure for reducing liquidity risk. It is a portfolio of liquid

assets and other assets that can be rapidly liquidated in a stress situation to obtain liquidity. Asset Liability Management takes measures to ensure that this portfolio is sufficiently diversified and that the liquidity buffer is adequate for the Bank’s anticipated needs, and regularly reviews these measures. In preparation for the new regulations under Basel III, it is planned to manage the required cover for LCR centrally by ALM in designated portfolios. These portfolios will be set up starting at the beginning of 2013.

2. Management of the risk resulting from increases in refinancing costs

The Market Risk division assesses the uncovered refinancing gap from the liquidity preview under stressed refinancing costs and assesses whether or not this risk indicator is within the specified limits. The result of this is also included in the ICAAP calculations. If the limit utilisation exceeds a warning threshold, the Asset Liability Management division takes appropriate measures.


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Cash flows relating to liabilities as of 31.12.2012

in millions of Euros Gross nominal inflow/outflow

Less than 1 month 1–3 months 3 months to

1 year 1–5 years More than 5 years

Non-derivative liabilitiesDeposits from banks -3,714 -1,392 -193 -64 -2,059 -8Deposits from customers -22,199 -16,238 -1,046 -1,592 -2,881 -443Debt securities issued -9,370 -11 -90 -1,397 -4,115 -3,757

Subtotal -35,283 -13,503 -1,449 -3,516 -10,810 -6,005Derivative liabilities

Net inflow/outflow 262 35 56 206 -152 116Other off-balance-sheet financial obligations

-798

-798

–

–

–

–

Total -35,819 -14,266 -1,393 -3,310 -10,961 -5,889

Cash flows relating to liabilities as of 31.12.2011

in millions of Euros Gross nominal inflow/outflow

Less than 1 month 1–3 months 3 months to

1 year 1–5 years More than 5 years

Non-derivative liabilitiesDeposits from banks -2,052 -1,165 -7 -75 -459 -346Deposits from customers -22,102 -13,571 -1,171 -5,079 -2,111 -170Debt securities issued -10,788 -28 -117 -453 -6,542 -3,647

Subtotal -34,942 -14,764 -1,295 -5,608 -9,112 -4,163Derivative liabilities

Net inflow/outflow 136 29 -16 82 -145 186Other off-balance-sheet financial obligations

-851

-851

–

–

–

–

Total -35,658 -15,586 -1,312 -5,526 -9,257 -3,977

The table above shows the consolidated nominal (not discounted) cash flows including interest payments on financial liabilities in the banking book. They are assigned to time buckets on the basis of their contractual maturities. For callable savings deposits, the next contractual interest rate adjustment period was used as the end of the term.

Because of this assignment method, some of the products are reported in a manner that does not correspond to the actual conditions. For example, capital savings accounts are generally held past their contractual maturity and are generally increased. The first time bucket under “Customer deposits” (less than one month) contains current accounts and other callable deposits. However, we expect that these funds will be invested for a significantly longer time on the basis of long-term historical experience.

175


175


51 | Participation risk

Participation risk includes potential losses in the fair value of non-consolidated equity investments, potential impairments and low profitability of non-consolidated equity investments. Participation risk does not include operating Group subsidiaries because their risks are assessed separately according to the specific risk types and are already accounted for in this way.

Impairment tests are conducted every year to validate the values of the equity investments in the Bank’s portfolio and to determine the hidden reserves in the equity investment portfolio. These impairment tests are completed on the basis of the planning projections (budgeted income statements, budgeted balance sheets, budgeted cash flows) prepared for future periods by the management of each entity. The free cash flows indicated in the projections are discounted using risk-adjusted rates. The total of the discounted free cash flows from the detailed planning period and the perpetuity is taken as the value of the company as of the reporting date. The proportionate value of the company based on the Bank’s shareholding is then compared with the carrying amount of the investment. If the current proportionate value of the company is lower than the carrying amount, an impairment is recognised for the equity investment in the corresponding amount. If the current proportionate value of the company is higher than the carrying amount, the difference highlights a hidden reserve.

In contrast to the procedure described above, more simplified techniques are adopted for micro-participations and those reporting book values covered by either pro rata equity, by pro rata capitalised average EBTs of the last three years or by other proofs of value such as net asset values for real estate companies.

The results of the impairment tests are reviewed by the Participation Risk team.

