annual report - bawag p.s.k. | mitten im leben. financial statements as of 31 december 2008 4 income...

2008

ANNUAL REPORTFinancial statements of BAWAG P.S.K.Bank für Arbeit und Wirtschaft undÖsterreichische Postsparkasse Aktiengesellschaft Viennafor the financial year ended 31 December 2008pursuant to UGB

2008

ANNUAL REPORTFinancial statements of BAWAG P.S.K.Bank für Arbeit und Wirtschaft undÖsterreichische Postsparkasse Aktiengesellschaft Viennafor the fi year ended 31 December 2008pursuant to UGB

nancial

CONTENTS

Financial Statements as of 31 December 2008 4

Income Statement for Financial Year 2008 6

Auditor’s Opinion 8

Notes 9

Boards and Officers 31

Management Report 34

The Economy 34

Key Events during the Financial Year 38

Notes to the Annual Financial Statements 42

Non-Financial Performance Indicators 48

Events after the Balance Sheet Date 51

Risk Report 52

Outlook 64

Statement of All Legal Representatives 65

Financial Statements as of 31 December 2008

4

BAlANCE ShEET AS Of 31 DECEMBER 2008

ASSETS

2008 EUR

2008 EUR

2007 in thousands of Euros

1. Cash on hand, balances at central banks 683,055,998.75 884,456 2. Public sector debt instruments approved by the central bank for refinancing 2,470,591,377.33 2,844,165

3. Receivables from credit institutions 5,870,928,836.27 8,355,355 a) On demand 113,567,613.64 663,781 b) Other receivables 5,757,361,222.63 7,691,574 4. Receivables from customers 23,537,990,403.11 20,768,151 5. Bonds and other fixed-income securities 4,743,895,793.81 6,031,230 a) From public-sector issuers 196,588,748.17 201,883 b) From other issuers 4,547,307,045.64 5,829,348 Thereof bonds issued by the Bank 152,091,146.21 199,331 6. Shares and other variable-rate securities 146,198,678.93 184,982 7. Equity interests 97,509,964.68 89,509

Thereof in credit institutions 73,555,263.26 64,670 8. Shares in Group companies 1,486,578,439.23 1,793,207 Thereof in credit institutions 622,944,737.13 815,410 9. Intangible non-current assets 132,440,593.36 148,89910. Tangible non-current assets 237,511,207.41 256,593

Thereof land and buildings used for Bank operations 144,255,529.91 145,144

11. Other assets 2,129,030,815.64 1,266,51512. Prepaid expenses 45,709,626.19 36,374

Total assets 41,581,441,734.71 42,659,437Items on the balance sheet

1. Foreign assets 11,966,118,180.84 16,926,408

Differences in the totals in the columns for the prior year are due to rounding


5

EQUITY AND LIABILITIES

2008EUR

2008EUR

2007 in thousands of Euros

1. Payables to credit institutions 6,526,477,842.25 8,114,489a) On demand 1,432,376,142.09 1,836,344b) With agreed maturities or period of notice 5,094,101,700.16 6,278,145

2. Payables to customers 22,092,711,387.76 22,065,314a) Savings deposits – thereof: 15,206,634,506.41 14,404,627

aa) On demand 873,973,542.46 1,078,596 bb) With agreed maturities or period of notice 14,332,660,963.95 13,326,031

b) Other customer liabilities – thereof: 6,886,076,881.35 7,660,686 aa) On demand 5,521,126,421.39 5,275,428 bb) With agreed maturities or period of notice 1,364,950,459.96 2,385,258

3. Debts evidenced by certificates 7,617,970,222.67 7,859,571a) Issued bonds 6,400,834,118.71 6,997,344b) Other debts evidenced by certificates 1,217,136,103.96 862,227

4. Other liabilities 2,099,816,029.73 881,335 5. Deferred income 12,743,771.32 12,640 6. Provisions 482,038,087.60 445,558

a) Provisions for severance payments 64,955,545.00 63,536b) Provisions für post-employment benefits 191,570,039.00 170,192c) Provisions for taxes 5,450,456.00 6,101c) Other provisions 220,062,047.60 205,730

7. Fund for general banking risks 80,000,000.00 – 8. Subordinated liabilities 720,511,657.78 731,709 9. Supplementary capital 770,081,686.83 829,44210. Subscribed capital 250,000,000.00 250,00011. Capital reserves 301,273,446.16 757,740

a) Tied 301,069,989.55 757,536b) Free 203,456.61 203

12. Revenue reserves 101,614.14 54,146a) Statutory revenue reserves 101,614.14 102b) Other revenue reserves – 54,044

13. Reserve pursuant to § 23 para. 6 BWG 613,754,463.10 612,30214. Accumulated profit – 26815. Untaxed reserves 13,961,525.37 44,924

Valuation reserve for non-scheduled write-downs 13,961,525.37 44,924Total liabilities 41,581,441,734.71 42,659,437Items on the balance sheet

1. Contingent liabilities 1,584,108,601.00 1,580,342Thereof liabilities arising from guarantees and obligationsfrom the provision of collateral 1,584,108,601.00 1,580,342

2. Commitments 9,832,362,352.09 10,990,257Thereof liabilities from repurchase agreements 145,345,668.34 329,000

3. Liabilities from trust transactions 515,971,800.50 496,164 4. Eligible own funds pursuant to § 23 para. 14 BWG 1,891,617,822.72 2,610,100

Thereof: own funds pursuant to § 23 para. 14 line 7 BWG 55,454,000.00 36,207 5. Required own funds pursuant to § 22 para. 1 BWG 1,510,908,333.29 1,870,404

Thereof required own funds pursuant to § 22 para. 1 line 1 and 4 BWG 1,455,448,290.04 1,834,197

6. Foreign liabilities 10,154,411,585.66 12,676,052

7. Loss in provisions for post-employment benefits (Article X paragraph 3 RLG)

– 1,573


6

Income Statement for financial Year 2008

2008 EUR

2008EUR

2007in thousands of Euros

1. Interest and similar income 1,914,805,771.19 1,761,177thereof from fixed-income securities 401,188,624.28 387,510

2. Interest and similar expenses -1,440,978,075.06 -1,371,161 I. NET INTEREST INCOME 473,827,696.13 390,016 3. Income from securities and equity interests 337,303,777.43 194,800

a) Income from shares, other ownership interests and variable-rate securities 2,916,833.44 81,316b) Income from equity interests 4,143,305.28 4,873c) Income from shares in Group companies 330,243,638.71 108,612

4. Fee and commission income 228,941,996.05 219,381 5. Fee and commission expenses -106,131,129.78 -108,766 6. Net profit from trading activities 23,795,126.32 30,795 7. Other operating income 9,104,495.28 48,463 II. OPERATING INCOME 966,841,961.43 774,689 8. General administrative expenses -553,902,649.53 -506,102

a) Staff costs -347,137,569.01 -312,511Thereof:aa) Wages and salaries -236,433,054.98 -213,450bb) Expenses for statutory social security contributions and compulsory contributions related to wages and salaries -56,646,998.26 -55,064cc) Other employee benefits -3,069,273.06 -3,168dd) Expenses for retirement benefits -17,777,901.29 15,351ee) Allocation to pension provision -20,295,136.00 -16,415ff) Expenses for severence payments and payments to severance-payment funds -12,915,205.42 -9,063

b) Other administrative expenses -206,765,080.52 -193,591 9. Depreciation and amortisations of asset items 9 and 10 -56,124,368.94 -68,64210. Other operating expenses -4,045,671.15 -16,555III. OPERATING EXPENSES -614,072,689.62 -591,299 IV. OPERATING RESULT (carryover) 352,769,271.81 183,390


7

2008 EUR

2008EUR

2007in thousands of Euros

IV. OPERATING RESULT (carryover) 352,769,271.81 183,390

11./12. Net income/expenses from the disposal and valuation of loans and advances, securities as well as contingent liabilities and commitments -263,398,951.62 -121,153

13./14. Net income/expenses from the disposal and valuation of securities valued as non-current financial assets, and of shares in Group companies and equity interests -554,956,808.10 -133,345

V. RESULT FROM ORDINARY BUSINESS ACTIVITIES -465,586,487.91 -71,10915. Extraordinary expenses -80,125,437.99 –

Thereof: allocation to the fund for general banking risks -80,000,000.00 –

16. Taxes on income 3,748,065.46 84,94017. Other taxes not included under item 16 223,265.68 1,238VI. ANNUAL LOSS -541,740,594.76 15,07018. Changes in reserves 541,473,036.90 -15,000

Thereof: allocation to the liability reserve – – Thereof: release from the liability reserve – –

VII. LOSS FOR THE YEAR -267,557.86 7019. Profit brought forward from previous year 267,557.86 198VIII. ACCUMULATED PROFIT – 268

BAWAG P.S.K. Bank für Arbeit und Wirtschaft und Österreichische Postsparkasse Aktiengesellschaft

The Managing Board

Roberts m.p. Koren m.p. Haynes m.p. Laughlin m.p. Prehofer m.p. Samusch m.p.


8

Auditor’s Opinion

We have audited the financial statements, including the accounting records, of

BAWAG P.S.K. Bank für Arbeit und Wirtschaft und Österreichische Postsparkasse Aktiengesellschaft, Vienna,

for the fiscal year from January 1, 2008, to December 31, 2008. The Company’s management is responsible

for the preparation and content of the financial statements and the accounting records and the management

report in accordance with Austrian regulations as well as regulations of the Austrian Banking Act. Our respon-

sibility is to express an opinion on these financial statements based on our audit and to state whether the

management report is in accordance with the financial statements.

We conducted our audit in accordance with laws and regulations applicable in Austria and Austrian Standards

on Auditing. Those standards require that we plan and perform the audit to obtain reasonable assurance

whether the financial statements are free from misstatement and whether we can state that the management

report is in accordance with the financial statements. In determining audit procedures we considered our

knowledge of the business, the economic and legal environment of the Company and as well as the expected

occurrence of errors. The audit involves procedures to obtain evidence about amounts and disclosures in the

financial statements predominantly on a sample basis. An audit also includes assessing the accounting

principles used and significant estimates made by management as well as evaluating the overall financial

statement presentation. We believe that our audit provides a reasonable basis for our opinion.

Our audit did not give rise to any objections. In our opinion, which is based on the results of our audit, the

financial statements are in accordance with legal requirements and present fairly in all material respects the

financial position of BAWAG P.S.K. Bank für Arbeit und Wirtschaft und Österreichische Postsparkasse Aktien-

gesellschaft as of December 31, 2008, and the results of its operations and its cash flows for the fiscal year

from January 1, 2008, to December 31, 2008, in accordance with Austrian generally accepted accounting

principles. The management report is in accordance with the financial statements.

Vienna, 3 April 2009 Deloitte Audit Wirtschaftsprüfungs GmbH

Dr. Peter Bitzyk m.p. Mag. Thomas Becker m.p.

Certified Public Accountants

The publication or transfer of the consolidated financial statements in a form different from the one we have audited is only permitted

after our consent if in the course of doing so reference is made to our audit opinion or our audit. This English translation of the Auditor’s

Report is for convenience purposes. Only the original German version is legally binding.


9

Notes

Shareholder Structure

The American investment firm Cerberus has been the main shareholder of BAWAG P.S.K. Bank für Arbeit und

Wirtschaft und Österreichische Postsparkasse Aktiengesellschaft (hereinafter BAWAG P.S.K.) through BAWAG

Holding GmbH since May 2007. The Bank’s minority share holders include Österreichische Post (the Austrian

postal service), Generali-Versicherung, Bausparkasse Wüstenrot and a group of Austrian industrialists.

The Bank’s headquarters were relocated from Seitzergasse 2–4, A-1010 Vienna, to Georg-Coch-Platz 2,

A-1018 Vienna, in the year 2008.

The proceedings that were initiated in 2007 for the sale of the BAWAG subsidiaries in Slovakia and the

Czech Republic were also concluded successfully in 2008.

The companies BV Holding GmbH and BV Vermögensverwaltung GmbH were established as a direct and

indirect subsidiary of P.S.K. Beteiligungsverwaltung GmbH. These companies are now responsible for BAWAG

P.S.K.’s structured credit portfolio and its credit surrogates.

At the end of the reporting period, the wholly owned subsidiary Sparda Bank AG was retroactively merged into

BAWAG P.S.K. effective 30 June 2008.

For further information on key events during the 2008 financial year, please see the management report.

Scope of Consolidation and Consolidated financial Statements

The Company is a member of the group parented by BAWAG Holdings Coöperatie U.A. The consolidated

financial statements can be viewed at the domicile of this company. BAWAG P.S.K. prepares its consolidated

financial statements in accordance with IFRS pursuant to the provisions of section 59a BWG.

The financial statements for BAWAG P.S.K., which is domiciled at Georg-Coch-Platz 2, A-1018 Vienna,

are submitted to the Commercial Court Vienna under the trade register number 205340 x.


10

Recognition and Measurement Principles

The annual financial statements were prepared in accordance with the provisions of the Uniform Commercial

Code (UGB) and the relevant provisions of the Austrian Banking Act (BWG) that were in force on the balance

sheet date and in accordance with the forms specified in Annex 2 to section 43 BWG. The principles used in

the preparation of the balance sheet correspond to standard bank practice and have not changed.

The annual financial statements were prepared according to generally accepted accounting principles and

provide as true and accurate a picture of the Company’s financial and earnings position as possible.

