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6 The biggest market in Central and Eastern Europe, Russia offers a wealth of attractive opportunities in an increasingly stable environment. A dependable bank at your side will help you make the best possible use of those opportunities. As Russia s largest foreign bank, RZB subsidiary Raiffeisenbank Austria offers you top-of-the-line expertise, outstanding quality of service and a comprehensive product line. Russia

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8 The symbolic cutting of the border fence between Austria and Hungary in 1989 marked the start of the opening of Central and Eastern Europe. Since then, Hungary has always managed to be among the region s most pro-reformist country, making it one of Central and Eastern Europe s most attractive investment targets. RZB founded its first banking subsidiary in the region here back in Raiffeisen Bank has become one of the country s leading banking institutions. Hungary

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10 Hardly any other country in the region has achieved positive sustainable development over the past few years. A flat tax of 19 per cent and prudent economic policies have turned Slovakia into one of the most popular destinations for corporate relocations. Award-winning RZB subsidiary Tatra banka is considered to be the best bank in the country. Just 12 years after being founded, it already has over 100 outlets spread throughout Slovakia. Slovakia

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12 One of the region s biggest markets and a promising candidate for EU membership in the next round of enlargement. Romania has already dealt with its initial backlog of reforms and has been catching up rapidly ever since. RZB has had a presence in Romania since Subsidiary Raiffeisen Bank stands out thanks to its rapid development and dense network of roughly 200 outlets. Romania

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14 A key nation in South Eastern Europe looking for a way back into the heart of the continent. RZB was the first foreign bank to enter this promising market following its political turnaround in RZB still benefits from that head start today. Raiffeisenbank is already the country s fourth-largest bank. It boasts a presence in every major Serbian city. Serbia and Montenegro

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16 From 2005, Austria will offer business combinations the most attractive rate of tax in Europe, and corporation tax will be slashed to 25 per cent. That will further enhance Austria s traditionally strong position as a business location. Austria will profit even more from its geographical position in the heart of Europe following the European Union s imminent enlargement. RZB is the Austrian corporate and investment bank as well as acting as the central institution of the country s strongest banking group. Austria

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18 Key data Survey of key data RZB GROUP (IFRS-compliant) 2003 Change Monetary values in mn Income Statement Net interest income after provisioning for possible loan losses % Net commission income % Trading profit (loss) % Administrative expenses (1,017.4) 13.1% (899.9) (700.5) Profit before tax % Profit after tax % Consolidated profit % Balance Sheet Loans and advances to banks 19, % 15,028 16,582 Loans and advances to customers 22, % 19,785 16,936 Deposits from banks 27, % 23,471 24,915 Deposits from customers 16, % 12,673 10,261 Equity 2, % 2,275 1,956 Balance-sheet total 56, % 46,405 44,584 Regulatory own funds Total own funds 3, % 2,869 2,425 Own funds requirement 2, % 2,238 1,929 Excess cover 27.4% (0.8 PP) 28.2% 25.7% Core capital ratio* 7.5% 0.1 PP 7.4% 7.4% Own funds ratio 10.2% (0.1 PP) 10.3% 10.1% Performance Return on equity (ROE) before tax 15.5% 3.0 PP 12.5% 13.3% Cost/income ratio* 64.1% (3.1 PP) 67.2% 66.4% Earnings per share ( ) % Return on assets (ROA) before tax 0.67% 0.14 PP 0.53% 0.57% Provisions for possible loan losses/risk-weighted assets 0.67% 0.13 PP 0.54% 0.46% Resources Number of staff on balance-sheet date 21, % 16,700 14,459 Of which in Austria 2,513 (0.6%) 2,528 2,513 Of which in Central and Eastern Europe 18, % 13,944 11,715 Banking outlets on balance-sheet date % Ratings Long-term Short-term Fin. strength Outlook Moody s Investors Service A1 P-1 C+ Stable Standard & Poor s A1 * Applying new method of calculation. 28

19 Contents Contents Preface by the Managing Board 30 Overview of RZB 33 Vision & Mission 38 Corporate social responsibility 42 The Raiffeisen Banking Group in Interview with Managing Board Chairman Walter Rothensteiner 48 Interview with Deputy Managing Board Chairman Herbert Stepic 51 Human resources 54 Management s Report on the Group 57 Economic conditions in general 57 The development of the banking sector 59 Summary of consolidated performance 62 Detailed review of items in the Income Statement 65 Development of the Balance Sheet 67 Development of equity 68 Outlook 70 Events after the balance-sheet date 71 Segment Reports Corporate Customers 72 Financial Institutions and Public Sector 83 Retail Customers 89 Proprietary Trading 94 Participations and Other 97 Financial Statements (IFRS-compliant consolidated financial statements) Income Statement and Balance Sheet 104 Statement of Changes in Equity 106 Cash Flow Statement 107 Notes 109 Notes to the Income Statement 119 Notes to the Balance Sheet 128 Additional notes pursuant to IFRS 140 Notes on financial instruments Risk Report 146 Notes required by Austrian legal standards 156 Boards and officers 161 Auditors Report 164 Supervisory Board s Report 165 Equity participations 166 Glossary 169 Addresses and contacts for selected RZB Group-members 172 Note: In this report, RZB refers to the RZB Group and Raiffeisen Zentralbank is used wherever statements refer solely to Raiffeisen Zentralbank Österreich AG. 29