Shares in non-consolidated companies

in millions of Euros 31.12.2012 31.12.2011Shares categorised as available-for-sale assets 123 161

Shares in credit institutions 36 76 Associates 21 35 Other shares 15 41

Shares in other companies 87 85 Subsidiaries 23 26 Associates 42 31 Other shares 22 28

Shares accounted for using the equity method 20 18 Associates 20 18

Total shares in non-consolidated companies 143 179


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52 | Operational risk

BAWAG P.S.K. defines operational risk as the risk of loss resulting from insufficient or failed internal processes and systems, external events, misconduct or staff errors. This definition of operational risk includes legal risks, but not strategic risks or risks to the Bank’s reputation, which are assessed and managed directly by the Managing Board.

BAWAG P.S.K.’s Managing Board specifies Group-wide principles for managing operational risk in its Enterprise Risk Meeting. In order to ensure that measures and principles are applied uniformly throughout the Group, these activities are coordinated by the central Operational Risk department. The detailed management of operational risks in the individual business segments is completed locally in the respective units by the division heads or the executive directors and their operational risk agents.

Since 1 July 2011, BAWAG P.S.K. has been using the standardised approach pursuant to sections 185ff SolvaV to calculate its own funds requirements in connection with operational risk at the Group level and for itself as an individual institution.

Losses incurred in the business segments and divisions as a result of operational risks are continuously documented in a central loss database through an institutionalised loss reporting system to collect data for the internal management of operational risks. Subsequent central analysis allows the clustering of losses to be identified early and further losses to be prevented.

Additional information is collected through Risk Control Self Assessments (RCSAs). All units and subsidiaries assess their material operational risks and the effectiveness of their control measures on a yearly basis using a uniform framework. This includes the assessment of individual control measures, the estimation of probabilities and the extent of losses arising from individual risks.

BAWAG P.S.K. has created an effective basis for limiting operational risks with a compartmentalised organisational structure, clear authorisation levels and working instructions. Additionally, consistent guidelines regarding authority levels and a risk-adequate internal control system including computer-assisted plausibility reviews is designed to allow the Bank to maintain a controlled risk situation.

177


177


Additional Disclosures Required by Austrian Law

53 | Fiduciary assets

in millions of Euros 31.12.2012 31.12.2011Fiduciary assets 134 187Receivables from credit institutions 3 4Receivables from customers 131 183Fiduciary liabilities 134 187Payables to credit institutions 25 26Payables to customers 109 161

54 | Breakdown of securities pursuant to the Austrian Banking Act (BWG)

The following table breaks securities down in accordance with section 64 paragraph 1 item 10 and item 11 BWG as of 31 December 2012:

in millions of Euros (IFRS figures) Not listedListed BAWAG P.S.K.

Group Total 2012Total Loans and

receivablesOther

valuationsBonds and other fixed income securities 2,036 7,620 463 7,157 9,656Shares and other variable income securities 7 71 – 71 78Shares in associates and other shares 100 – – – 100Shares in non-consolidated subsidiaries 23 – – – 23Total securities 2,166 7,691 463 7,228 9,857

The difference between carrying amounts and lower repayment amounts for the purposes of section 56 paragraph 2 BWG was EUR 106 million (2011: EUR 145 million). The difference between carrying amounts and higher repayment amounts for the purposes of section 56 paragraph 3 BWG was EUR 29 million (2011: EUR 41 million).

Liabilities and subordinated capital amounting to a nominal EUR 1,504 million will come due under the corresponding contracts in 2013.


178178


55 | Collateral received for contractual liabilities

Different types of collateral have been pledged to the Bank as part of its business transactions. The following breakdown is based on the Basel II collateral management system.

in millions of Euros Collateralised

on-balance-sheet claims

Collateralised off-balance-sheet

claimsTotal

Financial collateralStocks 41 152 193Cash deposits 96 527 623Bonds 717 3 720

Real estateCommercial properties 1,110 34 1,144Private properties 4,409 35 4,444

Personal collateralGuarantees 2,486 69 2,555Credit derivatives 219 356 575

Other forms of collateralLife insurance policies 405 2 407

Collateral received 9,483 1,178 10,661

To reduce credit risk for derivative instruments, the Bank received consideration (collateral deals) in the amount of EUR 434 million (2011: EUR 457 million) and paid consideration (collateral deals) in the amount of EUR 980 million (2011: EUR 939 million).

56 | Hybrid capital

The consolidated financial statements recognise hybrid capital within the meaning of section 24 paragraph 2 items 5 and 6 BWG in the amount of EUR 142 million (2011: EUR 404 million). The entirety of this amount was reported on the IFRS Statement of Financial Position in the line item Supplementary capital and subordinated debt capital.