Receivables from credit institutions and customers are generally recognised using the nominal value of the

receivable item. In the case of identifiable default risks, individual impairment provisions are formed accord-

ing to common criteria for each individual risk item, especially in retail banking.

Securities held until maturity for purposes of ongoing business are classified as financial investments and

recognised as such on the balance sheet. If the acquisition cost is higher than the redemption amount, the

difference is written down on a pro rata basis pursuant to section 56 paragraph 2 BWG. If the acquisition cost

is lower than the redemption amount, the difference is written up on a pro rata basis pursuant to section 56

paragraph 3 BWG.

Securities classified as financial investments are not discounted to their lower fair value because of the

application of the diluted lower value principle.

The securities held for trading, which are accounted for in the securities trading book, are valued using the

mark-to-market principle. Securities classified as current assets are valued using the principle of the lower of

cost or market. When derivatives are used to hedge the interest rate risk for listed and unlisted securities

classified as current assets, both components are valued using the mark-to-market principle as long as the

historical acquisition cost of the portfolio is not exceeded.

Equity interests are valued at cost unless non-temporary losses or a lack of earning power make write-downs

necessary.


11

Intangible non-current assets and tangible non-current assets are recognised at cost less scheduled linear

write-downs. The depreciation rates for buildings are in line with those defined in section 8 EStG, those for

other tangible non-current assets range from 5 per cent to 20 per cent; the amortisation rates for intangible

non-current assets range from 10 per cent to 20 per cent. Acquisitions in the first half of the year are written

down using the full annual rate, acquisitions made in the second half of the year are written down with half

the annual rate. Low-value goods with an individual purchase cost of EUR 400 or less are written down in full

in their year of acquisition. No write-ups were made in 2008.

Liabilities are valued at their repayment amount in accordance with the principle of prudence. Premiums and

discounts on securities issued by BAWAG P.S.K. are recognised pro rata temporis.

Severance payments were calculated on 31 December 2008 in the same manner as in the prior year using

discounted methods (interest rate 4 per cent, entry age normal method, fluctuation discount 8 per cent) in

accordance with expert opinion KFS RL 2 of the Board of Experts in the Austrian Chamber of Public Accoun-

tants (Fachsenat für Handelsrecht und Revision) using the amendments adopted on 5 May 2004.

Provisions for post-employment benefits were calculated using actuarial methods (interest rate 4 per cent,

entry age normal method) in accordance with expert opinion KFS RL 3 of the Board of Experts in the Austrian

Chamber of Public Accountants (Fachsenat für Handelsrecht und Revision) using the amendments adopted on

5 May 2004. The difference between the values resulting from the entry age normal method using the old and

new parameters was calculated on 31 December 2004. This difference is being recognised in equal amounts

over a period of five years. As of 31 December 2008, 20 per cent of this difference was still open.

The provisions for jubilee benefits were calculated on 31 December 2008 using discounted methods (interest

rate 4 per cent, entry age normal method, fluctuation discount 8 per cent) in accordance with expert opinion

KFS RL 2 of the Board of Experts in the Austrian Chamber of Public Accountants (Fachsenat für Handelsrecht

und Revision) using the amendments adopted on 5 May 2004. The difference between the values resulting

from the entry age normal method using the old and new parameters was calculated on 31 December 2004 in

accordance with these guidelines. This difference is being written down linearly over a period of five years.

As of 31 December 2008, 20 per cent of this difference was still open.

The other provisions were formed in line with the expected obligations. They take into account all recognisable

risks and obligations, including those that have not yet been valued.

Receivables and liabilities denominated in foreign currencies are principally translated at the mid spot

exchange rate on the balance sheet date.


12

Notes and Additional Information

Sub-items pursuant to § 45 BWGin thousands of Euros 31.12.2008 31.12.2007

Assets 3 Receivables from credit institutions– From Group companies 1,301,790 1,807,967 – Of which subordinated 16,970 50,663– From associated companies 2 1 – Of which subordinated – –– Other subordinated receivables 37,721 10,224

Assets 4 Receivables from customers– From Group companies 3,879,236 1,350,686 – Of which subordinated 15,490 18,267– From associated companies 229,201 362,713 – Of which subordinated – 18,168– Other subordinated receivables 18,168 5,221– Trust transactions pursuant to § 48 BWG – 30,217

Liabilities 1 Payables to credit institutions– To Group companies 2,227,113 1,757,271– To associated companies 478 730– Trust transactions pursuant to § 48 BWG – 30,217

Liabilities 2 Payables to customers– To Group companies 569,141 732,673– To associated companies 181,306 90,409


13

Carrying Amount and Repayment Amount Difference for Bonds and Other fixed-Income Securities

The difference between carrying amounts of bonds and other fixed-income securities with the characteristics

of financial investments and the lower repayment amounts is written down pro rata temporis pursuant to

section 56 paragraph 2 BWG. The difference to be applied until maturity amounted to EUR 42,702 thousand

as of the reporting date (2007: EUR 12,989 thousand).

The difference between carrying amounts of bonds and other fixed-income securities with the characteristics

of financial investments and the higher repayment amounts is written up pro rata temporis pursuant to section

56 paragraph 3 BWG. Differences in the amount of EUR 33,471 thousand have been recognised as of the

reporting date (2007: EUR 13,740 thousand).

Certain securities that do not have the characteristics of financial investments and that are admitted for

trading on a recognised exchange were recognised at cost in spite of the fact that their fair value was higher.

The difference in values was EUR 51 thousand on the reporting date (2007: EUR 1,247 thousand).

The difference between the acquisition cost and fair value for securities that do not have the characteristics of

financial investments, that are admitted for trading on a recognised exchange and that were recognised at

their higher fair value amounted to EUR 16,981 thousand as of the reporting date (2007: EUR 8,568

thousand).

Information on asset item 5 – Bonds and other fixed-income securities and 6 – Shares and other variable-rate securities

in thousand of Euros 31.12.2008 31.12.2007

Balance 4,890,094 6,216,212Thereof non-current assets 3,416,108 4,034,575Unlisted 64,896 61,341Expected redemption of bonds and other fixed-income securities in 2009 664,633 584,714

BAWAG P.S.K. held supplementary and subordinated bonds with a total value of EUR 70,423 thousand on the

balance sheet date (2007: EUR 136,116 thousand), thereof EUR 39,223 thousand (2007: EUR 55,005

thousand) of its own issued supplementary and subordinated bonds. BAWAG P.S.K. held EUR 43,029

thousand (2007: EUR 44,159 thousand) in securities issued by Group companies.


14

The Bank held three profit participation rights with an aggregate value of EUR 30,228 thousand as of 31

December 2008. No new profit participation rights were acquired in financial year 2008.

The addition that was not made during the financial year for tax reasons amounted to EUR 380 thousand.

financial instruments classified as financial investments reported at their fair value (section 237a paragraph 1 line 2 UGB):

The carrying amount of these securities classified as non-current assets amounted to EUR 1,583,762

thousand on 31 December 2008 (2007: EUR 6,393,095 thousand), the lower fair value of these securities

amounted to EUR 1,535,466 thousand (2007: EUR 5,987,648 thousand). No impairments must be recog-

nised on these securities because the repayment of the full nominal value is contractually agreed upon

maturity and the full repayment of this nominal amount can be assumed because of the issuer’s good credit

rating.

Reclassification of Securities

Securities with a nominal value of EUR 2,181,834 thousand were reclassified from current assets to non-

current assets effective 30 June 2008.


15

Information on asset item 7 – Equity interests and 8 – Shares in Group companies

in thousands of Euros 31.12.2008 31.12.2007Balance 1,584,088 1,882,716Listed – –

BAWAG P.S.K. does not directly engage in any leasing transactions, but offers such transactions through

direct and indirect subsidiaries.

Maturity Breakdown

Receivables from credit institutions and customers with agreed maturity dates or periods of notice by maturity:

in thousands of Euros 31.12.2008 31.12.2007Up to 3 months 6,591,176 7,947,421More than 3 months to 1 year 2,118,121 1,843,880More than 1 year to 5 years 6,558,434 5,777,729More than 5 years 11,142,645 10,035,064Total 26,410,378 25,604,094

Payables to credit institutions and customers with agreed maturity dates or periods of notice by maturity:

in thousands of Euros 31.12.2008 31.12.2007Up to 3 months 3,684,222 6,885,547More than 3 months to 1 year 7,118,963 5,636,457More than 1 year to 5 years 3,189,906 3,763,701More than 5 years 6,798,622 5,703,729Total 20,791,713 21,989,434

Savings deposits without a fixed holding period were classified according to average deposit periods.


16

Equity Interests

A list of all companies in which BAWAG P.S.K. directly or indirectly holds 20 per cent or more pursuant to

section 238 line 2 UGB can be found in the annexes. The companies with which BAWAG P.S.K. forms a

single tax entity for VAT purposes is also noted in this list.

The net income from equity interests in the amount of EUR 334,387 thousand (2007: EUR 113,484

thousand) includes income from Group companies in the amount of EUR 330,244 thousand (2007: EUR

108,612 thousand).

Provisions

The provisions for post-employment benefits recognised on the balance sheet include the following post-

employment benefit obligations and obligations from early pension agreements in the amount of EUR 70

thousand (2007: EUR 1,044 thousand).

In accordance with the requirements to make up provision differences that went into force on 31 December

2004, the actuarial calculation of the provisions for post-employment benefits (interest rate 4 per cent, entry

age normal method) on 31 December 2008 showed a provision requirement of EUR 191,501 thousand (2007:

EUR 169,148 thousand). The difference not yet made up on the balance sheet date in accordance with expert

opinion KFS RL 3 (20 per cent) amounted to EUR 6,703 thousand (2007: EUR 11,890 thousand).

The provision requirements were calculated taking into account the expert opinion and the new post-

employment benefit entitlements laid down in the pension law for banks and bank employees that went into

force on 1 January 1997.

The EUR 5,957 thousand difference between the coverage requirements and the provisions formed for tax

purposes in connection with the benefit entitlements carried forward in 2001 was capitalised and is being

written down over a period of ten years in accordance with section XII paragraph 1 PKG. On 31 December

2008, two tenths of this difference was still capitalised.

In accordance with the requirements to make up provision differences that went into force on 31 December

2004, the actuarial calculation of the provisions for jubilee benefits (interest rate 4 per cent, entry age normal

method, fluctuation discount 8 per cent) on 31 December 2008 showed a provision requirement of EUR

25,464 thousand (2007: EUR 23,281 thousand). The difference that had not yet been made up on the

balance sheet date (20 per cent) amounted to EUR 1,132 thousand (2007: EUR 2,436 thousand).

Provisions have also been formed for the impairment of financial investments, for credit risks, for legal risks,

for human resources purposes and for possible obligations in connection with the sale of real estate.


17

Capital Resources

The Bank has share capital in the amount of EUR 250,000,000. There are 250,000,000 bearer shares in

issue. Our bank has issued supplementary capital bonds with a nominal value of EUR 366,617 thousand and

has accepted supplementary capital deposits with a nominal value of EUR 299,700 thousand and JPY

14,000,000 thousand. No new supplementary capital was raised in 2008. Supplementary and subordinated

capital bonds were in issue on 31 December 2008 with remaining terms of between one and twenty-five years

and interest rates of between 3.14 per cent and 6.80 per cent.

BAWAG P.S.K. calculates its required capital resources in accordance with section 22n BWG for a large

securities trading book. The nominal value of the derivative instruments in the trading book as of 31 Decem-

ber 2008 amounted to EUR 46,340,860 thousand, and the securities held for trading on this date totalled

EUR 397,661 thousand. Money market transactions are recognised in Receivables from credit institutions

and Payables to credit institutions in the amount of EUR 642,405 thousand as of the reporting date.

No new subordinated issues were made or loans taken that exceeded 10 per cent of the subordinated obliga-

tions in financial year 2008.

Changes in own funds

in thousands of Euros 31.12.2008 31.12.2007Subscribed capital 250,000 250,000Reserves and fund for general banking risks 1,007,321 1,469,112Deductions -132,441 -150,734Core capital (Tier I) 1,124,881 1,568,378Shareholdings pursuant to § 23 paragraph 13 BWG -65,453 -45,942Eligible core capital (Tier I) 1,059,428 1,522,436Additional items (Tier II) 842,189 1,097,400Shareholdings pursuant to § 23 paragraph 13 BWG -65,453 -45,942Eligible own funds 1,836,164 2,573,894Own funds ratio 10.3% 11.2%Existing Tier III 55,454 36,207Own funds 1,891,618 2,610,101Required own funds 1,510,908 1,870,404Excess own funds 380,710 739,697


18

Taxes

The following table shows the changes in the valuation reserve for non-scheduled write-downs:

in thousands of Euros 1.1.2008 All. Rel. 31.12.2008Equity interests 28,130 – -28,130 –Shares in Group companies 2,262 – -2,262 –Land and buildings used for Bank operations 14,455 – -541 13,914Other assets 77 – - 30 47Total 44,924 – -30,962 13,962

The changes in the untaxed reserves increased the income for tax purposes by EUR 30,962 thousand and are

due to the release of valuation reserves.

The reduction in net income from income taxes is the result of tax contributions and is reported under the

result from ordinary business activities.