20 Preface Preface by the Managing Board Dear Sir or Madam, We are pleased to report another successful year that delivered record profits. RZB s growth in Central and Eastern Europe (CEE) has in recent years outpaced that of the market as a whole, resulting in gains in market share. At the same time, we have added two strong banks to our network in Central and Eastern Europe by acquiring Priorbank in Belarus as well as the Savings Bank of Albania (Banka e Kursimeve e Shqipërisë) towards year-end. Both we and the Raiffeisen Banking Group as a whole are continuously gaining market shares in Austria, and we are benefiting from a slightly better interest margin. We have seen improvements in our key performance indicators: return on equity, return on assets and earnings per share have all risen sharply, and we have also achieved a reduction in our cost/income ratio. We have come significantly closer to the ambitious aspiration stated in our long-term Vision Statement, namely that RZB is the leading Banking Group in Austria and Central and Eastern Europe. RZB is well prepared for the challenges to be faced on that path and will work towards its goal with its customary determination. This year, we can again state that RZB is standing on solid foundations. In Austria, the Group is founded on a good market position in its core business segments, namely corporate customer business and investment banking, and on the Raiffeisen Banking Group s position as one of the country s leaders in retail banking and business with small and medium-sized enterprises. In Central and Eastern Europe, the Group boasts the region s most extensive region-wide banking network offering award-winning quality of service. Our innovative power and technological edge underscore our claim to leadership. RZB s good standing in the international capital markets helped us successfully place a hybrid equity issue of 100 million, which was oversubscribed. In addition, we made the preparations needed to reinforce what we have already achieved and to ensure that our rapid growth in Central and Eastern Europe can be sustained in the future. The current status of Managing Board and Supervisory Board resolutions is that Raiffeisen International Bank-Holding AG, our steering unit for the most important subsidiaries in Central and Eastern Europe, is authorized to carry out a capital increase by way of a stock exchange flotation and/or the taking in of minority shareholders. This is necessary because growth in a region with a population of about 330 million cannot be financed exclusively from Austria with its population of about eight million on a long-term basis. It is thereby important to win the lasting faith of our shareholders in the growth path we have chosen. Those shareholders have declared their willingness to continue to provide us with capital. As its central institution, Raiffeisen Zentralbank is an integral part of Austria s powerful Raiffeisen Banking Group. Cooperation within that group offers its members evident advantages and synergistic benefits that are reflected in steady gains in market share. RZB is deeply rooted in that banking group, which also gives it the backbone it needs for its operations. We are delighted with our results in Net interest income after provisioning for possible loan losses, net commission income and trading profit again showed double-digit growth of 18.5, 26.8 and 15.7 per cent, respectively, and earnings showed a balanced spread across several pillars. As a result of strict cost management, costs rose by less than business volumes, growing by just 13.1 per cent despite the increase as planned in our investment outlay on sustaining the Group s expansion. Consequently, costs also fell in relation to earnings, namely from 67.2 per cent to 64.1 per cent. The renewed improvement in return on equity to 15.5 per cent again put us at the top of the league of major Austrian banks, and the same is true in Central and Eastern Europe, where our ROE of 24.1 per cent is among the best of any international bank operating in the region Preface Overview of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

21 Preface We are especially pleased with the development of our retail banking activities. That is not just because of an excellent customer response and because we already serve over three million customers in Central and Eastern Europe. It is also because our results have improved considerably despite the continued high level of start-up investments and because there are signs that our retail banking operations will reach breakeven this year. Retail banking in Central and Eastern Europe which we take to include servicing small and medium-sized enterprises is of particular strategic importance to RZB because it can be expected to deliver the highest rates of growth of any segment. RZB has already long since anticipated the enlargement of the EU on 1 May 2004, especially in Poland, the Czech Republic, Slovakia, Hungary and Slovenia. Moreover, RZB also has a strong presence in the countries that are being seen as candidates for a future enlargement. RZB is a beneficiary of the EU s development, which will reward its pioneering spirit and its successful development work in Central and Eastern Europe and which will give it an even stronger position in the region. RZB s business activities go hand-in-hand with systematic monitoring of the associated risks. RZB s risk assessment procedures have always been cautious, as is reflected by its provisions for possible loan losses. We were however disappointed by the unforeseen collapse of two major and well-rated enterprises in Western Europe. It was they who accounted for a large part of the increase in our provisioning for possible loan losses in the year under review. The 13 basis point increase in provisions for possible loan losses as a percentage of risk-weighted assets, which came to 0.67 per cent, brought us into line with our peers in Austria. We expect the positive trend to continue in 2004 with close to double-digit growth in business volumes and profit for the year and a small improvement in our performance indicators, including in particular cost/income ratio and return on equity. RZB will maintain its consistent commitment to quality in We see it as playing an important role in our success, together with our striving for sustained and partnership-based customer relations. We are pleased with the positive feedback that we receive from our customers and are happy to report that our approach is also being acknowledged by major international business publications. For instance, RZB again won over 30 awards for its achievements in Austria and Central and Eastern Europe during 2003, including awards from The Banker, Euromoney and Global Finance. We would like to thank our customers for the trust they have placed in RZB and for the success of our work together. We extend the same thanks to our shareholders, to their representatives within Raiffeisen Zentralbank s boards and to those who do business with us. Our special thanks naturally also go out to our employees, who now number over 21,000 and whose outstanding work made our good results possible in the first place. We look forward to continuing together along our successful shared path throughout Walter Rothensteiner Herbert Stepic Karl Sevelda Karl Stoss Manfred Url Segments Financial Statements Supervisory Board s Report Glossary Contacts 31

22 Managing Board The Managing Board of Raiffeisen Zentralbank. Karl Stoss, Karl Sevelda, Walter Rothensteiner, Herbert Stepic, Manfred Url Walter Rothensteiner Divisional remits: Management Services, Equity Participations, Public Relations, Human Resources, Legal and Compliance, Audit, Tax, Group Head Office/Executive Secretariat (jointly with Manfred Url). Born in 1953; read Commercial Science at the Vienna University of Economics and Business Administration; senior positions at Raiffeisenlandesbank Niederösterreich-Wien (most recently in management), member of the Managing Board of Leipnik-Lundenburger Industrie AG and sugar industry group Agrana. Joined Raiffeisen in 1995 as Vice-Chairman of the Managing Board; Chairman of the Managing Board and CEO since July Herbert Stepic Divisional remits: International Business Units, Trade and Export Finance, Retail Banking, Global Financial Institutions and Sovereigns. Chairman of the Managing Board of Raiffeisen International Bank- Holding AG. Born in 1946; read Commercial Science at the Vienna University of Economics and Business Administration. Joined RZB in 1973, where he set up and developed the Raiffeisen Foreign Trade Service; is now also Managing Director of trading house F.J. Elsner & Co; a member of the Managing Board of Raiffeisen Zentralbank since 1987 and Deputy to the CEO since Karl Sevelda Divisional remits: Austrian Corporate Customers, Multinational Corporate Customers, Corporate Finance, Customer Services. Born in 1950; read Social Science and Economics at the Vienna University of Economics and Business Administration and then became freelance researcher and staff-member at the Wirtschaftspolitisches Institut (economic policy institute); subsequently worked for banks outside Austria and held senior positions at Creditanstalt-Bankverein. A member of the Managing Board of Raiffeisen Zentralbank since Karl Stoss Divisional remits: Transaction Services, Treasury, Investment Banking, Economics and Financial Market Research, Office and Facility Management. Born in 1956; read Business Administration at Innsbruck University; after his doctorate studies, became Partner and Department Head at the St. Gallen Management Centre; then consultant and thereafter Vice-Chairman of the Managing Board of Österreichische Postsparkasse. Joined Raiffeisen Zentralbank in 2001, member of the Managing Board since March Moving to the Managing Board of Generali Holding Vienna, where he is designated CEO, in the autumn of Manfred Url Divisional remits: Credit Management, Marketing, Organization/IT, Verbund (Raiffeisen Banking Group), Group Head Office/Executive Secretariat (jointly with Walter Rothensteiner). Born in 1956; read Commercial Science at the Vienna University of Economics and Business Administration, followed by period abroad in France (ESSCA business school in Angers) and working for Banque Indosuez in Paris. Held several senior positions most recently in management at Raiffeisenlandesbank Steiermark; a member of the Managing Board of Raiffeisen Zentralbank since See page 163 for an organizational breakdown of Raiffeisen Zentralbank Preface Overview of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