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179


57 | Human resources

Headcount 31.12.2012 31.12.2011Number of employees on reporting date 4,480 4,502Average number of employees 4,509 4,500

Full-time equivalents 31.12.2012 31.12.2011Number of employees on reporting date 4,003 4,038Average number of employees 4,043 4,034

58 | Other disclosures required by BWG and Austrian GAAP (UGB) including remuneration policy

The Statement of Financial Position entry for Land and buildings shows property with a carrying amount of EUR 34 million (2011: EUR 42 million).

Obligations arising from the use of tangible non-current assets not recognised on the Statement of Financial Position were expected to come to EUR 19 million for the period subsequent to 2012 (2011: EUR 20 million); the expected amount in the five years following the year under review was EUR 97 million (2011: EUR 105 million).

The Statement of Financial Position as of 31 December 2012 contains deferred interest on supplementary capital bonds in the amount of EUR 4 million (2011: EUR 7 million).

Expenses for subordinated liabilities amounted to EUR 46 million (2011: EUR 60 million).

Expenses for BAWAG P.S.K.’s group auditor in the current financial year amount to EUR 2.6 million and comprise audit fees in the amount of EUR 2.6 million, tax advisory fees of EUR 0.0 million as well as other advisory fees in the amount of EUR 0.0 million.

The Company is a member of the consolidated group headed by Promontoria Sacher Coöperatie U.A. (consolidated financial statements 2011) and a member of the consolidated group headed by Promontoria Sacher Holding N.V. (consolidated financial statements 2012), respectively. Both of these companies are located in Baarn, the Netherlands. These consolidated financial statements are available at the parent company’s headquarters in Baarn, the Netherlands.

BAWAG P.S.K. uses the Internet as the medium for publishing disclosures under section 26 Banking Act and the Disclosure Regulation. Details are available on the web site of BAWAG P.S.K. at: www.bawagpsk-annualreport.com.


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Remuneration Policy

BAWAG P.S.K. has a Remuneration Committee, which is a Supervisory Board committee. This Remuneration Committee specifies the remuneration policy, monitors its implementation and submits regular reports on its activities to the full Supervisory Board. The committee consists of the chairman of the Supervisory Board, who heads it, and two further Supervisory Board members, including one member of the works council.

BAWAG P.S.K.’s Remuneration Committee has adopted a remuneration guideline that applies to the members of the Managing Board and the employees of the Group and that takes into account the principles of the EU’s CRD III Directive, the CEBS guideline and the associated amendments to the Austrian Banking Act.

For employees whose activities have a material influence on the Bank’s risk profile, this guideline stipulates a remuneration policy that does not impede effective risk management. It is designed to align the objectives of the employees with the long-term interests of the Bank and to ensure an appropriate balance between fixed and variable remuneration components. It also takes into account the legal regulations stipulating that the policy must be applied to the management and to risk purchasers, to employees with controlling duties, as well as to employees who are in the same wage group as the management and the risk purchasers and whose activities have a material influence on the risk profile of the Bank.

The annual budget for variable remuneration components is based on the degree to which the Bank achieves its earnings targets.

Approval for the payment of a bonus proposed by the Managing Board is granted by the Remuneration Committee, taking into account the market conditions and development, the appropriateness of bonus payments, the development of risk and the strengthening of the Bank’s equity base.

The required conditions were accounted for in the remuneration guideline as follows: To ensure risk adequacy, the variable remuneration must not provide an incentive to enter into inappropriate risks. To ensure sustainability, success is determined based on a longer-term observation period. For this reason, parts of the bonus are distributed over a period of up to five years. The payment of the retained portions is subject to strict Bank success criteria.

Because the Bank has no marketable shares, a “phantom scheme” was implemented that is also tied to the Bank’s business performance.

The appropriateness and market adequacy of remuneration is ensured, applying a balanced relationship between fixed and variable components.

The variable remuneration is determined on the basis of the individual’s success (in quantitative and qualitative terms) as well as on the success of the respective organisational unit and the Bank.

For individual matters concerning the remuneration of Managing Board members, a Committee for Management Board Matters has been set up taking into account the framework of the Austrian Labour Constitution Act.

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59 | Events after the reporting date

Please see the management report for information on key events after the end of the reporting period.







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Statement of All Legal Representatives

“We confirm to the best of our knowledge that the consolidated financial statements give a true and fair view of the assets, liabilities, financial position and profit or loss of the group as required by the applicable accounting standards and that the group management report gives a true and fair view of the development and performance of the business and the position of the group, together with a description of the principal risks and uncertainties the group faces.”