The tax accruals and deferrals that can be capitalised pursuant to section 198 paragraph 10 UGB increased

by EUR 18,405 thousand from EUR 18,838 thousand to EUR 37,243 thousand in financial year 2008.

The deferred taxes pursuant to UGB were calculated at a tax rate of 25 per cent on the balance sheet date.

A taxable group pursuant to section 9 KStG was parented by BAWAG P.S.K. in the financial year. We employed

the stand-alone method when calculating tax contributions, which assumes the fiscal independence of

individual group members. The tax contributions for each member are determined by the amount of corporate

income tax that the respective group member would have had to pay if it had not been assessed against the

group parent. Negative tax contributions are applied in the group to offset tax losses.

The item Income taxes includes tax contributions in the amount of EUR 3,808 thousand.


19

further Notes to the Balance Sheet

The balance sheet entry for Land and buildings shows property with a carrying amount of EUR 38,773

thousand (2007: EUR 38,841 thousand).

Obligations arising from the use of tangible non-current assets not recognised on the balance sheet were

expected to come to EUR 20,337 thousand in 2009 (2007: EUR 25,105 thousand); the expected amount in

the five years following the year under review was EUR 94,502 thousand (2007: EUR 114,884 thousand).

No collective impairment provisions were formed for receivables from customers as of the balance sheet date.

The receivables from customers include amounts collateralised by bills of exchange in the amount of EUR

136,749 thousand (2007: EUR 106,648 thousand), and under the item Receivables from credit institutions

in the amount of EUR 0 thousand (2007: EUR 10,190 thousand).

The carrying amount of assets transferred under repurchase agreements totalled EUR 641,893 thousand on

31 December 2008 (2007: EUR 2,315,020 thousand). The assets are still recognised as assets and the

countervalues as obligations.

The balance sheet entry for Other assets includes accrued interest for derivative financial instruments in the

amount of EUR 122,415 thousand (2007: EUR 176,210 thousand), positive fair values of derivative financial

instruments in the trading book in the amount of EUR 996,465 thousand (2007: EUR 621,148 thousand),

bank book derivative valuations in the amount of EUR 555,623 thousand (2007: EUR 90,924 thousand),

and settlement receivables from Group companies in the amount of EUR 352,534 thousand (2007: EUR

259,561 thousand).

The balance sheet entry for Other liabilities includes accrued interest for derivative financial instruments in

the amount of EUR 98,047 thousand (2007: EUR 68,562 thousand), negative fair values of derivative

financial instruments in the trading book in the amount of EUR 939,711 thousand (2007: EUR 568,148

thousand), bank book derivative valuations in the amount of EUR 526,762 thousand (2007: EUR 62,315

thousand), and payable taxes and other mandatory contributions in the amount of EUR 38,399 thousand

(2007: EUR 45,502 thousand).

The item Other liabilities on the balance sheet also contains deferred interest on supplementary capital bonds

in the amount of EUR 18,059 thousand.

Subordinated and supplementary capital liabilities are primarily issued in the form of securities. These

securities are all bullet bonds. Supplementary capital bonds are primarily subscribed by private Austrian

investors, while subordinated capital bonds are sold to major domestic and international investors.


20

Debts evidenced by certificates and supplementary capital bonds totalling EUR 1,022,811 thousand (nominal)

will come due for redemption as contractually agreed during the coming financial year. Liabilities to Group

companies account for EUR 110,485 thousand of the balance sheet item Debts evidenced by certificates and

EUR 403,465 thousand of the balance sheet item Supplementary capital.

Assets pledged as collateral pursuant to section 64 paragraph 1 line 8 BWG can be broken down as follows:

in thousands of Euros 31.12.2008 31.12.2007Cover pool for covered bonds 3,209,679 3,426,077Cover pool for trust savings deposits 38,009 53,652

Receivables and securities assigned to Oesterreichische Kontrollbank AG 1,112,027 1,107,575

Collateral pledged in favour of the European Investment Bank 518,712 665,001Other collateral 34,936 35,039Total 4,913,363 5,287,344

These assets are linked to the following obligations, which are reported in the balance sheet items Debts

evidenced by certificates, Savings deposits and Payables to banks and customers.

in thousands of Euros 31.12.2008 31.12.2007Covered bonds 2,532,987 2,827,171Trust savings deposits 35,251 32,872Oesterreichische Kontrollbank AG refinancing 1,112,034 1,107,575European Investment Bank refinancing 414.487 450,416Total 4,094,759 4,418,034

The assets and liabilities that are denominated in foreign currencies were as follows:

in thousands of Euros 31.12.2008 31.12.2007Assets 5,739,450 6,089,643Liabilities 4,419,076 4,091,901


21

The Contingent liabilities, which consist solely of liabilities from guarantees and the provision of collateral,

and the Commitments associated with unused lines of credit were as follows:

in thousands of Euros 31.12.2008 31.12.2007Contingent liabilities 1,584,109 1,580,342Commitments 9,832,362 10,990,257

The item Contingent liabilities also includes guarantees and letters of comfort issued for subsidiaries in the

amount of EUR 602,059 thousand.

The total volume of accounts with unused lines of credit of over EUR 50 million amounted to EUR 8,513,634

thousand on 31 December 2008 (2007: EUR 6,445,358 thousand).

The volume of pending futures contracts as of 31 December 2008 is shown in Annex 3. Trust transactions

represented a total volume of EUR 515,972 thousand on the balance sheet date.

Notes to the Income Statement

The increase in operating income can be attributed primarily to an extra dividend of the Group company P.S.K.

Beteiligungsverwaltung GmbH. Provisions for the reorganisation of personnel are the primary factor behind the

increase in operating expenses.

It was not necessary to break down interest income, income from securities and equity interests, fee and

commission income, the net profit from trading activities and the other operating income according to region

because Austria is the only relevant regional market for BAWAG P.S.K.

Impairment provisions for current assets were increased by EUR 142,246 thousand compared to the prior

year due to the generally strained conditions. The sale of securities which are valued as financial investments

to a Group company at fair value yielded a loss of EUR 510,073 thousand.

As the parent of the taxable group, BAWAG P.S.K. received tax contributions that led to a positive tax balance

in financial year 2008.


22

Expenditures on subordinated liabilities came to EUR 85,317 thousand.

Other operating income totalled EUR 9,104 thousand (2007: EUR 48,463 thousand) and included EUR 666

thousand in income from the sale of tangible non-current assets, EUR 2,451 thousand in compensation in

connection with a deposit insurance case and EUR 2,656 thousand in rental revenues.

Other operating expenses amounted to EUR 4,046 thousand (2007: EUR 16,554 thousand) and included

EUR 1,779 thousand in expenses incurred during the sale of real estate.

human Resources

Our average headcount during the 2008 financial year was 4,379 (2007: 4,514 employees), all of whom were

salaried employees. This headcount includes 250 employees (2007: 250 employees) who are employed by

BAWAG P.S.K. but who work in P.S.K. Zahlungsverkehrsabwicklungs GmbH.

Expenses for staff benefit fund contributions in financial year 2008 totalled EUR 488 thousand (2007: EUR

375 thousand).

Expenses for remuneration paid to active members of the Managing Board during the financial year came to

EUR 7,108 thousand (2007: EUR 6,418 thousand). Expenses for post-employment benefits to former

members of the Managing Board and their surviving dependents amounted to EUR 2,765 thousand (2007:

EUR 2,591 thousand). No bonuses were paid to members of the Managing Board for 2008. Remuneration of

members of the Supervisory Board came to EUR 289 thousand (2007: EUR 212 thousand).

Expenditures for severance pay and post-employment benefits for the Managing Board and key management

personnel came to EUR 16,760 thousand (2007: EUR 14,487 thousand). Expenditures with respect to other

employees came to EUR 35,214 thousand (2007: EUR 29,092 thousand).

As of the balance sheet date, there were no outstanding loans to the members of the Managing Board. Loans

to members of the Supervisory Board totalled EUR 42 thousand (2007: EUR 46 thousand). Repayments of

loans granted to board members took place as contractually agreed.

A list of the boards and officers of BAWAG P.S.K. can be found in the annexes at the end of the notes.


23

Notes on Derivative financial Instruments

To measure instruments traded on an exchange (stocks, equity index options, futures and options on futures),

we fed exchange prices into our front-office systems on a daily basis, thus ensuring mark-to-market valuation.

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 model.

The total value of an interest rate swap is the sum of the present values of its fixed and variable-rate legs.

Similarly, the total value of a cross currency swap is the sum of the present values of the two cash flows

expressed in terms of the functional currency.

In the case of foreign currency forwards and futures – i.e. agreements to exchange currency amounts at a

future date – the agreed forward rate, which depends on movements in exchange and interest rates for both

currencies, is compared with the forward rate on the balance sheet date and the result used to calculate the

instrument’s value.

Breakdown of derivative instruments in the trading book:

Only one side of interest rate swaps and basic swaps is recognised in the reported volumes. For futures and

options on interest-based index contracts, the nominal values of all bought and sold instruments is taken into

account in the calculation. Only one side of currency and interest rate swaps with multiple currencies (CRS) is

included in the total nominal value of the trading book. For currency forwards and futures, the nominal value

of the purchase and sale contracts is included in the total for derivative instruments. The same applies to

foreign exchange options. Only one side of the remainder of the derivatives is included in the calculation, with

the exception of CDS. For these instruments, the nominal of the purchased CDS and of the sold CDS is

included in the calculation of the derivative volume.

Vienna, 31 March 2009


24

Changes in non-current assets pursuant to section 226 paragraph 1 UGB

in thousands of Euros

Cost of purchase or conversion Write-downs (write-ups) Carrying amountBalance

1.1.2008

Additions 2008

Re- allocation

2008Disposals

2008 cumulative 2008

Balance 31.12.2008

Balance31.12.2007

Financial investmentsTreasury bills and other bills eligible for refinancing at central banks

2,804,649 153,301 – -519,373 51,776 16,988 2,386,802 2,746,483

Bonds and other fixed- income securities 4,299,925 5,438,346 – -6,323,523 -7,258 -1,335 3,422,006 4,122,615Stocks and other securities – – – – – – – –Equity interests 94,434 9,918 -43 -2,024 4,775 -150 97,510 89,509Shares in Group companies 1,880,744 267,881 43 -237,830 424,260 337,100 1,486,578 1,793,207

Intangible non-current assets1) 240,301 4,428 – – 112,288 20,922 132,441 148,935Tangible non-current assets

Land and buildingsused for Bank operations

206,895 2,858 – -163 65,335 3,632 144,256 145,144

Other tangible non-current assets2) 538,468 14,902 – -33,050 427,065 30,961 93,256 111,618Other land and buildings

(reported under Other assets on the balance sheet) – – – – – – – –

Total 10,065,417 5,891,634 – -7,115,962 1,078,240 408,118 7,762,848 9,157,511

1) Including acquisition and production costs from the merger of SPARDA Bank Aktiengesellschaft in the amount of EUR 275,864.932) Including acquisition and production costs from the merger of SPARDA Bank Aktiengesellschaft in the amount of EUR 1,001,657.81 and EUR 1,277,522.74 for low-value assets


25

Entities in which BAWAG P.S.K. holds at least 20 per cent

in thousands of EurosShare- holding

in %

Equity incl. untaxed

reserves

Netprofit/(loss) Cons. Figures as of

BanksBAWAG Allianz Vorsorgekasse AG, Vienna 50.00% 3,935 818 31.12.2008BAWAG banka d.d., Laibach 100.00% 19,889 -576 C 31.12.2008BAWAG Malta Bank Limited, Sliema 100.00% 387,230 -152.633 C 31.12.2008BAWAG P.S.K. Wohnbaubank Aktiengesellschaft, Vienna 100.00% 17,984 1.988 C 31.12.2008easybank AG, Vienna 100.00% 14,014 1.122 C 31.12.2008Kapital-Beteiligungs Aktiengesellschaft, Vienna 20.00% 8,832 266 30.09.2007Österreichische Verkehrskreditbank AG, Vienna 100.00% 16,964 1.061 C 31.12.2008PayLife Bank GmbH, Vienna 20.82% 61,660 17.765 31.12.2007

Non credit institutionsAUST-INGEBE Beteiligungsverwaltung GmbH, Vienna 100.00% 73 -1 31.12.2008AUSTOST ANSTALT, Balzers 100.00% 4,232 1,338 31.12.2008BAWAG Finance Malta Ltd., Sliema 100.00% 540 129 C 31.12.2008BAWAG INTERNATIONAL FINANCE LIMITED, Dublin 100.00% 8,229 60 31.08.2008BAWAG P.S.K. Capital Advisors Ltd., London 100.00% 287 285 C 31.12.2008BAWAG P.S.K. Datendienst Gesellschaft m.b.H., Vienna 100.00% 402 4 31.12.2008BAWAG P.S.K. IMMOBILIEN AG, Vienna 100.00% 40,778 7,466 C 31.12.2008BAWAG P.S.K. Jersey Auto Finance Limited, Jersey 100.00%BAWAG P.S.K. Jersey Capital Limited, Jersey 100.00% -10,112 -10,112 C 31.12.2008BAWAG P.S.K. LEASING GmbH, Vienna 100.00% 61,006 5,131 C 31.12.2008C e l e s t e Trust reg., Balzers 100.00% 51 16 31.12.2008Einlagensicherung der Banken und Bankiers Gesellschaft m.b.H., Vienna 61.82% 54 – 31.12.2007