23 Overview of RZB Overview of RZB Development of RZB s balance-sheet total Raiffeisen Zentralbank Österreich AG (Raiffeisen Zentralbank) was founded in It is the central institution of the Austrian Raiffeisen Banking Group (RBG). Raiffeisen Zentralbank is one of the foremost corporate and investment banks in Austria, where it services the country s largest corporations and institutions. Alongside its role as the Group s central institution, Raiffeisen Zentralbank is the core enterprise within the RZB Group (RZB). RZB is a banking group with Austrian origins that also sees Central and Eastern Europe (CEE) as a core market. The Group s popularity with customers, its resultant growth and its powerful commitment to Central and Eastern Europe make it a top player in that region. Besides Central and Eastern Europe, RZB also has a presence in a number of international financial centres and in the rapidly growing markets of Asia. 5 0 bn Data as at 31 December; HGB/BWG-compliant 1998 and 1999, IFRS-compliant from RZB s balance-sheet total tops 50 billion for the first time As a result of its expansion in Central and Eastern Europe and gains in market share within Austria, RZB s balance-sheet total has grown rapidly and consistently in recent years to exceed 50 billion for the first time in RZB is thus Austria s third-largest banking enterprise. The proportion of the Group s balance-sheet total accounted for by the Network Banks in Central and Eastern Europe is rising steadily, increasing from just under a fifth in 2000 to over one third in Growth based on solid foundations RZB s vigorous growth is driven by its expansion in Central and Eastern Europe and a steady increase in customers. Its development goes hand-in-hand with a keen awareness of costs and risks. The leading international rating agencies have repeatedly confirmed RZB s economically solid foundations. Its current ratings are: Standard and Poor s Short Term A1 Moody s Short Term P-1 Long Term A1 Financial Strength C+ Segments Financial Statements Supervisory Board s Report Glossary Contacts 33

24 Overview of RZB The Shareholders of Raiffeisen Zentralbank Stake* Raiffeisenlandesbank Niederösterreich-Wien 31.39% Raiffeisenlandesbank Oberösterreich 14.92% Raiffeisenlandesbank Steiermark 14.92% Raiffeisen-Landesbank Tirol 5.83% Raiffeisenverband Salzburg 5.79% Raiffeisenlandesbank Kärnten 5.62% Raiffeisenlandesbank Burgenland 4.61% Raiffeisenlandesbank Vorarlberg 4.58% ZVEZA Bank 0.04% Total Regional Raiffeisen Banks** 87.70% Österreichische Volksbanken AG 5.05% UNIQA Versicherungen AG 2.59% RWA Raiffeisen Ware Austria 2.52% NÖ Landesbank-Hypothekenbank AG 1.33% Landeshypothekenbank Steiermark AG 0.62% Hypo Tirol Bank AG 0.18% Other 0.01% Total other than Regional Raiffeisen Banks 12.30% Total % * Ordinary and preference shares held directly or indirectly; all figures rounded to two decimal places. ** 81 per cent of which held by R-Landesbanken-Beteiligungs-GmbH. The central institution of the Raiffeisen Banking Group Raiffeisen Zentralbank acts for RBG in national matters and represents it abroad. Additionally, as the Group s central institution, it renders central services for RBG. RBG is Austria s foremost banking group, offering its customers a complete range of financial services as a so-called universal banking group. At year-end 2003, it had eligible equity of 9.3 billion and a consolidated balance-sheet total of close to 129 billion. It has a market share of about one quarter in the Austrian banking sector and operates Austria s biggest network of banking outlets, consisting of approximately 2,300 branches and offices. The Regional Raiffeisen Banks (Raiffeisenlandeszentralen) collectively hold nearly 88 per cent of the share capital of Raiffeisen Zentralbank, which is not listed on a stock exchange. An overview of the Raiffeisen Banking Group is provided from page 44. RZB s range of products and services One of Austria s leading corporate and investment banks Within Austria, Raiffeisen Zentralbank is a specialist corporate and investment banker. It serves the country s Top 1,000 companies. It sees itself as the Austrian corporate finance bank and as a foremost provider of export finance. Besides servicing a large number of Austrian clients in those segments and in the trade finance, cash management, treasury and fixed-income product fields, Raiffeisen Zentralbank also has many major foreign corporations and multinationals in its customer base. In addition, a large number of financial service providers draw upon Raiffeisen Zentralbank s services as a financial engineer. Together with its subsidiary Raiffeisen Centrobank, Raiffeisen Zentralbank has become an established leader in the investment banking market. It is the biggest player on the Vienna stock exchange, in the bonds trading segment and in new issues business with equities and bonds. Specialist subsidiaries round off Raiffeisen Zentralbank s line, which also encompasses finance leasing, M&A consultancy, asset management, private banking, real-estate business and commodity trading. See the Segment Reports commencing on page 72 for a detailed review of RZB s domestic activities during Preface Overview of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