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Boards and Officers of BAWAG P.S.K. Bank für Arbeit und Wirtschaft und Österreichische Postsparkasse Aktiengesellschaft

Managing Board of BAWAG P.S.K. as of 31 December 2012

Byron HAYNES, Member of the Managing Board (from 1 August 2008), Chairman of the Managing Board and CEO (from 16 September 2009)

Andreas ARNDT (from 1 October 2010)

Wolfgang KLEIN (from 1 November 2010)

Jochen KLÖPPER (from 1 April 2012)

Sanjay SHARMA (from 1 January 2010 until 31 December 2012)

Managing Board Appointments That Ended during the YearChristoph RANINGER (from 17 May 2010 until 31 October 2012)

Managing Board of BAWAG P.S.K. from 1 January 2013

Byron HAYNES, Member of the Managing Board (from 1 August 2008), Chairman of the Managing Board and CEO (from 16 September 2009)

Wolfgang KLEIN, Member of the Managing Board (from 1 November 2010) and Deputy Chairman of the Managing Board (from 1 January 2013)

Andreas ARNDT (from 1 October 2010)

Jochen KLÖPPER (from 1 April 2012)

Corey PINKSTON (from 1 January 2013)


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The Supervisory Board of BAWAG P.S.K. as of 31 December 2012

ChairmanCees MAAS (from 15 October 2009, Member of the Supervisory Board from 27 July 2009 until the end of the Annual General Meeting adopting

the Annual Financial Statements for 2014)

Deputy ChairmanPieter KORTEWEG (from 15 December 2009, Member of the Supervisory Board from 27 August 2007 until the end of the Annual General Meeting

adopting the Annual Financial Statements for 2014)

MembersMarius J.L. JONKHART (from 18 July 2007 until the end of the Annual General Meeting adopting the Annual Financial Statements for 2014)

Keith TIETJEN (from 5 October 2010 until the end of the Annual General Meeting adopting the Annual Financial Statements for 2014)

Christopher BRODY (from 1 January 2012 until the end of the Annual General Meeting adopting the Annual Financial Statements for 2014)

Rudolf JETTMAR (from 15 May 2007 until 15 March 2012)

Walter OBLIN (from 15 March 2012 until the end of the Annual General Meeting adopting the Annual Financial Statements for 2014)

Works Council DelegatesIngrid STREIBEL-ZARFL (from 1 October 2005)

Brigitte JAKUBOVITS (from 1 October 2005)

Beatrix PRÖLL (from 1 October 2005)

State CommissionerBeate SCHAFFER (from 1 August 2009, previously Deputy State Commissioner from 1 March 2007 to 31 July 2009)

Deputy State CommissionerMarkus CHMELIK (from 1 March 2010)

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Committees of BAWAG P.S.K. as of 31 December 2012

Risk and Credit CommitteeCees MAAS, Chairman

Marius J.L. JONKHART, Deputy Chairman

Walter OBLINChristopher BRODYIngrid STREIBEL-ZARFL, Works Council Delegate

Beatrix PRÖLL, Works Council Delegate

Audit and Compliance CommitteeMarius J.L. JONKHART, Chairman

Cees MAASWalter OBLINKeith TIETJENIngrid STREIBEL-ZARFL, Works Council Delegate

Brigitte JAKUBOVITS, Works Council Delegate

Nomination CommitteeCees MAAS, Chairman

Pieter KORTEWEG, Deputy Chairman

Christopher BRODYIngrid STREIBEL-ZARFL, Works Council Delegate


Remuneration CommitteeCees MAAS, Chairman


Ingrid STREIBEL-ZARFL, Works Council Delegate

Committee for Management Board MattersCees MAAS, Chairman


Keith TIETJEN

Related Parties Special Audit CommitteeMarius J.L. JONKHART, Chairman

Cees MAAS, Deputy Chairman

Pieter KORTEWEGWalter OBLINIngrid STREIBEL-ZARFL, Works Council Delegate


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AUDITOR’S OPINION

AUDITOR’S OPINION

We have audited the accompanying consolidated financial statements of BAWAG P.S.K. Bank für Arbeit und Wirtschaft und Österreichische Postsparkasse Aktiengesellschaft, Vienna, for the fiscal year from 1 January 2012 to 31 December 2012. These consolidated financial statements comprise the consolidated statement of financial position as of 31 December 2012, the consolidated profit or loss statement, the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the cash flow statement for the fiscal year ended 31 December 2012, and the Notes.