Leasing 431 Grundstückverwaltung Gesellschaft m.b.H., Vienna 21.32% 13,644 412 31.12.2007LTB Beteiligungs-Gesellschaft m.b.H., Vienna 25.10% 4,868 2,167 30.11.2008P.S.K. Beteiligungsverwaltung GmbH, Vienna 100.00% 995,069 1,912 C 31.12.2008P.S.K. Handel und Vermietung GmbH, Vienna 100.00% 478 108 31.12.2007P.S.K. Zahlungsverkehrsabwicklungs GmbH, Vienna 99.71% 551 – 31.12.2008PULAWSKA Planungs- und Errichtungsges.m.b.H. in Liqu., Vienna 100.00% 15,487 98 31.12.2007RF BAWAG Leasing Gesellschaft m.b.H., Vienna 100.00% 3,437 39 31.12.2007RVG, Realitätenverwertungsgesellschaft m.b.H., Vienna 100.00% 17,008 -137 C 31.12.2008Wiener Risikokapitalfonds Ges.m.b.H., Vienna 20.00% 20 – 31.12.2007


26

Other Group affiliates and associates


in %


reserves


Consolidation mandatoryBAWAG CAPITAL FINANCE II LIMITED, Jersey 100.00% CBAWAG CAPITAL FINANCE III LIMITED, Jersey 100.00% CBAWAG CAPITAL FINANCE LIMITED, Jersey 100.00% CBAWAG Investments Limited, St. Helier 100.00% CBAWAG P.S.K. Fuhrparkleasing GmbH, Vienna 100.00% CBAWAG P.S.K. IMMOBILIENLEASING GmbH, Vienna 100.00% CBAWAG P.S.K. INVEST GmbH, Vienna 100.00% CBAWAG P.S.K. Kommerzleasing GmbH, Vienna 100.00% CBAWAG P.S.K. LEASING GmbH & Co. MOBILIENLEASING KG., Vienna 100.00% CBAWAG P.S.K. MOBILIENLEASING GmbH, Vienna 100.00% CBAWAG P.S.K. Vermietungs- und Leasing GmbH, Vienna 100.00% CB.L.H. BAWAG Leasing Holding GmbH, Vienna 100.00% CBodensee Limited, Sliema 51.00% CBPI Holding GmbH & Co KEG., Vienna 100.00% CBPI Holding GmbH & Co. Immobilien und Anlagen KG., Vienna 99.65% CBPI Holding GmbH, Vienna 100.00% CBV Holding GmbH, Vienna 100.00% CBV Vermögensverwaltung GmbH, Vienna 100.00% CCARNI Industrie-Immobiliengesellschaft m.b.H., Vienna 100.00% CFCH beta Finanzierungsvermittlung GmbH, Vienna 100.00% CGara Feuerwehrzentralen Leasing Gesellschaft m.b.H., Vienna 100.00% C

Hafner See-Liegenschaftsverwaltungs-gesellschaft m.b.H., Vienna 100.00% CHBV Holding und Beteiligungsverwaltung GmbH, Vienna 100.00% CKLB Baulandentwicklung GmbH, Vienna 100.00% CM. Sittikus Str. 10 Errichtungs GmbH, Vienna 100.00% CP.S.K. IMMOBILIENLEASING GmbH, Vienna 100.00% CR & B Leasinggesellschaft m.b.H., Vienna 100.00% CRF 17 BAWAG Immobilienleasing GmbH, Vienna 100.00% CRF elf Realitätenverwertungsgesellschaft m.b.H., Vienna 100.00% CRF fünfzehn BAWAG Mobilien-Leasing Gesellschaft m.b.H., Vienna 100.00%

C

RF sechs BAWAG P.S.K. LEASING GmbH & Co. KG., Vienna 100.00% CRF zwölf BAWAG Leasing Gesellschaft m.b.H., Vienna 100.00% CRhein Limited, Grand Cayman 51.00% CSTART Immobilienleasing GmbH, Vienna 100.00% CStiefelkönig Schuhhandels Gesellschaft m.b.H., Graz 100.00% C


27

Other Group affiliates and associates


in %


reserves


Consolidation not mandatoryAI-ALTERNATIVE INVESTMENTS LTD., Jersey 100.00%ATHENA Burgenland Beteiligungen AG, Eisenstadt 38.30%ATHENA Erste Beteiligungen AG, Vienna 24.00%Athena Wien Beteiligungen AG, Vienna 50.00%ATHENA Zweite Beteiligungen AG, Vienna 24.00%AUSTOST HANDELS- UND TREUHANDGESELLSCHAFT M.B.H., in Liqu., Munich 100.00%

AUSTOST HANDELS UND TREUHAND LIMITED, Guernsey 100.00%B.A.O. Immobilienvermietungs GmbH, Vienna 33.33%B.I.S. BAWAG Internet Services GmbH, Vienna 100.00%BAWAG FINANCE HOLDING LIMITED, Dublin 100.00% CBAWAG 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., Prague 100.00%BAWAG Leasing Zrt., Budapest 100.00%BAWAG P.S.K. Versicherung AG, Vienna 49.99% at equityBAWAG Real Estate Leasing s.r.o., Prague 100.00%BPI Holding GmbH & Co. Betriebsanlagenverwaltungs KG., Vienna 100.00%BPLCZ One s.r.o., Prague 100.00%CVG Immobilien GmbH, Vienna 100.00%E-C-B Beteiligungsgesellschaft m.b.H., Vienna 50.00%Elektro-Beteiligungs-GmbH, Vienna 100.00%Foundationsquartier GmbH, Vienna 33.30%Gara RPK Grundstücksverwaltungsgesellschaft m.b.H., Vienna 100.00%GCP2 GmbH, Vienna 100.00%Generali Leasing GmbH, Vienna 25.00%HFE alpha Handels-GmbH, Vienna 100.00%IDG Immobilien Development Gesellschaft m.b.H. & Co KG, Vienna 100.00%

IDG Immobilien Development Gesellschaft m.b.H., Vienna 100.00%

Ingebe Immobilienhandels- und Vermittlungs-GmbH., Vienna 100.00%

IPO Wachstumsfonds Beteiligungs-Management GmbH, Vienna 35.91%Kommunalleasing GmbH, Vienna 50.00%MAP Handels GmbH, Vienna 95.84%MARVE Immobilienentwicklungsgesellschaft m.b.H., Vienna 100.00%Obernosterer - Beteiligungsgesellschaft m.b.H., Graz 100.00%Omnimedia Werbegesellschaft m.b.H., Vienna 27.57%


28


in %


reserves


OMNITEC Informationstechnologie-Systemservice GmbH, Vienna 50.00%PLATO Grundstücksverwertung GmbH, Vienna 100.00%PT Immobilienleasing GmbH, Vienna 100.00%RAIL TRANS INVEST LIMITED, Dublin 100.00%Realplan Beta Liegenschaftsverwaltung Gesellschaft m.b.H., Vienna 50.00%RF 2 BPI Holding GmbH & Co. KG., Vienna 99.84%Stiefelkönig d.o.o., Belgrade 100.00%Stiefelkönig d.o.o., Zagreb 100.00%Stiefelkönig spol. s.r.o., Bratislava 100.00%Stiefelkönig trgovinas cevlji d.o.o., Maribor 100.00%Stiefelkönig Schuhhandels GmbH, Germany 100.00%uni venture Beteiligungs AG, Vienna 100.00%Versicherungsdienst der BAWAG P.S.K. GmbH, Vienna 50.01%WBG Wohnen und Bauen Gesellschaft mbH, Vienna 24.00%Vindobona Alpha S.a r.l., Luxembourg 100.00%Vindobona Finance Beta S.A., Luxembourg 100.00%Vindobona Gamma S.a r.l., Luxembourg 100.00%Zeus Recovery Fund S.A., Luxembourg 50.00% at equity


29

All Derivative financial Instruments in BAWAG P.S.K.’s Accounts as of 31 December 2008Derivates in the bank book

in thousands of EurosNominal values by maturity

Fair purchase and selling value

Up to 1 year 1-5 years over 5 years Total pos fair value neg fair value

Interest rate derivativesa) Interest rate swaps (with a single currency) 4,957,341 6,447,067 5,622,968 17,027,376 604,586 -422,325 b) Basic swaps 62,394 327,096 1,176,188 1,565,678 49,350 -48,611 c) Interest rate futures – – – – – – d) Interest rate futures and interest-rate-based index contracts (*) 531,900 – – 531,900 – – e) Options on interest-rate based index contracts 27,541 181,671 374,915 584,127 1,809 -1,340 f) Other comparable contracts – – – – – –

Exchange rate transactions and gold-based transactionsa) Currency and interest rate swaps (with multiple currencies) 9,124 132,984 1,207,095 1,349,203 19,299 -67,907 b) Exchange futures 3,070,960 – – 3,070,960 142,999 -101,845 c) Currency futures and currency-based index contracts – – 237,831 237,831 – -33,273 d) Currency options 29,159 – 9,292 38,451 335 -223 e) Gold-based contracts and contracts comparable with items a to d 185 – – 185 62 – f) Other exchange and gold contracts – – – – – –

Index and asset value contractsa) Futures in asset values and other securities- price-based index futures – – 42,628 42,628 – –

b) Index futures in asset values and other securities- based index futures 16,600 102,903 30,000 149,503 10,578 -3,023

c) Options in asset values and other securities index options –

d) Other comparable contracts involving asset values and other securities –

Precious metalsa) OTC precious metal futuresb) Listed precious metal futuresc) Precious metal optionsd) Other comparable precious metal contracts

Commodities contracts (excluding precious metals contracts)a) OTC commodities futuresb) Listed commodities futuresc) Purchased commodities options – 13,070 5,000 18,070 – -549 d) Other comparable commodities contracts

Credit derivativesa) Single name credit event/default swaps – 3,376,656 439,180 3,815,836 463,263 -154,823 b) Portfolio credit event/default swapsc) Total return swapsd) Credit spread forwardse) Credit spread optionsf) Other

Other futures, options and comparable transactions that cannot be assigned tothe categories above 33,061 269,494 79,624 382,179 1,295 -3,433 Total nominal value in bank book 28,813,927 1,293,576 -837,352

* Futures are included in the item Interest rate futures and interest-rate-based index contracts. No fair values are given for the futures because they are compensated for by the continual variation margin payments.


30

Derivatives in the trading book

in thousands of EurosNominal values by maturity

Fair purchase and selling value

Up to 1 year 1-5 years over 5 years Total pos fair value neg fair value

Interest rate derivativesa) Interest rate swaps (with a single currency) 4,134,923 10,519,824 7,598,030 22,252,777 526,921 -459,322 b) Basic swaps – 275 112 387 5,029 -1,192 c) Interest rate futures – – – – – – d) Interest rate futures and interest-rate-based index contracts (*)

970,000 – – 970,000 – –

e) Options on interest-rate-based index contracts 2,140,172 5,247,142 3,910,908 11,298,222 131,175 -132,624 f) Other comparable contracts – – – – – –

Exchange rate transactions and gold-based transactionsa) Currency and interest rate swaps (with multiple currencies)

– 34,764 2,066,491 2,101,255 59,672 -59,940

b) Exchange futures 715,023 26,785 – 741,808 28,633 -34,848 c) Currency futures and currency-based index contracts

– – – – – –

d) Currency options 5,283,055 1,741,510 900,068 7,924,633 235,248 -228,922 e) Gold-based contracts and contracts comparable with items a to d

27,778 – – 27,778 478 -224

f) Other exchange and gold contracts – – – – – – Index and asset value contracts

a) Futures in asset values and other securities- price-based index futures

b) Index futures in asset values and other securities- based index futures

c) Options in asset values and other securities index options

d) Other comparable contracts involving asset values and other securities

Precious metalsa) OTC precious metal futuresb) Listed precious metal futuresc) Precious metal optionsd) Other comparable precious metal contracts

Commodities contracts (excluding precious metals contracts)a) OTC commodities futuresb) Listed commodities futuresc) Purchased commodities optionsd) Other comparable commodities contracts

Credit derivativesa) Single name credit event/default swaps 10,000 749,000 265,000 1,024,000 40,571 -48,964 b) Portfolio credit event/default swapsc) Total return swapsd) Credit spread forwardse) Credit spread optionsf) Other

Other futures, options and comparable transactions that cannot be assigned tothe categories above – – – – – – Total nominal value in the trading book 46,340,860 1,027,727 -966,036Total nominal value 75,154,787 2,321,303 -1,803,388

* Futures are included in the item Interest rate futures and interest-rate-based index contracts. No fair values are given for the futures because they are compensated for by the continual variation margin payments.