25 Overview of RZB A broad product line in Central and Eastern Europe In Central and Eastern Europe, RZB serves not just major corporations but also smaller and medium-sized enterprises. In anticipation of market trends, that customer segment has become an increasingly important target of RZB s activities in recent years. In addition, the Group has been launching retail banking operations in all of its Central and Eastern European markets since The number of customers in that segment has now passed the three million mark. As in Austria, RZB offers a broad range of financial and finance-related services in the region via its numerous subsidiaries, and the volume of those services has already taken on Austrian dimensions. A niche player in the international marketplace In foreign markets outside Central and Eastern Europe, RZB is a niche player offering a specially tailored range of products via its representative offices and branches. Those representative units were originally set up to assist Austrian exporters in emerging markets and international financial centres. However, they also serve local clients, albeit exclusively corporate customers and financial institutions. RZB s representative outposts are becoming increasingly important to its Central and Eastern European customers, who use them as a point of contact during expansion. Raiffeisen Zentralbank has the strongest Asian presence of any Austrian bank, with branches in Singapore and Beijing as well as representative offices in Hong Kong, Seoul, Mumbai, Ho Chi Minh City and Tehran. Raiffeisen Zentralbank is also well positioned in other international financial centres, with offices in New York, London and Malta and representative units in Paris, Brussels, Milan, Chicago and Houston. That presence underscores RZB s role as a linchpin between East and West. A leading banking group in Central and Eastern Europe RZB s involvement in Central and Eastern Europe dates back to a time when the fall of the Iron Curtain was still unforeseeable. It founded its first banking subsidiary in Hungary in At year-end 2003, the Group s network in the region operated under the umbrella of Raiffeisen International consisted of 14 banks, and another has just been added with the Savings Bank of Albania (Banka e Kursimeve e Shqipërisë). Hungary is a typical example of Raiffeisen Zentralbank s vision and pioneering role. When it set up its Hungarian banking subsidiary, Raiffeisen Zentralbank became the first Western bank to enter Central and Eastern Europe, and it has since then been the first Western player to have an on-the-spot presence in many markets. Recently, the example set in Hungary has been repeated in Belarus and Kosovo; in both countries, Raiffeisen Zentralbank has become the first foreign corporate bank to undertake a strategic investment. By virtue of its so-called Network Banks, RZB now offers the most wide-ranging coverage of Central and Eastern Europe of any bank, enabling it to service international clients in virtually every country in the region. In addition, RZB makes it easier for companies in individual countries in the region to penetrate markets in neighbouring countries, helping internationalize Central and Eastern Europe. Segments Financial Statements Supervisory Board s Report Glossary Contacts 35

26 Overview of RZB Experience and proximity to the market as keys to success One key to RZB s success in Central and Eastern Europe has been and remains its indepth familiarity with that market. It is the result of traditionally close ties with the region. There were strong economic bonds between Austria and Central and Eastern Europe even when the communists were still in power, giving Raiffeisen Zentralbank a decisive initial advantage and laying the foundations for its pioneering role. In addition to its key function as a chaperone for Austrian and foreign clients, RZB has also found many opportunities for itself in Central and Eastern Europe. The region s underdeveloped service standards and inadequately developed banking landscape have offered new service providers excellent opportunities for growth and the prospect of ample profits. The secrets of RZB s success in Central and Eastern Europe have undoubtedly been two organizational characteristics that honour basic Raiffeisen traditions: the strong local roots of the banking subsidiaries and their high degree of autonomy within a homogeneous Group-wide framework. Raiffeisen International The Network Banks holding umbrella Raiffeisen Zentralbank s Network Banks are unified under the umbrella of Raiffeisen International Bank-Holding AG (Raiffeisen International). Raiffeisen International is a wholly-owned subsidiary of Raiffeisen Zentralbank. Besides the Network Banks, Raiffeisen International also manages RZB s finance leasing companies in Central and Eastern Europe as well as providers of services to the network, for instance in the IT sector. However, the Network Banks account for the bulk of the balance-sheet total of Raiffeisen International, namely over 90 per cent. This holding company has been called Raiffeisen International since the autumn of 2003, having previously been known as Raiffeisen International Beteiligungs AG (RIB). Raiffeisen International was conceived as the steering unit for the network in Central and Eastern Europe. Organizationally, Raiffeisen International has the structural elements required for autonomous administration of the Central and Eastern Europe network, including for instance Financial Controlling. A number of service needs are met by Raiffeisen Zentralbank and are paid for within the scope of service level agreements. Ensuring sustained growth The subsidiaries excellent profitability in the high-growth Central and Eastern European region continues to allow RZB to finance most of its expansion internally by ploughing back profits. In addition, the Managing Board of RZB strives to maximize flexibility so as to make it possible to boost growth by carrying out capital increases. Various ways of bringing minority shareholders into Raiffeisen International are therefore under examination, including a stock market flotation. Appropriate resolutions have already been passed by the Managing and Supervisory Boards of Raiffeisen International and Raiffeisen Zentralbank, allowing an IPO during the next few years should the need arise. However, Raiffeisen Zentralbank will always retain its majority stake in Raiffeisen International Preface Overview of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

27 Overview of RZB Continued expansion in Central and Eastern Europe during 2003 At the beginning of the year, Raiffeisen International s takeover in Belarus, initiated in 2002, came to fruition. Following the granting in mid-january of official approval for complete subscription to a 100 per cent capital increase, Raiffeisen International became the majority shareholder of Priorbank. Raiffeisen International followed up in April with a public takeover offer to the remaining shareholders of Priorbank, which is the country s third-largest bank. Some 3,000 shareholders accepted the offer, increasing Raiffeisen International s stake to 61.4 per cent. This stake cost the equivalent of 37.6 million. Towards the end of the year, Raiffeisen International won the bid for the Savings Bank of Albania (Banka e Kursimeve e Shqipërisë), which is by far the largest bank in that country with a market share in excess of 50 per cent. Since the purchase was not completed until 2004, this acquisition is not yet reflected in the accounts for the year under review. It was Raiffeisen International s largest takeover to date, costing US$ 126 million. Segments Financial Statements Supervisory Board s Report Glossary Contacts 37

28 Overview of RZB Vision RZB is the leading banking group in Austria and Central & Eastern Europe. Mission We seek long-term customer relationships. In Austria and Central and Eastern Europe, we provide a full range of highest-quality financial services. In the world s financial centres and Asia, we are an important niche player. As the central institution of the Raiffeisen Banking Group in Austria, we offer specific services to our owners. We achieve sustainable and above-average return on equity. We empower our employees to be entrepreneurial and to show initiative and we foster their development Preface Overview of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

29 Overview of RZB Growth in excess of the market average; integration Raiffeisen International s goal for its Network Banks is that they should grow more rapidly than the market as a whole in their respective national markets and thus increase their market shares. That goal was again achieved in In Kosovo, Raiffeisen International took over the remaining 24 per cent of American Bank of Kosovo, acquired in 2003, and renamed it Raiffeisen Bank Kosovo. That rebranding was a clear externally visible manifestation of the bank s ongoing integration into Raiffeisen International. The merger of the Group s two banks in Bosnia and Herzegovina was completed at the beginning of 2003, further reinforcing Raiffeisen s leadership in that country. Raiffeisen International s Network Banks at year-end 2003: The Network Banks in Central and Eastern Europe As on 31 December 2003 Balance-sheet Growth of Operative total balance-sheet Banking market Market ( mn) total in 2003* outlets Workforce entry** ranking*** Raiffeisen Bank, Budapest 3, % 50 1, Raiffeisen Bank Polska, Warsaw 1, % 58 1, Tatra banka, Bratislava 3, % 103 2, Raiffeisenbank, Prague 1, % 41 1, Raiffeisenbank Bulgaria, Sofia % Raiffeisenbank Austria, Zagreb 2, % 29 1, Raiffeisenbank Austria, Moscow 1, % Raiffeisenbank Ukraine, Kiev % Raiffeisen Bank, Bucharest 1, % 190 3, Raiffeisen Bank Bosna i Hercegovina, Sarajevo % Raiffeisenbank, Belgrade % Raiffeisen Krekova banka, Maribor % Raiffeisen Bank Kosovo, Pristina % Priorbank, Minsk % 63 2, Total at year-end , % ,544 Banka e Kursimeve, Tirana**** 1, % Total with Banka e Kursimeve 19, ,494 * Because of movements in euro exchange rates, growth in local-currency terms may differ (normally faster growth). ** Subsidiary banks are usually founded one year earlier. Year of takeover in case of acquisitions. *** By balance-sheet total. **** The Savings Bank of Albania is not yet accounted for in the Financial Statements for Segments Financial Statements Supervisory Board s Report Glossary Contacts 39