Management’s Responsibility for the Consolidated Financial Statements and for the Accounting Records

The Company’s management is responsible for the Group accounting records and for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the EU. This responsibility includes: designing, implementing and maintaining a system of internal controls relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies and making accounting estimates that are reasonable in the circumstances.

Auditor’s Responsibility and Description of Type and Scope of the Statutory Audit

Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with laws and regulations applicable in Austria and Austrian Standards on Auditing, as well as in accordance with International Standards on Auditing (ISAs) issued by the International Auditing and Assurance Standards Board (IAASB) of the International Federation of Accountants (IFAC). These standards require that we comply with professional guidelines and that we plan and perform the audit to obtain reasonable assurance whether the consolidated financial statements are free from material misstatements.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers the system of internal controls relevant to the Group’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a reasonable basis for our audit opinion.

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AUDITOR’S OPINION

Opinion

Our audit did not give rise to any objections. In our opinion, which is based on the results of our audit, the consolidated financial statements comply with the legal requirements and give a true and fair view of the financial position of the Group as of 31 December 2012 and of its financial performance and its cash flows for the fiscal year from 1 January 2012 to 31 December 2012, in accordance with International Financial Reporting Standards (IFRSs) as adopted by the EU.

Comments on the Group Management Report

Pursuant to statutory provisions, the management report for the Group is to be audited as to whether it is consistent with the consolidated financial statements and as to whether the other disclosures are not misleading with respect to the Company’s position. The auditor’s report also has to contain a statement as to whether the management report for the Group is consistent with the consolidated financial statements and whether the disclosures pursuant to section 243a para 2 UGB (Austrian Commercial Code) are appropriate.

In our opinion, the consolidated management report for the Group is consistent with the consolidated financial statements. The disclosures according to section 243a para 2 UGB (Austrian Commerical Code) are appropriate.


Deloitte Audit Wirtschaftsprüfungs GmbH

Mag. Erich Kandler m.p. Mag. Monika Dabrowska m.p. Certified Public Accountant Certified Public Accountant

The publication or transmission of the consolidated financial statements in a form different from the one we have audited is only permitted with our consent if in the course of doing so reference is made to our audit opinion or our audit. The auditor’s opinion only refers to the German version of the consolidated financial statements including the group management report. For any amended version the provisions of section 281 para 2 UGB need to be obeyed.

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SUPERVISORY BOARD’S REPORT


Supervisory Board

The Supervisory Board of BAWAG P.S.K. properly fulfilled all duties incumbent upon it by law, the Bank’s Articles of Association and its Rules of Procedure. The Managing Board of the Bank was continuously monitored and regularly advised. The Managing Board informed the Supervisory Board of all material issues in a timely and comprehensive manner. There were open discussions in the Supervisory Board, and also individual discussions between the Chairman of the Managing Board and the Chairman of the Supervisory Board.

Supervisory Board MembersThe composition of the Supervisory Board changed in January 2012. Christopher Brody, previously Chief Investment Officer and head of the International Business division at BAWAG P.S.K., succeeded Ronald E. Kolka, who stepped down from the Supervisory Board at the end of 2011. The term of Rudolf Jettmar also ended on 15 March 2012. The Annual General Meeting appointed Walter Oblin as his successor. I would like to take this opportunity to thank Ronald E. Kolka and Rudolf Jettmar in the name of the entire Supervisory Board for their good and constructive work and to wish them all the best for the future.

Supervisory Board MeetingsThe Supervisory Board convened for five meetings and one teleconference in 2012, and all members attended nearly all of the meetings in person.

The meeting in March 2012 focused on the financial statements for 2011. Among other things, the Supervisory Board discussed the risk strategy of BAWAG P.S.K., the payment transactions agreement with the Republic of Austria and the cooperation agreements with Generali and Wüstenrot. A focus of discussions in 2012 was the future business model and the Bank’s capital and cost structure. In December 2012, the new Managing Board and shareholder structure was presented. Subject to the approval of the FMA and other authorities, GoldenTree Asset Management LP (GoldenTree) would acquire an indirect stake of 39.46 per cent in BAWAG P.S.K. as part of the restructuring of the shareholder group. The new shareholder structure and restructuring of the shareholder group was subsequently approved by all the regulatory authorities by the end of December 2012. Companies related to GoldenTree and Cerberus each acquired one registered share in BAWAG P.S.K. with restricted transfer rights so that they can exercise various shareholder rights. Among other things, GoldenTree is to be granted the right to appoint one member to the Supervisory Board pursuant to section 88 AktG. The Articles of Association, the Rules of Procedure for the Supervisory Board and the Rules of Procedure for the Managing Board were amended to implement these rights. In future, the Supervisory Board of the Bank will consist of twelve members.