31

Boards and Officers

The Managing Board of BAWAG P.S.K. as of 31 December 2008

David ROBERTS (since 7 November 2007)

Stephan KOREN (since 1 October 2005)

Jochen BOTTERMANN (from 1 October 2005 to 31 December 2008)

Byron HAYNES (since 1 August 2008)

Joseph LAUGHLIN (since 13 August 2007)

Carsten SAMUSCH (since 13 August 2007)

Regina PREHOFER (since 15 September 2008)


32

The Supervisory Board of BAWAG P.S.K. as of 31 December 2008

ChairmanWulf von SCHIMMELMANN (from 18 July 2007 until the Annual General Meeting 2011*)

Deputy ChairmanDaniel E. WOLF (from 18 July 2007 until the Annual General Meeting 2011*)

MembersMarius J.L. JONKHART (from 18 July 2007 until the Annual General Meeting 2011*)

Pieter KORTEWEG (from 27 August 2007 until the Annual General Meeting 2011*)

Rudolf JETTMAR (from 15 May 2007 until the Annual General Meeting 2011*)

Mike ROSSI (from 23 July 2008 until the Annual General Meeting 2011*)

Works Council DelegatesIngrid STREIBEL-ZARFL

Brigitte JAKUBOVITS

Beatrix PRÖLL

State CommissionerEmmerich BACHMAYER (since 1 March 2007, Deputy State Commissioner until 28 February 2007)

Deputy State CommissionerBeate SCHAFFER (since 1 March 2007)

Members of the Supervisory Board Departing in 2008Ewald NOWOTNY (from 1 January 2008 to 22 July 2008)

* Until the end of the Annual General Meeting adopting the Annual Financial Statements for 2010.


33

Committees of BAWAG P.S.K. as of 31 December 2008

Credit CommitteeDaniel E. WOLF, Chairman

Wulf von SCHIMMELMANN, Deputy Chairman

Marius J.L. JONKHART

Rudolf JETTMAR

Ingrid STREIBEL-ZARFL, Delegated by the Works Council

Beatrix PRÖLL, Delegated by the Works Council

Audit CommitteeMarius J.L. JONKHART, Chairman

Daniel E. WOLF, Deputy Chairman

Pieter KORTEWEG

Rudolf JETTMAR


Brigitte JAKUBOVITS, Delegated by the Works Council

Nomination CommitteeWulf von SCHIMMELMANN, Chairman


Pieter KORTEWEG



Remuneration CommitteeWulf von SCHIMMELMANN, Chairman


Pieter KORTEWEG

Related Parties Special Audit CommitteeMarius J.L. JONKHART, Chairman

Wulf von SCHIMMELMANN, Deputy Chairman

Pieter KORTEWEG

Rudolf JETTMAR



BAWAG P.S.K. Management Report 2008

34

BAWAG P.S.K. MANAGEMENT REPORT

The Economy

State of the Economy

The turbulence on the financial markets culminated in a severe global crisis in the second half of 2008.

Starting with a wave of mortgage defaults in the United States, the crisis quickly spread throughout the

closely linked international financial markets. The effects of the crisis on the real economy did not come

immediately, but they came. The United States economy slid into a recession in December 2007, and the

world’s other industrialised countries saw their own downturns around the middle of 2008. Plummeting

import demand in these countries caused the recession to spread to the emerging market economies, and the

healthy growth that these countries had enjoyed slowed considerably as net exports dwindled.

Economic growth in the Eurozone slowed to 1.2 per cent in 2008, whereby most of this expansion was

achieved in the first quarter. While robust at the start of the year, domestic demand fell continuously as the

year progressed, and declining order intake caused businesses to heavily curtail their investments. Consumers

struggled with rapidly increasing inflation, especially in the form of rising energy and food prices. This com-

bined with the negative economic outlook caused consumers to tighten their purse strings. As the downturn

impacted various key export markets, the Eurozone’s foreign trade activity slowed markedly over the year.

The Austrian economy again performed above the average for the Eurozone as a whole in 2008. Overall

economic output grew by 1.9 per cent, but capacity utilisation was down in year-on-year comparison. Because

the Austrian economy is very open, the worldwide economic downturn spread to the country in the second half

of the year through declining exports. Especially goods manufacturers saw their growth slowing because of

their heavy dependence on foreign buyers, and the decline that began in the summer of 2007 rapidly gained

momentum.

According to data collected by the Austrian Institute of Economic Research, order levels and the production

outlook deteriorated rapidly for goods manufacturers especially in the final quarter of the year. Retail sales

failed to reach the levels recorded in 2007. Investment confidence also slumped drastically in the second half

of the year as order levels and capacity utilisation fell, reducing the need for investments.


35

The number of actively employed persons reached a record high of 3.4 million in the middle of the year

2008. The average annual unemployment rate was 3.8 per cent, considerably lower than in 2007. However,

the Austrian labour market started to show signs of increasing unemployment in the last quarter of 2008.

The rapid rise in the oil price through to the middle of the summer caused the consumer price index to

increase significantly in 2008. The following price decline went even faster than the increase before it, with

inflation falling from 3.1 per cent in October to 1.3 per cent in December. The overall inflation rate for the

year was 3.2 per cent. Unlike in the rest of the Eurozone, the core inflation rate (inflation without energy or

food) also increased in Austria, peaking at 2.8 per cent in October and coming in at 2.4 per cent for the year

as a whole.

iTraxx Europe index *)250

200

150

100

50

0

Jan

07

Apr

07

Jul 0

7

Oct

07

Jan

08

Apr

08

Jul 0

8

Oct

08

Jan

09

*) Credit default index, composed of the 125 most liquid investment grade rated entities

Interest Rates

Short- and long-term interest rates were very volatile in 2008. Money market rates mirrored the changes in

the key interest rates, but with extraordinarily high risk spreads. The worsening of the crisis in October and

the resulting plummet in confidence drove short-term interest rates in the Eurozone up to more than 100

basis points over the ECB’s key interest rate, and briefly to more than 300 basis points over the Fed Funds

Target Rate in the United States. After this, the central banks began to gradually cut their policy rates, and

the Federal Reserve’s target range of 0 to 0.25 per cent at the end of the year put its interest rates lower than

they had ever been. The ECB also surprised the market with its first 75 basis point cut to 2.5 per cent in

December. The risk spreads narrowed considerably after these cuts.


36

After a period of slight gains, the capital markets began to slide in the middle of the year, largely due to a

combination of the negative economic outlook and the expectations that inflation would fall. At the end of the

year, the benchmark for ten-year government bonds in the Eurozone was at 2.95 per cent, nearly 140 points

lower than at the end of 2007. Yields in the United States had fallen even lower, with ten-year Treasuries

closing the year at 2.22 per cent, down 180 points over the end of the prior year. The yield curve remained

inverted for nearly the entire year in the Eurozone, a situation that intensified during the peak of the crisis in

the autumn. A positive yield curve finally returned in December.

Eurozone interest rates

6.00

5.00

4.00

3.00

2.00

1.00

0.0

Jan

07

Apr

07

Jul 0

7

Oct

07

Jan

08

Apr

08

Jul 0

8

Oct

08

Jan

09

3-month Euribor 10-year government benchmark

Exchange Rates

The Euro had a turbulent year. The nominal effective exchange rate index, which measures the value of a

currency compared to those of its main trading partners, rose by 4 per cent into late summer and then fell

rapidly. The gains posted again in December led to a minimal appreciation for the Euro overall at the end of

the reporting period. However, the common currency lost against the world’s most important currencies:

–6 per cent versus the US dollar, –24 per cent versus the Japanese yen and –10 per cent versus the Swiss

franc. The US dollar and Swiss franc posted significant gains against the Euro in October. The franc increased

by over 7 per cent relative to the Euro in just a few weeks as investors fled to this “safe haven” while the

financial crisis worsened. The very short-lived nature of such a trend is borne out by the fact that the franc

lost 5 per cent again in just one month.


37

Equity Markets

The crisis on the real estate and financial markets also caused a decline in prices on all major equity markets.

The greatest losses by far came in October. The Standard & Poor’s Index and the Euro Stoxx 50 Index both

lost 35 per cent in 2008 (with 17 per cent and 15 per cent losses in October, respectively). The Vienna stock

exchange followed the lead of its larger counterparts, and the ATX closed its last day of trading in 2008 with a

year-on-year loss of 60 per cent.

Outlook

The financial crisis began taking a serious toll on the real economy in the autumn of 2008, and a marked

downturn can now be seen in many sectors. This downturn is also spreading to the emerging economies as

global import demand falls. The market is gripped by uncertainty, and growth is expected to decline signifi-

cantly the world over in 2009. It is impossible to say when this trend will finally reverse. However, we can

already see a number of positive factors that will play an important part in overcoming the recession once they

have their full effect. These include measures for the stabilisation of the financial markets, the numerous

economic stimulus packages and the central banks’ expansive monetary policies. Significant interest rate cuts

and the injection of additional liquidity have already done much to stabilise the financial markets, but the real

economy will not benefit for some months to come.

Rapidly falling inflation is boosting households’ purchasing power. Inflation is even expected to fall below zero

briefly, which will increase real disposable incomes.

Austria has not been able to escape the effects of the global recession. Declining demand from the country’s

main trading partners is directly impacting domestic industry, especially the automobile components manu-

facturers and capital goods manufacturers. Demand from the Eurozone and other industrialised countries

began slowing noticeably as 2008 progressed, and exports to Asia and neighbouring countries in Eastern

Europe will fall off this year as well. This will bring a noticeable increase in unemployment in Austria.

Unlike in most other EU countries, however, the moderate growth in private consumption is forecast not to

slow this year as falling inflation and tax breaks boost the level of real disposable income in the country.

However, Austrians are thrifty and the majority of this additional income will likely be put into savings.


38

Key Events during the financial Year

Changes in the Managing Board

David Roberts, who served the Bank as an advisor starting in May 2007 and as a Member of the Managing

Board starting in November 2007, was appointed Chairman of the Managing Board and CEO of BAWAG P.S.K.

in place of Ewald Nowotny on 1 January 2008. Stephan Koren was appointed Deputy Chairman of the Man-

aging Board on the same date.

Byron Haynes was appointed to the Managing Board on 1 August 2008 and Regina Prehofer on 15 September

2008 to speed the implementation of BAWAG P.S.K.’s new strategy: increased focus on its banking business

in its core market of Austria. Regina Prehofer’s area of responsibility covers BAWAG P.S.K.’s retail and com-

mercial banking in Austria; Byron Haynes was appointed Chief Financial Officer of the Bank. Stephan Koren

assumed the position of Chief Risk Officer in the place of Jochen Bottermann as of 1 September 2008, who

retired from the Managing Board on 31 December 2008, but who will continue to serve the bank as a senior

advisor. During his tenure on the Managing Board, Jochen Bottermann was responsible for the Bank’s expan-

sion into Eastern Europe, among other things. He also directed the successful expansion of the Bank’s

business with small and medium-sized enterprises (SMEs).

Alois Steinbichler left the bank in September 2008 to pursue new challenges. He played an important part in

stabilising the Bank’s liquidity situation and repositioning the Bank in Eastern Europe.

Changes in the Supervisory Board

After leaving the Managing Board, Ewald Nowotny assumed a post on the Bank’s Supervisory Board in January

2008. He stepped down from the Supervisory Board in July 2008 and was succeeded by Mike Rossi, an

international banking expert.

Consolidation of the headquarters at the Building on Georg-Coch-Platz

After the sale of several properties in 2007, including BAWAG’s headquarters building on Seitzergasse in

Vienna’s first district, the consolidation of the central units that were formerly housed in the Seitzergasse and

Georg-Coch-Platz buildings was initiated. This project was concluded successfully in December 2008.

The new headquarters of BAWAG P.S.K. is now located in the Postal Savings Bank building designed by

Otto Wagner at Georg-Coch-Platz 2 in Vienna’s first district.


39

Transformation Programme

Another of the Bank’s key projects, the Transformation Programme, was also successfully concluded in

December 2008. The objective of this programme was to boost the effectiveness of the Bank’s sales units and

to relieve them of administrative tasks, and also to install efficient and rapid automated processes in the back

office. The Bank also strengthened its risk organisation under this programme by focusing its expertise in four

regional risk centres and by revising existing and introducing new risk tools in 2008.

Payment Transfers

The European Union began the gradual implementation of the Single Euro Payments Area, SEPA, on 28

January 2008. The objective of this system is to create a uniform framework for the processing of payment

transactions throughout Europe. BAWAG P.S.K. was involved in all phases of implementation from the very

beginning as a member of the Austrian Payment Council (APC) and was the first Austrian bank that was

SEPA-fit when the system went online.

Basel II Reporting

In the past years BAWAG P.S.K. prepared for the adaptation of its regulatory reporting system to the require-

ments of Basel II (Solvabilitätsverordnung der Finanzmarktaufsicht). Important risk control instruments were

implemented or improved as part of this work. The conversion to the new regulatory reporting system was

effected as of January 2008 accord ing to schedule. For calculating the own funds requirement BAWAG P.S.K.

applies the standardised approach concerning credit risk and the basic indicator approach concerning opera-

tional risk.

legal Aspects

Claims of former Board Members

The contracts of the Board members Christian Büttner, Hubert Kreuch, Peter Nakowitz, and Josef Schwarz-

ecker were terminated effective 30 April 2006. Johann Zwettler resigned on 31 December 2005. Because of

criminal proceedings currently ongoing against these individuals, the Bank has rescinded various contractual

obligations for future remuneration. Current opinions from BAWAG P.S.K.’s legal advisors indicate that a large

portion of the claims defined in these individuals’ contracts of employment will no longer be enforceable by

the former members of the Managing Board. The criminal proceedings have been concluded in the court of

first instance. All former members of the Managing Board were found guilty of breach of trust and balance

sheet fraud. In addition the court ordered payment of compensation (with the exception of Christian Büttner)

to the Bank in the amount of at least EUR 67.7 million. The court’s decision is still open to appeal.