30 Overview of RZB Best Bank in Eastern Europe and Central Asia Selected major awards in 2003 Best Trade Finance Bank in Central and Eastern Europe Best Corporate/Institutional Web Design in Europe Euromoney Best Debt House in Slovenia Euromoney Best Consumer Integrated Site in Europe Best Bank in Serbia and Montenegro Polish Chamber of Commerce Most Entrepreneur-Friendly Bank in Poland Euromoney Best Bank in Slovakia Euromoney Best Equity House in Croatia Captial Bank of the Year in Romania PARI Bank of the Year in Bulgaria Golden Convertible Mark Best Bank in Bosnia and Herzegovina Golden Kuna of the Croatian Chamber of Commerce Best Bank in Croatia 40 Preface Overview of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

31 Overview of RZB Development of Raiffeisen International s balance-sheet total Balance-sheet total grows by 40 per cent The consolidated balance-sheet total of Raiffeisen International grew by roughly 40 per cent on the year to 20.1 billion. The increase was mainly due to organic growth, with the integration of Raiffeisen-Leasing International accounting for nearly 1 billion thereof. Priorbank did not have a significant impact on the overall growth figure and the Savings Bank of Albania was not yet shown in the accounts Data as on 31 December. HGB/BWG-compliant 1998 and 1999, IFRS-compliant from without Savings Bank of Albania. The Group s banking outlets in Central and Eastern Europe totalled 697 at year-end, which was 93 more than at the close of In other words, RZB s network of banking outlets in Central and Eastern Europe has grown more than sevenfold in just five years see page 91 for details and the Savings Bank of Albania will add nearly 100 more. Raiffeisen International employed 18,386 people at year-end 2003, which was 36 per cent upon the year. The increase was primarily due to the integration of Priorbank, which employed 2,189 of the additional 4,908 staff-members. The remainder was accounted for by the enlargement of the branch network and RZB s product and service line and by the integration of Raiffeisen-Leasing International (700 employees). The increase in the number of staff again highlighted RZB s role as a major employer in the region. 6.9 bn Earnings increase by 58 per cent Raiffeisen International s profit before tax increased by 58 per cent from million to million. Profit after tax came to million, which translates into growth of 67 per cent. Raiffeisen International s contribution to the RZB Group s consolidated profit also increased to a disproportionately large 69 per cent. Raiffeisen International posted an ROE before tax of 24.1 per cent, which was substantially above the previous year s figure of 19.9 per cent. ROE after tax came to 19.8 per cent, as against 15.4 per cent in Although there was another increase in the Network Banks capital outlay, Raiffeisen International s cost/income ratio improved to 64.7 per cent, having been 70.5 per cent in 2002 (all data applying IFRS). Internationally acknowledged quality Over 100 local and international awards bear witness to RZB s high quality standards in the region. International business publications like Euromoney, The Banker and Global Finance regularly honour RZB and its banking subsidiaries. Most recently, RZB won the title of Best Trade Finance Bank in Central and Eastern Europe. A selection of the most important awards can be found on page 40. Segments Financial Statements Supervisory Board s Report Glossary Contacts 41

32 Overview of RZB Corporate social responsibility Corporate governance a system of corporate management and supervision that strives for sustained value added has been an important topic since back in the 19 th century, when the first Raiffeisen banks were founded. At that time, the statutes and articles of the Raiffeisen banks were absolutely revolutionary. They laid down how the banking cooperatives institutions and their management should work together to the advantage of their members and to ensure each bank s sustained development. That tradition is unchanged today. (A detailed treatment of this and other topics is provided in a brochure that is available in the Internet at Raiffeisen is one of the driving forces behind the corporate governance debate in Austria. For instance, RZB staff-members played a leading role in the creation of Austria s corporate governance code in Raiffeisen Zentralbank acts in accordance with the code s intentions in particular with respect to its transparency requirements and applies key components of the code insofar as that is both practicable and productive for the central institution of a decentralized banking group and for an unlisted company. A high degree of transparency goes without saying Acting in its shareholders interests was already one of Raiffeisen Zentralbank s founding tasks. It still performs that role as the central institution of the Austrian Raiffeisen Banking Group, albeit with a considerably extended range of responsibilities. The shareholders material stake in the company s success is a natural component of company policy, as is keeping the company s owners fully informed. A high degree of transparency as is also given expression by the detailed financial statements contained in this Annual Report also goes without saying in Raiffeisen Zentralbank s dealings with other stakeholders. Liaison between the institutions of Raiffeisen Zentralbank is regulated primarily by the Articles of Association. Operational management and the representation of Raiffeisen Zentralbank vis-à-vis third parties is the responsibility of the Managing Board. The contracts of the current members of the Managing Board run until 2007 (although Karl Stoss will be moving to another company in the autumn of 2004). Besides supervising management, the Supervisory Board and/or its subcommittees (working committee and human resources committee) are also responsible for granting approvals in especially important matters. Those tasks are regulated in the Supervisory Board s standing orders as laid down in accordance with the Austrian Aktiengesetz (companies act) and Bankwesengesetz (banking act) and the Articles of Association. The Supervisory Board of Raiffeisen Zentralbank is probably the most experienced in Austria. The majority of its members are chairmen of the managing boards of the successful Raiffeisen Regional Banks. The Supervisory Board receives backing from the Länderkuratorium (federal advisory board), which is a consulting body made up mainly of the supervisory board chairmen of the Regional Raiffeisen Banks. Economic, social and ecological responsibility Reflecting its commitment to sustainability, RZB acts as a responsible group that sees environmental protection, a sense of social responsibility, financial success and growth not as antagonistic forces but as complementary factors in the long-term positive development of companies and of society. RZB and its staff-members are bound by homogenous Group-wide values designed to promote that development. In particular, they also include a commitment to maintaining durable mutually beneficial relations with customers and the duty to abide by ethical values that is such a key element of trust-based banking. That is why RZB s established Values include the principle that Integrity and honesty guide us in everything we do. There follow a number of measures that exemplify RZB s assumption of its economic, ecological and social responsibilities Preface Overview of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