The amendments to the Austrian Code of Corporate Governance that were published in January and July 2012 were incorporated into BAWAG P.S.K.’s declaration of commitment.

Another key focus of the Supervisory Board during the reporting period was the risk profile of BAWAG P.S.K. The agenda of each meeting included the discussion of the business and capital situation, among other things. As every year, the Board discussed the management letter of the financial auditor. Reports were given regularly about the Bank’s market position, relevant legal issues and personnel and Managing Board matters.

The focuses of the individual meetings also included the discussion of key subsidiaries of BAWAG P.S.K., the strategy for Austrian and international corporates, public sector and financial markets, and the efficiency boosting programme. Another issue of extensive discussion was the development of the derivative transaction concluded with the City of Linz in 2007 and the associated legal and mediation proceedings.

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Meetings of the Supervisory Board CommitteesAt the beginning of 2012, BAWAG P.S.K.’s Supervisory Board had five committees. In March 2012 a new Remuneration Committee pursuant to section 39c of the Banking Act was created and the previous Remuneration Committee was renamed the Committee for Management Board Matters.

Because of Basel III, the CRD IV draft and the draft of the Banking Act, these committees were adapted and renamed as follows in October 2012:

The Audit Committee is now named the Audit and Compliance Committee: The committee already dealt with compliance issues. The new name makes the strong focus of this committee clear. The update on legal issues is also to be dealt with by the Audit and Compliance Committee in the future.

The Credit Committee was renamed the Risk and Credit Committee: The risk report (from the Audit and Compliance Committee) and the preparations for decisions by the full Supervisory Board pertaining to the risk strategy will take place in the Risk and Credit Committee in the future.

Additional responsibilities of the Nomination Committee: The tasks of the Nomination Committee were adapted to reflect the draft amendments to the Banking Act.

The Audit and Compliance Committee (called the Audit Committee until 30 October 2012) held six meetings in 2012. The meetings in February and March focused on reviewing the Bank’s financial statements for 2011 and the Corporate Governance Report for 2011, as well as on the reports from Internal Audit and the Compliance Officer and the risk report pursuant to section 21 WAG for 2011. In February 2012, the annual auditing plans of Internal Audit and the Compliance Office were presented and approved, and in July, an overview of the most important stress tests at the Bank was presented, among other things. In October, the Audit and Compliance Committee discussed the recommendation for the appointment of the auditor. A preview of the extensive regulatory changes was also on the agenda. Internal Audit and the Compliance Office submitted quarterly reports.

Reports on audits and enquiries by the regulatory authorities were also provided by the Audit and Compliance Committee, focusing on ICAAP and IRB. The risk report for the Bank, which includes the calculation of the Bank’s risk-bearing capacity and reports on corporate, retail and market risk, was a regular item on the Audit and Compliance Committee’s agenda. This will be handled by the Risk and Credit Committee in the future.

The external auditors were present at all of the meetings. Outside of the meetings, the Audit and Compliance Committee also met with the external auditors and the heads of the Compliance Office and Internal Audit without the members of the Managing Board being present.

The Risk and Credit Committee (called the Credit Committee until 30 October 2012) held five meetings in 2012. There were also credit applications that were decided upon by way of circular resolution. In addition to the approval of loans, the Risk and Credit Committee also dealt with general credit risk topics. Reports on the Bank’s most important equity holdings were presented in June. The focus in December was the risk strategy, the summary of the risk report and a review of exposures in the construction industry.

The Related Parties Special Audit Committee generally only meets as needed. The Supervisory Board decided in October 2012 to lower the approval limit for transactions with related parties from EUR 50 million to EUR 10 million. No meeting was held in 2012.

The Nomination Committee held two meetings in 2012 and also made decisions by way of circular resolution. The most important topics of discussion were the posts of the Managing Board members and changes in the Managing Board at the end of the year. In December 2012, the Nomination Committee completed the preparations for the Supervisory Board’s annual discussion about its own performance and efficiency. The entire Supervisory Board will discuss these topics in detail in March 2013.


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The Committee for Management Board Matters (called the Remuneration Committee until March 2012) held three meetings and one teleconference in which it discussed and agreed the compensation, MbO objectives and contracts of the Managing Board members. The Committee for Management Board Matters also decided on the Bank’s remuneration guidelines, in particular the amendments to the Remuneration Policy of the Bank. The “Key Functions” and “Compensation and Benefits” projects were also discussed.