40

Refco, SPhinX

In the spring of 2006, BAWAG P.S.K. was the subject of an investigation by the U.S. Department of Justice

(DOJ) in relation to the bankruptcy of the US brokerage firm Refco, and was also confronted with threats of

legal action by the Creditors Committee of unsecured creditors related to the Refco bankruptcy and the

investor T.H. Lee. A settlement was reached with all parties (DOJ, Creditors Committee, T.H. Lee) on 6 June

2006, which required the Bank to effect an unconditional payment of USD 675 million. The settlement also

stipulated that in the event of the sale of the Bank for a sale price of over EUR 1,800 million, a further

30 per cent of the proceeds of the sale, up to a maximum of USD 200 million, would also be effected as an

additional settlement.

This settlement was confirmed by a court decision on 11 September 2006 and payment of the unconditional

settlement amount of USD 675 million was effected in full (50 per cent to Refco Group Ltd, LLC and 50 per

cent to the DOJ) by BAWAG P.S.K. Upon closing of the contract of sale pertaining to the BAWAG P.S.K. shares

in May 2007, an additional payment of USD 200 million was also effected. The remaining payments to

T.H. Lee for which BAWAG P.S.K. was liable have also been made in full.

Under the American legal system, this settlement represents an agreement with the parties to the contract but

does not entirely preclude legal action by other parties. In early March 2008, the liquidators of SPhinX Funds

filed a suit with the Supreme Court of the State of New York against more than fifty defendants, including

BAWAG P.S.K. No specific amounts are stated in this suit. Jurisdiction has been clarified; procedural issues

must now be worked out, and detailed documents are being prepared to contest the case.

BAWAG P.S.K. has asserted its claims from non-redeemed investments in SPhinX Funds in the amount of

roughly USD 29.4 million with the liquidators of SPhinX. These claims have not yet been approved. If the

liquidators continue to deny these claims after their evaluation is complete, the claims must be lodged with

the competent court on the Cayman Islands.

The restructuring of the claims from the Refco bankruptcy entered into force on 26 December 2006. In total,

USD 331 million in claims were registered by parties who did not participate in the settlement with BAWAG

P.S.K. The Bank believes that the risks associated with these claims are low.

The Bank was sent another suit which had originally been threatened by Global Management Worldwide

Limited, but upon receipt by the Bank this suit had already been replaced by a new, revised suit, in which the

Bank is no longer mentioned as a defendant. The Bank opted not to pursue possible objections based on

statutes of limitations vis-à-vis the legal representatives of the litigant.


41

Changes in the General Terms and Conditions

The Austrian Consumer Information Association (Verein für Konsumenteninformation, VKI) filed a petition for

injunction against BAWAG P.S.K. in October 2008. This consumer protection organisation is claiming that

the changes to the General Terms and Conditions were not presented in a transparent manner, and that

consumers were therefore not informed clearly enough about which concrete changes require their acceptance.

The manner in which the Bank informs its customers about changes in the General Terms and Conditions

was changed immediately after notice of the petition was received and the matter discussed with the VKI.

Customers who had already been informed of the changes were also provided with additional detailed

information in writing. A settlement has been reached in the meantime.

Changes in the Bank’s Equity Interests

The sale of the Bank’s holdings in the piano manufacturer Bösendorfer and the television broadcaster ATV was

finalised in January 2008.

The proceedings that were initiated in 2007 for the sale of the BAWAG subsidiaries in Slovakia and the Czech

Republic were also concluded successfully in 2008. Istrobanka in Slovakia was sold to the Belgian bank KBC

after an international bidding process; the sale closed on 1 July 2008. BAWAG Bank CZ in the Czech Repub-

lic was sold to the German bank Landesbank Baden-Württemberg (LBBW) effective 1 September 2008.

Both banks were sold at a gain for BAWAG P.S.K. The sale of a second large group of properties that was

initiated at the beginning of 2008 was not finalised because of the poor market conditions. If these condi-

tions improve in the upcoming months, individual properties and smaller groups of properties may come up

for sale.

BAWAG P.S.K. decided to postpone the sale of the Stiefelkönig Group shoe chain that it initiated in the first

half of 2008 because of the changed conditions in the retail sector. The Bank is now working to sustainably

increase the competitiveness of the group.

Oesterreichische Clearingbank AG was founded in October 2008 as a result of the international financial crisis

and on the basis of the Interbank Market Support Act (Interbankmarktstärkungsgesetz) with the objective of

improving Austrian banks’ access to liquidity and maintaining the flow of liquidity between Austrian banks.

BAWAG P.S.K. holds a 5.17 per cent stake in this company.


42

In October 2008, a consortium of banks comprising UniCredit Bank Austria AG, Erste Group Bank AG,

Raiffeisen Zentralbank Aktiengesellschaft, Österreichische Volksbanken-Aktiengesellschaft and BAWAG P.S.K.

agreed to provide capital to Constantia Privatbank Aktiengesellschaft in cooperation with Oesterreichische

Nationalbank and the Republic of Austria to secure Constantia Privatbank’s liquidity and existing business

and to strengthen the Austrian financial market. Aviso Gamma GmbH was founded as a holding company to

this end; BAWAG P.S.K. holds a 10.625 per cent stake. Aviso Gamma GmbH then acquired Constantia

Privatbank Aktiengesellschaft.

BAWAG P.S.K.’s structured credit portfolio was sold to BV Vermögensverwaltung GmbH in 2008. This compa-

ny is a subsidiary of the Bank and was established to bring the Bank’s structured securities holdings into a

single portfolio. The Bank also sold corporate bonds to BV Holding GmbH, a newly established wholly owned

indirect subsidiary of BAWAG P.S.K.

BAWAG Jersey Capital and BAWAG Capital Advisors were established in 2008 to support new business activi-

ties and were added to the Group.

P.S.K. Beteiligungsverwaltung GmbH sold 70,472 shares (a stake of 0.5 per cent) in the Hungarian bank

MKB Bank Zrt to Saberasu Japan Investments II B.V. in December 2008. The latter is controlled by Cerberus

Capital Management, L.P. The shares were sold for the proportionate carrying amount of the MKB shares on

P.S.K. Beteiligungsverwaltung GmbH’s books according to UGB.

The Bank’s 26 per cent stake in Allianz Pensionskasse AG was sold at its current carrying amount in

December 2008.

Notes to the Annual financial Statements

With the entry into the commercial register in January 2009, Sparda Bank Vienna, a wholly owned subsidiary

of BAWAG P.S.K., was merged into BAWAG P.S.K., effective 30 June 2008. Due to this change, the assets

and liabilities of Sparda Bank are included in the figures for BAWAG P.S.K. as of 31 December 2008. The

income statement for 2008 includes the figures for Sparda Bank from the second half of the year. Sparda

Bank had consolidated assets totalling EUR 75 million and a profit for the second half of the year of less than

EUR 2 million. This means that the comparability of the figures between the current and prior reporting

periods is not affected.


43

BAWAG P.S.K. had consolidated assets of EUR 41,581 million as of 31 December 2008, EUR 1,078 million

or 2.5 per cent less than at the end of 2007. The main cause of this decline was the lower volume of

receiv ables from and payables to credit institutions on the reporting date. The decline in securities resulted in

a shift on the assets side of the balance sheet. As already mentioned, BAWAG P.S.K. sold its structured credit

portfolio to the newly founded company BV Vermögensverwaltung, and sold credit surrogates to BV Holding.

BAWAG P.S.K. indirectly holds 100 per cent of the shares of both of these companies, and deferred the

purchase price for these transactions. This increased the Receivables from customers by EUR 2,479 million,

while the recognised securities fell by the same amount.

Assets

in millions of Euros 31.12.2008 31.12.2007

BalanceShare of assets

BalanceShare ofassets

Change

Receivables from customers 23,538 57% 20,768 49% +2,770 +13.3%Securities 7,360 17% 9,060 21% -1,700 -18.8%

Receivables from credit institutions 5,871 14% 8,355 20% -2,484 -29.7%

Shares in Group companies 1,584 4% 1,883 4% -299 -15.9%Other items 3,228 8% 2,593 6% +635 +25.1%Assets 41,581 100% 42,659 100% -1,078 -2.5%

Receivables from customers amounted to EUR 23,538 million on 31 December 2008, EUR 2,770 million or

13.3 per cent higher than on the prior reporting date. Adjusted for the one-off effects of the sale of securities

described above, this item increased by EUR 291 million or 1.4 per cent. Receivables from public-sector

customers, primarily the Republic of Austria, fell by nearly EUR 500 million in 2008 while loans to corporate

customers were increased by more than EUR 500 million. The majority of this new business was concluded

with Austrian customers and has improved the credit supply in the domestic economy. Retail lending also

grew handsomely with a plus of roughly EUR 300 million.

BAWAG P.S.K.’s securities portfolio amounted to EUR 7,360 million on 31 December 2008 (–EUR 1,700

million or –18.8 per cent). The sale of the structured credit portfolio and credit surrogates discussed above

and scheduled redemptions were offset by the acquisition of EUR 2,492 million in securities for the newly

created liquidity book. This book of Treasury investments contains liquid single-name instruments.

Receivables from credit institutions amounted to EUR 5,871 million on the reporting date. These declined by

EUR 2,484 million because of the atypically high level of receivables on the books on 31 December 2007.


44

Shares in Group companies amounted to EUR 1,584 million on the reporting date (–EUR 299 million or

–15.9 per cent). Significant disposals (–EUR 229 million) resulted from the sale of the subsidiaries Istroban-

ka and BAWAG Bank CZ. BAWAG Malta’s parent injected additional capital in the amount of EUR 50 million

to strengthen the bank. The share in P.S.K. Beteiligungsverwaltung is EUR 120 million lower than in the prior

year. This is the result of the partial write-down of the shareholding in the amount of EUR 310 million in

connection with a one-time dividend payment in the same amount, and a capital injection into the newly

founded BV Holding in the amount of EUR 190 million.

The increase in Other items by EUR 635 million to EUR 3,228 million is primarily due to the increase in the

positive fair values of derivative financial instruments.

Liabilities and equity

in millions of Euros 31.12.2008 31.12.2007

BalanceShare of assets

BalanceShare ofassets

Change

Savings deposits 15,207 37% 14,404 34% +803 +5.6%Other customer deposits 6,886 17% 7,661 18% -775 -10.1%

Securities issued by BAWAG P.S.K. 9,109 22% 9,421 21% -312 -3.3%

Payables to banks 6,526 15% 8,115 19% -1,588 -19.6%Other liabilities and equity 3,853 9% 3,058 8% +794 +26.0%Liabilities and equity 41,581 100% 42,659 100% -1,078 -2.5%

The EUR 803 million or 5.6 per cent increase in savings deposits to EUR 15,207 million as of 31 December

2008 is an encouraging indicator of the fact that the Bank has regained the trust of its customers. Savings

deposits account for more than one third of the Bank’s balance sheet total, showing how important this

category is for BAWAG P.S.K.

Other customer deposits came in at EUR 6,886 million on 31 December 2008 (–EUR 775 million or

–10.1 per cent). This decline can be attributed to the expiration of a special transaction.

Outstanding securities issued by BAWAG P.S.K. totalled EUR 9,109 million on the reporting date,

–EUR 312 million or –3.3 per cent less than at the end of the prior year. The reason for this lower figure

was the redemption of Bank securities and the decision not to issue new securities because of the adverse

conditions on the international financial markets.


45

The most important reason for the EUR 794 million rise in Other liabilities and equity to EUR 3,853 million

is the higher fair values of derivative financial investments (as also seen on the assets side). Reserves were

released to cover the loss for the period of EUR 542 million.

Income statement

in millions of Euros 2008 2007 Change

Net interest income including income from securities 477 471 +6 +1.1%

Net income from equity interests 334 113 +221 +>100%Commissions 123 111 +12 +11.0%Net income from financial investments 24 31 -7 -22.7%Other operating income 9 48 -39 -81.2%Net operating income 967 774 +193 +24.8%Administrative expenses -554 -506 -48 -9.5%Write-downs and other operating expenses -60 -85 +25 +29.4%Operating expenses -614 -591 -23 -3.9%Operating profit 353 183 +170 +92.4%Cost/income ratio 63.5% 76.3%Allocation of credit risk provisions -147 -76 -71 -94.4%Valuation and sale proceeds from securities -116 -45 -71 -<100%

Valuation and sale proceeds fromfinancial assets -555 -133 -422 -<100%

Profit (loss) on ordinary activities -466 -71 -395 -<100%Result of extraordinary items -80 – -80 -<100%Taxes 4 86 -82 -95.4Profit (loss) before changes in reserves -542 15 -557 –

Changes in reserves and retained earnings 542 -15 557 –Profit (loss) after changes in reserves – – – –

Net interest income including income from securities contained a one-off disbursement in the amount of

EUR 47 million in 2007 in connection with the sale of real estate. Without this one-off effect, net interest

income was EUR 424 million in 2007, and therefore EUR 53 million or 12.5 per cent higher in 2008 at

EUR 477 million. This shows the success of the strategy of focusing on BAWAG P.S.K.’s core areas of business.

Excellent margins were also achieved.


46

Net income from equity investments is reported at EUR 334 million. This figure includes a one-off disburse-

ment from P.S.K. Beteiligungsverwaltung in the amount of EUR 310 million. This disbursement was made in

connection with the restructuring of the Bank’s equity interests. BAWAG P.S.K.’s recognised equity interest in

P.S.K. Beteiligungsverwaltung was reduced by this amount at the same time, so that the transaction had no

effect on the bank’s earnings.