33 Overview of RZB Applying ecological criteria when assessing creditworthiness Early recognition of ecological risks is an integral part of Raiffeisen s credit scoring procedures. That benefits both RZB and borrowers in that ecological damage will eventually harm not only the customer but also RZB, whether in the form of loan losses, liabilities or image problems. Careful use of resources The careful use of environmental resources is another key concern. Since 1996, an environmental committee has been in place within Raiffeisen Zentralbank that has developed an efficient ISO certified environment management system. It draws up an annual sustainability report. A corporate ecology benchmark test carried out annually by the Österreichische Gesellschaft für Umwelt and Technik (ÖGUT: Austrian society for the environment and technology) confirms the effectiveness of the committee s longstanding efforts: Raiffeisen Zentralbank is the best practice company in each of the eight categories covered by the test. Not least, Raiffeisen Zentralbank s energy usage in 2003 was more than 12 per cent down on That translates into a reduction of 316 kilogrammes of emitted CO 2 equivalent per staff-member. RZB also contributes to Kyoto s fulfilment outside the Group s boundaries. Complex climate protection projects call for extensive know-how, the best possible financial solutions and close contacts with national and international research bodies. That is why Raiffeisen Zentralbank has entered into an alliance to date unique in Austria with the Austrian Carbon Management services platform. By bundling the know-how available within that alliance, Raiffeisen Zentralbank is able to offer its customers technical solutions and finance from a single source. A fair and balanced human resources policy The fostering of staff-members, their professional development and their training and the creation of working conditions that satisfy employees needs at the same time as laying the foundation stones for corporate success are key goals of corporate policy whereby RZB sees the fair treatment of staff and concern for their development as going equally without saying in those of its national markets that lack mature social welfare systems. Reflecting that commitment, RZB has developed a multitude of special facilities and options for staff over the past few years. For instance, Raiffeisen Zentralbank has concluded a teleworking agreement with the Staff Council that lets employees work at home. Thanks to that agreement and the company s child care support, for example in the form of the company crèche and kindergarten, Raiffeisen Zentralbank is making a major contribution to increasing the compatibility of work and family life and, in turn, equality of opportunity. The sharing of professional know-how within the Group and the enhancement of employee qualifications are also important pillars of a sustainable and staff-friendly human resources policy. In addition, communication with and transparency vis-à-vis staff-members are key focuses of our human resources management. Against the background of its holistic vision of commercial success and its commitment to responsible action, RZB is also very aware of its social responsibilities. That is reflected by the many things it does to promote and support charitable organizations and projects in Austria and Central and Eastern Europe. For example, branch openings by many of its banking subsidiaries in Central and Eastern Europe have for years been used as an occasion to make substantial donations to local hospitals. Segments Financial Statements Supervisory Board s Report Glossary Contacts 43

34 Raiffeisen Banking Group The Raiffeisen Banking Group in 2003 The Austrian Raiffeisen Banking Group (RBG) is the country s strongest banking group. It has a market share of about one quarter. Nearly every second Austrian over the age of 15 is a customer at a Raiffeisen Bank (customer share of 39 per cent). The Raiffeisen Banking Group has some 53 billion of customer deposits under management (without building society deposits), about 38 billion of which is in saving deposits. RBG employs approximately 22,800 people in Austria. It has achieved its powerful position in the market through healthy growth and solely by its own efforts. Market shares of the Raiffeisen Banking Group in Austria Total domestic non-bank deposits with Raiffeisen Banks mn 53,184 48,956 47,026 42,971 42,253 Market share of total non-bank deposits % Savings deposits with Raiffeisen Banks mn 37,815 36,036 34,402 32,308 32,503 Market share of savings deposits % Sight deposits with Raiffeisen Banks mn 11,671 9,652 8,540 7,555 6,615 Market share of sight deposits % Time deposits with Raiffeisen Banks mn 3,149 2,928 3,770 2,577 2,781 Market share of time deposits % Direct lending to domestic non-banks by Raiffeisen Banks mn 53,374 51,941 50,055 47,387 44,226 Market share of direct lending to non-banks % Securities funds managed by Raiffeisen Banks mn 25,847 23,445 22,731 20,812 18,649 Market share of securities funds % Sources: Oesterreichische Nationalbank (those data relate exclusively to business at Raiffeisen Banks, the Regional Raiffeisen Banks and Raiffeisen Zentralbank but not to business done by specialist Raiffeisen companies), and Oesterreichische Kontrollbank with regard to securities funds (data for investment fund companies Raiffeisen KAG, Kepler KAG and Salzburg-München KAG). Working together for a stronger position in the market Three-tier RBG is made up of the autonomous locally active Raiffeisen Banks, the Raiffeisen-Landeszentralen (Regional Raiffeisen Banks) or Raiffeisenlandesbanken (Provincial Raiffeisen Banks), and Raiffeisen Zentralbank Österreich AG (Raiffeisen Zentralbank). In addition, the Group holds a multitude of interests and owns specialist subsidiaries. Cooperation within RBG is voluntary and has been proving its worth for decades. It enables each Raiffeisen Bank to exploit the economies of scale that are created by working together, to offer customers the services of a so-called universal bank offering a complete line of products, to guarantee all customer deposits, and to profit from the Group s nationwide brand presence and the knowhow pooled within the Group s central institutions and specialist companies. At the same time, the Raiffeisen Banks have retained their key competitive advantages, including above all the proximity to the customer that results from their autonomy and cooperative structures and the independence of their corporate activities Preface Overview of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