In March 2012, the Supervisory Board set up a new Remuneration Committee pursuant to section 39c of the Banking Act. Its duties include the approval of the general principles of the Bank’s remuneration policy and monitoring the remuneration policy, remuneration practices and remuneration-based incentive structures pursuant to section 39c BWG, except for those pertaining to Managing Board members. One meeting was held in 2012, during which the Bank’s remuneration guidelines were adopted and an overview of bonuses in 2011 was presented.

The committees of the Supervisory Board also reported regularly about their discussions and decisions.

Managing Board

The Supervisory Board appointed Jochen Klöpper as Chief Risk Officer of BAWAG P.S.K. effective 1 April 2012.

Christoph Raninger resigned from the Managing Board as of 31 October 2012. Sanjay Sharma announced his resignation from the Managing Board as of 31 December 2012. I would like to take this opportunity to sincerely thank Christoph Raninger and Sanjay Sharma for their hard work and commitment to the Bank and to wish them all the best for their future challenges in the name of the entire Supervisory Board.

At the meeting in December, the Supervisory Board voted to appoint Wolfgang Klein as deputy chairman of the Managing Board and Corey Pinkston as Managing Board member for Corporates and Financial Markets, both as of 1 January 2013.

Annual Financial Statements

The accounts, the annual financial statements for 2012 and the management report were audited by Deloitte Audit Wirtschaftsprüfungs GmbH. The audit revealed no cause for objection. The legal regulations were complied with in full, and an unqualified auditor’s opinion was issued.

After an in-depth discussion, the Supervisory Board concurred with the results of the audit, raised no objections against the annual financial statements and management report for 2012 including the proposal for the appropriation of profits submitted by the Managing Board and hereby approves the annual financial statements for 2012 pursuant to section 125 paragraph 2 of the Stock Corporation Act.

The consolidated annual financial statements for 2012 including the notes pursuant to the International Financial Reporting Standards (IFRS) and the Group management report were audited by Deloitte Audit Wirtschaftsprüfungs GmbH. The audit revealed no reasons for objection, and the legal requirements were met in full. The auditor confirmed that the consolidated annual financial statements provide a true and accurate picture of the financial position of the Group as of 31 December 2012 and of the earnings position and cash flows for the financial year started on 1 January 2012 and ended 31 December 2012 in accordance with the International Financial Reporting Standards.

The auditors also confirmed that the Group management report is consistent with the consolidated financial statements and that the legal requirements for exemption from the preparation of consolidated annual financial statements according to Austrian law have been met in full.

The Supervisory Board agreed with the opinion of the auditor after extensive discussion.


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In conclusion, I would like to express my sincere thanks and respect to all employees in the name of the entire Supervisory Board for their hard work and commitment in 2012.


The Supervisory Board Cees Maas m.p. Chairman of the Supervisory Board


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GLOSSARY ABS Asset-backed security; a special form of investment in which a security is based on and also

collateralised by a specified pool of financial assets.

ABX A series of indices that each reference 20 subprime RMBS (residential mortgage-backed securities).

Agio Premium; positive difference between the purchase price and the nominal value.

Associated company A company over which a material influence is exerted in terms of its business or financial policy and that is recognised in the consolidated accounts using the equity method.

Backtesting A method for verifying projected VaR values by comparing them with the actual developments.

Banking book All risk-bearing on- and off-balance-sheet positions of a bank that are not assigned to the trading book.

CDO Collateralised debt obligation; securities that are collateralised by various assets.

CDO2 Collateralised debt obligation on collateralised debt obligations; securities that are collateralised by different CDO tranches.

CDS Credit default swap; a financial instrument that securitises credit risks, for example those associated with loans or securities.

CDX An index made up of credit default swaps from the 125 most liquid investment-grade American companies; is marketable.

CLO Collateralised loan obligation; securities that are collateralised by a pool of credit claims.

CMBS Commercial mortgage-backed security; securities collateralised by loans on commercial properties.

Core capital ratio The numerator expresses the core capital (Tier I) and the denominator the required own funds multiplied by 12.5.

Core capital ratio relative The numerator expresses the core capital (Tier I) and the denominator the required own funds to credit risk for credit risk multiplied by 12.5.

Core revenues The total of net interest income and net fee and commission income.

Cost-income ratio The ratio between the operating expenses (administrative expenses excluding restructuring expenses, scheduled amortisation and depreciation) and operating income (net interest income, income and expenses from fees and commissions, other operating income and expenses, gains and losses on financial assets and liabilities).