Commissions came in at EUR 123 million for 2008 and were up by EUR 12 million or 11.0 per cent in

annual comparison. Loan commissions and commissions for brokering savings association contracts and

insurance policies increased significantly in the reporting period.

The Bank had Other operating income in the amount of EUR 9 million in 2008. In the 2007 financial year,

one-off factors such as the sale of real estate and proceeds from legal actions boosted this item to an atypi-

cally high level.

Administrative expenses came in at EUR 554 million in the reporting period, and were up by EUR 48 million

or 9.5 per cent compared to 2007. Staff costs rose year-on-year by EUR 34 million or 10.9 per cent to

EUR 347 million. The reasons for this significant increase were pay raises awarded individually and on the

basis of changes in the collective bargaining agreement, as well as higher restructuring costs in connection

with post-employment benefit models and changes in the mortality tables used to calculate the social capital.

Operating expenses rose by EUR 13 million or 6.7 per cent to EUR 207 million, primarily as a result of higher

marketing expenses.

Write-downs and other operating expenses were EUR 25 million lower in 2008 because of one-off effects

related to the sale of real estate in 2007.

At the reporting date, net operating income for 2008 amounted to EUR 967 million, and operating expenses

EUR 614 million. This yielded an operating profit of EUR 353 million, an improvement of EUR 170 million

over the prior reporting period. Taking the one-off effects discussed above into account, however, BAWAG

P.S.K.’s operating profit remained essentially unchanged.

Allocations to credit risk provisions totalled EUR 147 million in the reporting period. This figure is almost

double that for 2007 but was necessary because of the high credit risks to which the Bank is exposed.

A one-off factor in 2008 is an impairment provision in the amount of EUR 31 million for American and

Icelandic banks that have encountered difficulties.

The valuation and sale proceeds from securities came in at minus EUR 116 million in 2008 because of the

international financial crisis, and was considerably higher than in the prior period.


47

The valuation and sale proceeds from financial assets in the amount of minus EUR 555 million includes the

following one-off effects: impairment losses on securities classified as non-current assets in the amount of

minus EUR 510 million, gains from the sale of Istrobanka and BAWAG CZ in the amount of EUR 271 million

and the write-down of the shareholding in P.S.K. Beteiligungsverwaltung in the amount of minus EUR 310

million already discussed above.

The tax income in the amount of EUR 4 million arose from BAWAG P.S.K.’s position as the parent of the

taxable group.

All in all, the Bank achieved a net loss for the period of EUR 542 million, which was covered by the profit

carried forward and the release of reserves.

Own funds pursuant to section 23 BWG

in millions of Euros 31.12.2008 31.12.2007Subscribed capital 250 250Reserves and fund for general banking risks 1,007 1,469Deductions -132 -151Core capital (Tier I) 1,125 1,568Core capital ratio 6.0% 6.6%Shareholdings pursuant to § 23 (13) BWG -65 -46Eligible core capital (Tier I) 1,059 1,523Additional items (Tier II) 842 1,097Shareholdings pursuant to § 23 (13) BWG -65 -46Eligible own funds 1,836 2,574Own funds ratio 10.3% 11.2%Existing Tier III 55 36Own funds 1,892 2,610Required own funds 1,511 1,870Excess own funds 381 740


48

Non-financial Performance Indicators

Corporate Governance

BAWAG P.S.K. substantially revised its corporate governance framework in 2007. The Bank has a comprehen-

sive and efficient structure of executive and Supervisory Board committees.

Supervisory Board

BAWAG P.S.K.’s Supervisory Board, which has the task of supervising and assisting the Managing Board,

consists of six international and national experts who are nominated by the Annual General Meeting. Three

additional members of the Supervisory Board are delegated by the works council.

The Rules of Procedure of the Supervisory Board comprise the rights and obligations of this board. They also

define the individual committees of the Supervisory Board and their responsibilities. (The individual members

of the Supervisory Board and the composition of the committees are shown in the section Boards and Officers.)

The Supervisory Board established a Credit Committee that is responsible for evaluating financing commit-

ments above a certain volume, particularly with regard to credit risk. The Audit Committee is responsible for

reviewing the Bank’s accounts and the annual financial statements, and monitoring the Bank’s risk manage-

ment and internal control systems. This committee is also in regular contact with the external auditor, the

Internal Auditing division and the Compliance Office.

While the Nomination Committee deals with selecting suitable candidates for Managing Board posts and

preparations for nomination when existing members will be stepping down, the Remuneration Committee

deals with relationships between the Bank and the members of the Managing Board. It decides the per-

formance targets for the Managing Board and also the remuneration paid to and contracts signed with

the members of the Managing Board, for example.

In order to complete the Bank’s corporate governance system, the Supervisory Board set up the Related

Parties Special Audit Committee in July 2008. This committee reviews transactions with the Bank’s board

members and officers and also all financing commitments and transactions above a certain amount involving

companies that are related to the Bank’s shareholders. This committee was established voluntarily.

The Related Parties Special Audit Committee is intended to ensure transparency in all transactions involving

the Bank‘s shareholders or related parties.


49

Managing Board

The Managing Board consisted of up to eight members over the course of 2008. By the beginning of the year

2009, the number of Board members had fallen to six. The Rules of Procedure of the Managing Board define

the responsibilities and tasks of this board. According to these rules, 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 commitments above a certain amount;

the Credit Policy Committee, which focuses on credit guidelines and strategies; and the Enterprise Risk

Meeting for risk management for the entire Bank. The Managing Board also created the Retail and SME

Committee, the Asset Liability Committee and the Operations Committee.

In order to better account for current economic conditions, the limit above which financing commitments

must be reviewed by the Credit Approval Committee was lowered and the powers of this committee were

expanded in 2008.

Risk Management

Risk management was again one of the Bank’s primary concerns in 2008. The credit risk area was divided

into two divisions, Retail and SME Risk and Corporate and Institutional Risk. While the Retail and SME Risk

division employs extensive automated, monitored processes, the Corporate and Institutional Risk division

focuses on the detailed and comprehensive analysis of the individual borrowers and groups of borrowers.

In the area of market risk, work focused on extending ongoing reporting and also on the development of

internal value-at-risk models and the valuation of structured securities.

Code of Corporate Governance

BAWAG P.S.K. voluntarily adopted the Austrian Code of Corporate Governance for listed enterprises in 2006.

The changes made to the general Code of Corporate Governance in 2008 also led to changes in the Bank’s

internal code. Compliance with this Code was audited by independent third parties in 2008 and revealed that

all key provisions of the Code were fulfilled with the exception of those that do not apply to a bank with a

closed shareholder structure.


50

Compliance

The Compliance Office is a sub-unit of BAWAG P.S.K.’s Legal division but reports directly to the Managing

Board. Regular reports are also submitted to the Audit Committee.

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 company

agreement has also been signed that governs transactions between the Bank and employees.

Corporate Social Responsibility

Every business strives to be successful and to create value through its actions. For BAWAG P.S.K., success

may not come at the cost of a liveable, peaceful and intact world now and in the future.

To this end, the sustainability and corporate social responsibility measures the Bank initiated in 2007 were

continued and stepped up in 2008. Because of organisational changes, the CSR Officer is now assigned to

the Development and Communications division. This division reports directly to the CEO.

As announced in the 2007 Annual Report, BAWAG P.S.K. is now releasing its first corporate social responsi-

bility report for the year 2008. The report was created according to the guidelines of the Global Reporting

Initiative and is included with this Annual Report on CD and on the Internet. We decided to forgo a printed

version of this report to save paper.

Our CSR report provides information on the current status of our CSR efforts and details of key focuses in

2008, for example our human rights and anti-discrimination project. We have completed the first phase of

this project by finishing our human rights matrix and a gap analysis.

We have also determined and implemented initial measures under the project. The credit policies that outline

our lending principles now include, for example, ethical and anti-discrimination guidelines for making lending

decisions.

We also created a Supplier Code of Conduct. Among other obligations, companies providing prod ucts and

services to BAWAG P.S.K. must now undertake to protect the basic human rights of their employees in their

operations.


51

To the best of our knowledge, BAWAG P.S.K. is the first bank in Austria to have performed such a comprehen-

sive analysis of relevant human rights issues and to have adopted systematic measures to account for these

issues in its everyday business.

You can also find information about our collaboration with the Red Noses project and about our Christmas

campaign for the auctioning of “unwanted presents” for the benefit of the Gruft homeless shelter in the

enclosed BAWAG P.S.K. Corporate Social Responsibility Report.

Events after the Balance Sheet Date

Equity holdings

With the entry into the commercial register in January 2009, Sparda Bank Vienna, a wholly owned subsidiary

of BAWAG P.S.K., was merged into BAWAG P.S.K., effective 30 June 2008. This change was made to reduce

costs and leverage synergies and will improve the level of service offered by Sparda Bank. The brand “Sparda

Bank” is being continued.


52

Risk Report

Introduction and Overview

BAWAG P.S.K. identifies, measures, monitors and manages all risks to which BAWAG P.S.K. Group is exposed.

Because the Bank employs financial instruments, it is subject to the following risks that are addressed by

means of different monitoring and management processes within its risk management system:

4Credit risk

4Market risk

4Liquidity risk

4Participation risk

4Operational risk

This risk report provides information on BAWAG P.S.K.’s exposure to and management of each of the risks

listed above.

Risk Management framework – Risk Organisation

BAWAG P.S.K.’s Managing Board defines the Bank’s risk strategy, and the principles of risk management,

limits for all relevant 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 Audit

Committee.

Over the course of 2008, the Group’s risk management framework was adapted to the needs of the specific

risk types to which the Bank is exposed. The risk management organisation comprises the following units:

4Corporates and Institutional Credit Risk

4Market Risk

4Operational Risk

4Retail and SME Credit Risk

4Risk Reporting

4Risk Sciences

4Workout Group and Collections

4Special Projects


53

Risks Specific to BAWAG P.S.K.

Credit Risk

Credit risk is the risk that a customer will not be able to meet its payment obligations. For risk management

purposes, BAWAG P.S.K. considers and consolidates all elements of credit risk exposures, such as individual

obligor default risk, country risk and business segment risk.

In the retail segment, the creditworthiness of private and small business customers is assessed by means of

an automated scoring method. This consists of initial application scoring on the basis of proven and recog-

nised 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 ratings 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 method is based on a series 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 probabilities of default.

All non-consumer exposure components that exist in BAWAG P.S.K. are aggregated at the customer and

customer group level using a specific software application. Reporting duties for collateralised and uncollatera-

lised exposures are defined for customers and groups of affiliated customers by risk grades to identify the

concentration of risk exposure.


54

Portfolio Development in 2008

The trend of increasing lending in the retail segment and decreasing lending to public-sector entities and

credit institutions that has been seen over recent years continued again in 2008.

Loan Portfolio Breakdown by Risk Class (Unsecured Exposure)

RISK CLASS 12/2008 12/2007

n. r. 3.0% 1.01%

RC 1 27.6% 28.36%

RC 2 12.2% 18.89%

RC 3 19.3% 21.55%

RC 4 18.3% 16.94%

RC 5 13.9% 4.74%

RC 6 1.5% 1.99%

RC 7 2.5% 3.43%

RC 8 1.6% 3.09%

Loan Portfolio Breakdown by Size Class (Unsecured Exposure)

EUR 1,000 / Number of customers

12/2008 12/2007

> 1,000 1,326 1,349

> 5,000 449 478

> 20,000 134 140

> 50,000 63 72

> 100,000 50 65

> 500,000 8 5

Loan Portfolio Breakdown by Region (Unsecured Exposure)

12/2008 12/2007

Austria 74.9% 64.88%

Western Europe 14.9% 27.89%

CEE 7.0% 5.73%

Others 0.6% 0.87%

North America 2.5% 0.51%

Asia/Pacific 0.1% 0.12%

100.0% 100.00%

The majority of BAWAG P.S.K. Group’s outstanding loans can still be attributed to Austrian customers, while

outstanding loans to Western European borrowers have declined considerably.


55

Impaired loans

Impairment provisions are formed for loans for which it can be assumed that the open claims will not be

entirely fulfilled. These correspond to the estimated incurred but not yet detected losses in the credit portfolio.

The primary components are

4specific loss provisions that are formed manually after detailed analysis based on the estimates of the

Credit Risk unit and under responsibility of the Workout Group, and

4loss provisions that are formed automatically by the core banking system in the case of more than two

unpaid instalments, when limits are exceeded on current accounts, and when legal action is initiated.

Past Due loans with no Provisions

No provisions are formed for past due loans when BAWAG P.S.K. has reason to believe that impairment is not

applicable either because there is no doubt about the creditworthiness of the customer or on the basis of

collateral available or on the stage of collection of amounts owed to BAWAG P.S.K.

Collateral

All types of collateral that are accepted by BAWAG P.S.K. are listed in the Group Collateral Handbook.

Prudent discounts are defined for each type of collateral.

Workout Group and Collections

The Workout Group and Collections unit is responsible for working out and closing out troubled credit commit-

ments. The primary objectives here are minimising losses by providing restructuring expertise, and maximising

the amount collected if collection is required.


56

Early Recognition of Potentially Troubled Assets

Customers that must be monitored especially closely for different reasons such as their business segment,

risk concentration, deterioration in creditworthiness, or other relevant reasons are kept on a watch list until

their status changes again. All customers on the watch list are subject to more frequent monitoring and

assessment.