35 Raiffeisen Banking Group Structure of the Raiffeisen Banking Group Raiffeisen Banks 586 Raiffeisen Banks Regional Raiffeisen Banks 8 Regional Raiffeisen Banks, ZVEZA Bank Interests in Austrian financial institutions Insurers, investment fund companies, finance leasing companies, building society, Raiffeisen Centrobank, Kathrein&Co., Nationalbank, Kontrollbank, VISA, Europay, Investkredit, etc. The Network in Central and Eastern Europe Foreign branches, offices and equity participations Specialist companies and back-office companies Raiffeisen International: Network Banks, Leasing International, other subsidiaries Branches, representative offices, banks Cash management and securities settlers, IT companies, real-estate and trading companies, private equity companies, travel agents, etc. As a universal banking group, Raiffeisen provides its customers with a complete range of financial products and services. They also include the financial services provided by the specialist Raiffeisen companies, and in particular the products of investment fund subsidiary Raiffeisen KAG, the Raiffeisen Bausparkasse building society, the Raiffeisen-Versicherung insurance company and Raiffeisen-Leasing. Each of those subsidiaries is Austria s market leader in its core segment. RBG operates Austria s densest network of banking outlets. There are 586 autonomous Raiffeisen Banks (2002: 599) as well as their 1,713 affiliated branches (2002: 1,719). As a result, RBG accounts for nearly 44 per cent of all banking outlets in Austria. The Raiffeisen Banks are at the same time the owners of the Landeszentrale (Regional Raiffeisen Bank) in each particular province. The Regional Raiffeisen Banks or Provincial Raiffeisen Banks perform liquidity balancing tasks and render other centralized services for the Raiffeisen Banks in their region. In addition, the Regional Raiffeisen Banks are themselves autonomous universal banks and shareholders of Raiffeisen Zentralbank. They collectively hold nearly 88 per cent of the share capital of Raiffeisen Zentralbank. Raiffeisen Zentralbank is RBG s central institution. Its role is to provide central services for the Group. It was set up in 1927 and has become one of Austria s leading corporate and investment banks. It sees Central and Eastern Europe as part of its enlarged home market alongside Austria and has a closely meshed network of approximately 800 banking outlets in a total of 16 markets in the region. Raiffeisen Kundengarantiegemeinschaft Österreich (RKÖ) RBG took a pioneering step in the field of deposit guarantees in Austria when it set up Raiffeisen-Kundengarantiegemeinschaft Österreich (RKÖ). RKÖ was founded in 2000 to give legal substance in this era of globalization and mega-mergers to something that has been an unwritten law within RBG from the outset. RKÖ guarantees up to 100 per cent of customer deposits and thus goes far beyond Austria s statutory deposit guarantee standards. By setting up this new facility, Raiffeisen has formalized what its trademark, the sheltering gable cross, has always stood for security and trust. Segments Financial Statements Supervisory Board s Report Glossary Contacts 45

36 Raiffeisen Banking Group Structure of the Raiffeisen deposit guarantee association Raiffeisen Zentralbank RLB RB Obligation to furnish business reserves Regional deposit guarantee association Austrian Raiffeisen deposit guarantee association Regional Raiffeisen Bank Raiffeisen Bank RKÖ is a national amalgamation of regional deposit guarantee associations. The business reserves of all the member-banks are made available to guarantee deposits, with legally binding effect, on the basis of a precisely defined pattern of apportionment and financial obligations. Consequently, even if a member were forced to file for bankruptcy which has never happened customer deposits at that Raiffeisen Bank would retain their value beyond the limitations of statutory deposit guarantees. For the event that a particular regional deposit guarantee association lacks sufficient means to meet all guaranteed customer claims against an insolvent bank, the members of RKÖ guarantee to commit their business reserves to match up to 100 per cent of all customer deposits at the insolvent bank as well as 100 per cent of the obligations arising from that bank s own securities issues. Instead of claims in bankruptcy, the insolvent bank s customers would thus be offered claims of appropriate value against other banks within the Raiffeisen Banking Group. Some 78 per cent of all Raiffeisen Banks in Austria are members of Raiffeisen deposit guarantee associations, including Raiffeisen Zentralbank itself. This means that over 90 per cent of total customer deposits within RBG are protected by RKÖ (as of December 2003). Joint risk monitoring Since the end of 1999, joint risk monitoring within RBG has taken place under the aegis of the Risk Committee. Each quarter, the Risk Committee draws up a risk report company-bycompany and on a consolidated basis for the whole of RBG. The risk report employs a valueat-risk approach. Besides assessing overall risk and comparing that risk with RBG s risk-bearing capacity, the report contains detailed reports on credit and country risks, equity risks, market risks and operational risks. In addition to regular monitoring of the development of risks, RBG s joint risk monitoring activities are supplemented by an accounting-data and benchmark-based early warning system and proactive observation of markets. Raiffeisen Internet Banking Continuing a success story The Raiffeisen Banking Group remained Austria s unchallenged leader in the Internet banking market during The system s consistent strategic implementation and the ongoing enlargement of the line increased the number of customers using the Group s e-banking services by over 40 per cent compared with year-end 2002 to more than 580,000. That corresponds to a market share of approximately 43 per cent. Raiffeisen The country s foremost bank brand Marketing and advertising were once again perfect examples of fruitful cooperation within RBG. The unit responsible for those tasks Zentrale Raiffeisenwerbung (ZRW) celebrated 46 Preface Overview of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

37 Raiffeisen Banking Group The Gable Cross The trademark of the Raiffeisen Banking Group The Gable Cross is the trademark used by almost every member of the Raiffeisen Banking Group. It consists of two stylized horse s heads crossed and attached to the gable of a house. It is a symbol of protection to be found in old European folk traditions. A gable cross on the roof was believed to protect a house and its occupants from outside dangers and to ward off evil. The Gable Cross was adopted as our trademark back in 1877, within the lifetime of F.W. Raiffeisen, founder and mentor of the Raiffeisen cooperative movement. It stands for the protection and security that the members of the Raiffeisen Banks enjoy through their self-determined collaboration. Today, the Gable Cross is one of Austria s best-known trademarks, and it is in use around the world, for instance within the scope of RZB s homogeneous branding in Central and Eastern Europe. its 30 th anniversary. Nationwide brand management by ZRW has turned Raiffeisen into one of the country s strongest brands in any sector and into the banking industry s leading name. A survey has shown that Raiffeisen carries the highest brand value of any banking institution in every Austrian province except Vienna. The survey distilled perception (presence, familiarity, advertising recall), appraisal (image, popularity) and behaviour (proportion of population using Raiffeisen as banking service provider, principal banking service provider, exclusive banking service provider; customer satisfaction) into a single figure. The Raiffeisen brand stands for a successful and robust company with strong Austrian roots in the countryside and for an ally who delivers security and dependability. The Consolidated Balance Sheet of the Raiffeisen Banking Group for 2003 RBG s Balance Sheet was drawn up on the basis of the monthly returns and balance sheets of the following entities: the Raiffeisen Banks, the Regional Raiffeisen Banks, RZB, Raiffeisen Finanzierung AG, Raiffeisen Bausparkasse Ges.m.b.H., Raiffeisen Kapitalanlage Ges.m.b.H., Raiffeisen Wohnbaubank AG, Evangelische Kreditgenossenschaft eg, Notartreuhandbank AG and Raiffeisen Vermögensverwaltungsbank AG. The data conform to Austrian accounting and reporting standards. The key figures are provided below. An Income Statement for RBG cannot be drawn up until June, when all the audited financial statements will have become available. The unaudited preliminary figures show that RBG once again developed well. One of RBG s characteristic features is its equity base, which has always been strong. Among other things, the following table also shows the development of RBG s equity. RBG s balance-sheet performance and equity mn or per cent 2003 Change Balance Sheet Loans and advances to banks 18, % 13,091 13,797 Loans and advances to customers 77, % 72,856 68,564 Deposits from banks 26, % 22,548 23,524 Deposits from customers 76, % 68,041 64,577 Equity 6, % 5,873 5,297 Balance-sheet total 128, % 114, ,177 Regulatory own funds Eligible own funds 9, % 8,417 7,680 Own funds requirement 6, % 6,610 6,007 Core capital ratio 7.47% 0.08 PP 7.39% 7.51% Own funds ratio 10.79% 0.60 PP 10.19% 10.23% Segments Financial Statements Supervisory Board s Report Glossary Contacts 47