CPDO Constant proportion debt obligation; a financial instrument that invests in a portfolio of CDS indices (CDX, iTraxx).

Cross-selling The active selling of complementary products and services to existing customers.

Derivatives Financial instruments whose value depends on the value of an underlying asset (such as stocks or bonds). The most important derivatives are futures, options and swaps.

Disagio Discount; a negative difference between the purchase price and the nominal value.

Exposure The expected amount that the bank can lose in the event of default.

Fair value The amount at which an asset could be exchanged or a liability settled between knowledgeable, willing parties in an arm’s length transaction.

Fair value hedge Assets or liabilities, generally with fixed interest rates, are protected against changes in their fair value using derivatives.

Futures Standardised, exchange-traded forward agreements in which an asset from the money, capital, precious metals or foreign exchange market must be delivered or purchased at a specific time and at a price that is agreed in advance.

Hedge accounting An accounting technique that aims to minimise the effects that the opposing developments in value of a hedge transaction and its underlying transaction have on the income statement.

GLOSSARY

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Hedging Protecting against the risk of disadvantageous interest rate and price changes with hedging transactions.

ICAAP Internal Capital Adequacy Assessment Process; an internal procedure to ensure that a bank has sufficient own funds to cover all material types of risk.

Investment properties Properties held as financial investments, primarily to generate rental income.

iTraxx An index made up of credit default swaps from the 125 most liquid investment-grade European companies; is marketable.

LCDX An index that references 100 US senior secured loans.

Monte Carlo simulation A numerical method for solving mathematical problems by modelling random values.

NPL Non-performing loan; all customer exposures in default risk class 8, regardless of whether a limit has been breached or the customer is in arrears on an individual account or not.

NPL cover The total of impairment write-downs and collateral relative to the NPL exposure.

Operating income The total of core revenues, gains and losses on financial assets and liabilities adjusted for non-controlling interests and other operating income and expenses.

Operating profit Operating income less operating expenses (personnel expenses, other administrative expenses and depreciation and amortisation on tangible and intangible non-current assets).

Option The right to buy (call) or sell (put) an underlying reference asset at an agreed price within a specific period of time (American option) or at a fixed point in time (European option).

OTC Over the counter; trade with non-standardised financial instruments directly between the market participants instead of through an exchange.

Own funds ratio The numerator expresses the own funds according to the Austrian Banking Act and the denominator the required own funds multiplied by 12.5.

Return on equity Relationship between the after-tax earnings (without non-controlling interests and restructuring expenses) and the average equity (without non-controlling interests).

Return on credit-risk Relationship between the after-tax earnings (without non-controlling interests) and the average weighted assets credit-risk-weighted assets (without non-controlling interests).

Risk-weighted assets Also called RWA; risk-bearing assets that have been weighted according to regulatory requirements.

RMBS Residential mortgage-backed security; securities collateralised by loans on residential properties.

Subprime Loans extended to borrowers with low credit ratings.

Swap A financial instrument that is generally used to exchange payment flows between two parties. Currency swap: The exchange of capital amounts and payment flows in different currencies.

Serves to hedge currency risks. Interest rate swap: The exchange of interest payment flows (such as fixed against variable) in the

same currency. Serves to hedge interest rate risks.

Trading book All positions that a bank holds in financial instruments for the purpose of sale again in the short term when the best result can be achieved depending on the development of prices and interest rates. Positions that are not assigned to the trading book are managed in the banking book.

Value-at-risk (VaR) A method for quantifying risks that measures the potential maximum future losses that can occur within a specific period and with a certain probability.

GLOSSARY

Owner and Publisher

BAWAG P.S.K.Bank für Arbeit und Wirtschaft undÖsterreichische Postsparkasse AktiengesellschaftGeorg-Coch-Platz 2, 1018 Vienna, AustriaCompanies Registry number: 205340xData Protection Authority number: 1075217EU VAT number: ATU51286308Telephone: +43 (0)5 99 05-0E-mail: [email protected]: www.bawagpsk.com

Editors: Tamara Kapeller, Christian Mader, Stefan Rossmanith, Julia Stipek, Sebastian Witek (BAWAG P.S.K.)Translation: LanguageLink Sprachdienste, ViennaLayout and Production: Gottfried Neubauer, Helmut Wernbacher (BAWAG P.S.K.)Printed by: AV+Astoria Druckzentrum, Vienna

www.bawagpsk.comwww.bawagpsk-annualreport.com

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