Market Risk

Market risk is the risk of loss caused by taking open risk positions in the market and the adverse development

of market risk factors (interest rates, foreign exchange rates, equity prices, volatilities). Market risk can

pertain to 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 at the Group level.

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 the most

part 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 monitoring and 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. Treasury Manual.

Market Risk in the Trading Book

Since 1998, BAWAG P.S.K. has used the value-at-risk of an internal model that has been assessed by Oester-

reichische 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 2008) and the

linear and non-linear gamma and vega risks broken down by risk type.


57

Because of the uniform depiction of the market risk, the VaR results are used for internal risk control pur-

poses and are also included in the reports to the supervisory authorities. The regulatory capital requirements

for each specific risk in the trading book are calculated using the legally specified standardised procedure.

The model is based on a variance-covariance approach in which the value-at-risk is calculated with the

computer system PMS 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. 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 compared.

The VaR limits are supplemented by sensitivity limits and worst-case limits.

On 31 December 2008, the value-at-risk (with gamma and vega risk included) was measured at EUR 1.48

million (28 December 2007: EUR 1.06 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:

Value-at-Risk in the trading book (99 per cent, one-day holding period), financial year 2008, in millions of Euros

Risk class in millions of Euros Minimum Maximum Average 30.12.2008FX risk 0.36 1.2 0.69 0.64Interest rate risk 0.42 1.68 0.82 1.13Total (without correlations) 0.96 2.27 1.5 1.77Total (with correlations) 0.71 2.11 1.27 1.48Diversification n/a n/a -0.24 -0.28

The minimum and maximum risk values of the specific risk categories may have occurred on different trading days, making it impossible to

aggregate the values.

The accuracy and reliability of the model is verified by means of daily backtesting by comparing the hypotheti-

cally realised gains and losses for two consecutive trading days with the value-at-risk of the first day. If a nega-

tive backtesting result is lower than the VaR, this is designated as an “exception”.

There was only one excep tion 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 speci-

fied by the Federal Ministry of Finance (which has applied continuously since 1998) can be maintained.


58

The daily VaR (99 per cent, one-day holding period) values are compared with the backtesing results (delta)

for the reporting period in the following chart:

VaR (99 %, one-day holding period) compared to backtesting results (delta) for 2008

2,000

1,500

1,000

500

0

-500

-1,000

-1,500

-2,000

-2,500

Jan

08

Delta VaR

Feb

08

Mar

08

Apr

08

May

08

Jun

08

Jul 0

8

Aug

08

Sep

08

Oct

08

Nov

08

Dec

08

As a measure of risk, value-at-risk quantifies the potential loss under normal market conditions. VaR metho d-

ology 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 pre-

dicted by value-at-risk may be too conservative or too liberal. It is not intended to cover losses associated with

unusually severe market movements. These are intended to be covered by stress tests.

Stress tests are performed, in the course of which the trading book is stressed by scenarios simulating

ex treme market conditions which are not covered by the confidence interval. The results of these tests are

compared with the worst-case foreign exchange and interest rate limits.

In running the stress scenarios in 2008, improvements were achieved in the stress tests by implementing

three-dimensional shifts for interest rates and creating more sensible stress scenarios. For this, the yield

curves, foreign exchange rates and volatility series were analysed for the past eight years on the basis of

overlapping one-, ten- and twenty-day yields. This made it possible to include possible market liquidity

bottlenecks. Corresponding stress tests were defined on the basis of the maximum changes.


59

A distinction is made between time-based and event-based stress tests, whereby statistical methods (changes

of correlations, higher confidence level, etc.) and extreme market movements of risk factors are assumed and

used. The results are reported to the Managing Board, the Asset Liability Committee (ALCO), trading manage-

ment and the responsible group heads.

Market Risk in the Bank Book

Interest rate risk in the bank 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 Asset Liability Committee has assigned interest rate risk limits to the Treasury division to manage and

limit the risk arising from interest rate changes. The Market Risk division reports to the ALCO at least on a

monthly basis about the limit utilisation as well as about the distribution of risk at the Group level.

The Asset Liability Committee comprises the Managing Board member responsible for the Treasury and

representatives of the Treasury, the Chief Financial Officer, the Chief Risk Officer and the Managing Board

member responsible for Corporate Finance. The market risk and the effects of this risk are analysed on the

basis of the risk reports and using stress tests, and steering measures are then adopted for the Bank as a

whole to mitigate risk and optimise earnings. The minutes of these meetings are also discussed in the Man-

aging Board meetings and the risks are including in the overall risk report that is presented to the Managing

Board’s Enterprise Risk Meeting.

Present Value Perspective

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 of the instrument that will occur when the market yield

curves shift by one basis point (0.01 per cent).


60

The following table depicts the Group’s interest rate risk as of 31 December 2008 on the basis of the PVBP

concept. The net asset value changes of all financial positions in the Group’s bank book due to a yield curve

shift of one basis point are assigned to the corresponding time buckets as follows:

BAWAG P.S.K. PVBP as of 31 December 2008

in thousands of Euros <1y 1y-3y 3y-5y 5y-7y 7y-10y >10y TotalAssets (including hedges) -496 -403 -1,029 -246 -248 -376 -2,799

Loans -406 -262 -437 -196 -136 -235 -1,672Securities -90 -141 -592 -49 -112 -141 -1,127

Liabilities (including hedges) 700 624 616 220 264 158 2,583Deposits 507 564 584 148 224 154 2,181Issued debt 193 60 32 72 40 4 402

Other 6 21 9 12 22 173 243Off balance sheet -102 -47 271 78 -11 -6 183Total as of 31.12.2008 108 196 -134 65 27 -51 210

Total as of 31.12.2007 103 -73 55 -103 18 -221 -221

Net Interest Income Simulation

Net interest income is one of the key parameters in periodic interest income management. To determine the

net interest income after the end of a specific period, the average volume and average interest rates of all

assets and liabilities that are subject to interest are compared.

Software-based dynamic interest rate simulation models are used to determine the interest income and

expenses on the basis of the individual contracts and the interest rate characteristics, whereby the market

yield curve that applies at the beginning of the simulation is constant for the entire simulation period.

This basic projection is the stable rates scenario. The expected future product margins, estimates about the

extension of contracts that are customarily extended (such as capital savings accounts) and assumptions

about the interest rate parameters for products for which the interest rate terms are not contractually specified

must also be input into the model.

Using this basic projection, standardised shifts in the yield curve (so-called alternative rate scenarios) were

extrapolated in 2008 to assess changes in net interest income over the simulation period caused by changes

in market interest rates. Net interest income is currently calculated based on assumptions about various

parallel and non-parallel upward and downward shifts, and the results are presented monthly to the Asset

Liability Committee and to the Managing Board’s Enterprise Risk Meeting as part of the overall risk report.


61

This allows changes in net interest income as a result of changes in market interest rates and changes in

Bank assets and liabilities to be projected at the position level. These analyses are used to identify measures

for managing net interest income.

The breakdown of derivatives shows a net value for all derivative financial instruments in the bank book with

the exception of swap positions that are used to hedge the Bank’s own issued securities.

fX Risk in the Bank Book

The extent of the open foreign exchange positions in BAWAG P.S.K.’s bank book is constrained by conservative

limits to ensure that no excessive FX risks are carried in the bank 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 positions in the accounts and initiates

analysis and clearing activities in the case of differences.

1 | liquidity Risk

In addition to the risk of not being able to fulfil payment obligations when they become due (liquidity risk in a

narrow sense), this risk type also includes the danger that it will not be possible to obtain sufficient liquidity

at the expected terms when it is needed (refinancing risk). Liquidity risk also includes the risk that transac-

tions cannot be closed or evened up, or that they can only be closed or evened up at a loss because of insuf-

ficient market profundity or due to market interruptions (market liquidity risk).

By restructuring its equity investments and especially by selling its subsidiaries in Slovakia and the Czech

Republic, the bank considerably improved its liquidity and its independence from the interbank and capital

markets. As the money market was rocked by turbulence in the second half of 2008, BAWAG P.S.K.’s high

liquidity played an important part in stabilising the national interbank markets.

Assuming a 10 per cent increase in the investment volume and continued tension on the interbank and

capital markets, there will be no need to seek refinancing on the interbank market or to make significant use

of the refinancing instruments defined in the Bank’s policies for at least the current financial year.


62

2 | Participation Risk

Participation risk includes potential losses in the market value of non-consolidated equity investments,

potential impairments and low profitability of non-consolidated equity investments. After the sale of major

equity investments in the reporting period, the Bank plans to eliminate further equity investments that are not

involved in its core business from its portfolio in the coming year.

3 | Operational Risk

BAWAG P.S.K. defines operational risk as “the risk of loss resulting from insufficient or failed internal pro-

cesses, staff and systems or from external events.”

The strategic requirements for managing operational risk are defined with the objective of minimising opera-

tional risk to the greatest possible extent through suitable measures.

BAWAG P.S.K.’s Managing Board specifies Group-wide principles for managing operational risk in its Enter-

prise 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 unit.

The detailed management of operational risks in the individual business segments is completed locally in the

respective units by the division heads and their operational risk agents.

BAWAG P.S.K. has created an effective basis for limiting operational risks with a compartmentalised organisa-

tional structure, clear authorisation levels and working instructions. Additionally, consistent guidelines regard-

ing 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.


63

Risk Outlook 2009

Because of high impairment losses, declining credit demand and significally increased refinancing costs in

connection with the liquidity crunch, the financial crisis has caused a number of financial institutions to

collapse. In addition to the bankruptcy of a major investment bank in the United States, many in part

renowned financial institutions around the world are currently dependent on government assistance or have

been taken over by the state.

The crisis has since spread from the financial markets to the real economy. The deteriorating economic

conditions have caused a rise in insolvency, and private and business bankruptcies are expected to increase in

the coming months.

Through its withdrawal from Slovakia and the Czech Republic, the Bank has reduced its exposure in Central

and Eastern Europe.

No bank is immune to the current worldwide turbulence on the financial markets or to the continuing world-

wide credit and liquidity crisis. BAWAG P.S.K. continues to monitor changes in the market’s valuation of

assets, where such a market exists, and compares this against separately carried out fundamental value

analysis, based on predicted cash flows and underlying credit quality. Fair value changes could still result in

negative impacts for the Bank in 2009. Because of the Bank’s financial strength, the development of its core

business and its strong liquidity position, BAWAG P.S.K. is prepared to weather the worsening market condi-

tions. The majority of the Bank’s credit portfolio now consists primarily of loans to customers located in

Austria and therefore its future performance will be largely dependent on the Austrian economy.


64

Outlook

Year 2009 will be challenging as the global economic slowdown continues to directly impact the real Austrian

economy as well as the global financial sector. Our structured credit portfolio has been valued conservatively

as of 31 December 2008; nevertheless, against the background of the current market development further

fair value changes could still result in negative impacts for the Bank.

The Bank is using the Basel II standardised approach to determine its risk weighted assets, which are used to

calculate capital ratios such as Tier I and own funds. In line with the economic developments, rating agencies

have begun to reduce their ratings for individual companies, banks and structured credit vehicles to reflect

higher risks on the respective balance sheets and risks to future earnings. The Bank is expecting and has

already seen downgrades of individual financial assets since the beginning of 2009.

Because of the Bank’s financial strength, the development of its core business and its strong liquidity posi-

tion, BAWAG P.S.K. is prepared to weather the worsening market conditions.

Our focus and priorities for 2009 include:

4Pro-active risk management in response to the challenging market environment,

4Continue to improve productivity and stringent cost optimisation with a focus on non-personnel costs,

4Continue to invest and develop our core Austrian retail and commercial customer franchises to build

further sustainable profitability over the medium term, and

4Redeploy our liquidity to support households, small and medium-sized enterprises, commercial customers

and companies.



65

Statement of All legal Representatives

“We confirm to the best of our knowledge that the separate financial statements of BAWAG P.S.K. give a true

and fair view of the assets, liabilities, financial position and profit or loss of the company as required by the

applicable accounting standards and that the management report gives a true and fair view of the develop-

ment and performance of the business and the position of the company, together with a description of the

principal risks and uncertainties the company faces.”


David Roberts, CEO m.p.Chairman of the Managing Board

Stephan Koren m.p.Deputy Chariman of the Managing Board

Byron Haynes m.p. Joseph Laughlin m.p. Member of the Managing Board Member of the Managing Board

Regina Prehofer m.p. Carsten Samusch m.p. Member of the Managing Board Member of the Managing Board

Owner and publisher

BAWAG P.S.K.

Bank für Arbeit und Wirtschaft und

Österreichische Postsparkasse Aktiengesellschaft

Georg-Coch-Platz 2, A-1018 Vienna, Austria

Companies Registry number: 205340x

Data Protection Authority number: 1075217

EU VAT number: ATU51286308

Telephone: +43 (0)5 99 05-0

E-mail [email protected]

Internet: www.bawagpsk.com

Editor: Christian Karlinger (BAWAG P.S.K., Accounting)

Translation: LanguageLink Sprachdienste, Vienna

Layout and Production: Gottfried Neubauer, Helmut Wernbacher (BAWAG P.S.K., Strategic Marketing)

Typesetting: AV+Astoria Druckzentrum, Vienna

www.bawagpsk.com

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