38 Interviews The European Union s enlargement long since anticipated Interview with Walter Rothensteiner, Chairman of the Managing Board RZB again performed well in You have obviously found your recipe for success? Every year, we need to renew our efforts to be better, faster and more efficient and, of course, we must also question the status quo at all times. At the same time, we must be a stable and predictable ally to our customers. We believe that success comes from durable partnership-orientated relationships with our customers, a good workforce and a smoothly running organization. If you like, that is our recipe for success. Other banks have also reported a sharp increase in profits for What makes RZB different? I am particularly pleased that we achieved another powerful increase in profit over and above our record result in In other words as is evident in many fields we didn t just return to our normal form after a weak What contribution did your strategy make? That strategy is what guides us. We know our targets and how to achieve them. RZB is on an expansion course that is most evident in Central and Eastern Europe. However, I would also like to put the spotlight on business in Austria. We are constantly growing in that densely occupied market, and our profitability is increasing at the same time. Our orientation is clear: we are a highly expert specialist in corporate and investment banking. The market perceives us as the Austrian service provider in those fields. At the same time, the Raiffeisen Banking Group does an excellent job covering the retail banking and SME segments. Moreover, almost all of our specialist subsidiaries are market leaders in their fields, so overall we are undoubtedly the strongest banking group in the Austrian marketplace Preface Overview of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

39 Interviews But you also operate as a so-called universal bank in Central and Eastern Europe. That is a natural development. We entered the region as a corporate bank back in the 1980s mirroring the environment of the time and have since successively exploited market opportunities as they arise as well as anticipating forthcoming developments. The automatic consequence was diversification of our customer base and the creation of a universal product portfolio. And you brought the necessary experience with you from Austria? Yes. We provide the Raiffeisen Banking Group with a complete range of products through the specialist companies we control. They include funds, insurance, finance leasing, building society products, asset management, securities trading, and so on. If something generates broad sales or is profitable when made-to-measure for the customer, we have it in the line, just as if we were an expert specialist. Most of the markets in Central and Eastern Europe are ready for this. The good thing is that we do not have to reinvent the wheel although we do need to adapt to local circumstances. Competition is also going to become stiffer in Central and Eastern Europe. What makes RZB different from its competitors in the region? Raiffeisen is the only bank that can offer its customers coverage of virtually the whole region from one source. No other bank is as committed to Central and Eastern Europe as Raiffeisen. Our involvement in the region accounts for a much bigger slice of our total operations than is true of any of the other international banks operating there. And no other international bank has as many years of experience in Central and Eastern Europe as we do. And quality of service is another important factor that sets us apart from the rest of the field, whether we are servicing a multinational customer across the region or a retail customer in Košice. RZB offers Austria and virtually all of Central and Eastern Europe from one single source. How do you plan to make your quality of service stand out from that of your competitors? After all, in principle everybody is in the same business. Quite the reverse. There are big differences. We are not in the market to grab business on an opportunistic basis. We are much more interested in durable partnership-based customer relations. That means that we must identify with our customers and be helpful and friendly to them and perfectly functioning IT systems and efficient back-office support must provide the backdrop. A continuously growing range of products made-to-measure for specific customer segments is also a prerequisite. A whole range of international awards prove that we are on the right path. For example, Superior Customer Service Quality is not just a catch phrase; it is our plan of action for retail banking activities in Central and Eastern Europe. Our retail account managers alone (from Hungary, Poland, the Czech Republic, Bosnia and Herzegovina, Romania, the Ukraine and Kosovo) completed over 11,000 days of training in 2003 to guarantee adherence to it. Segments Financial Statements Supervisory Board s Report Glossary Contacts 49

40 Interviews Isn t your high customer orientation too costly? No. It is probably the best possible investment. Of course we have to act profitably. If we didn t, we soon wouldn t be there to serve our customers. However, satisfied customers are willing to pay more for a good service and will use good services more often and more intensively. That is why it is so important to see the bank and its services through the customer s eyes. Personally, I find that comparatively easy. I also experienced banks from the other side of the fence as a director of an industrial enterprise. To remain in touch with the customer s point of view, RZB does more than just collect feedback from customers on a regular basis. It has also introduced a management tool called Six Sigma. It helps us improve processes and enhance quality of service at the same time as optimizing costs. Let s stay with Central and Eastern Europe. You are well positioned in the new member countries. How will EU enlargement affect your business? RZB has actually long since anticipated the European Union s enlargement. We were already active in the region when it didn t even have a name. Consequently, our involvement was not a gamble on EU enlargement; it was justified in itself. In principle, Central Europe s integration into the EU has already taken place for economic purposes, but the political act will enhance security and create more stable conditions for us as well. We strive for durable partnership-orientated relationships with our customers. You are also operating in countries that are not yet candidates for membership. I am convinced that the EU will sooner or later absorb South Eastern Europe as well. We are the leading bank in that region and will undoubtedly benefit from the potential created by its future membership of the EU. You are also present in Asia. What is your strategy there? Asia is our second regional focus abroad. RZB is the most broadly deployed Austrian bank in the region. However, we see our activities there as merely complementing our other operations. We occupy an interesting niche in the Asian markets. RZB provides its customers with guidance and support in those key emerging markets and profits at the same time from growing economic ties between Asia and RZB s home markets in Central and Eastern Europe and Austria. So where do you see RZB in five years? RZB will have built upon its strong position as the Austrian corporate and investment bank. Together with the Raiffeisen Banking Group, we will be Austria s market leader. At the same time, Raiffeisen will be the leading universal bank in Central and Eastern Europe. Our geographical expansion will have been completed and our presence in most markets will already be so dense that only a few new branches will be opened Preface Overview of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

41 Interviews An IPO is a realistic strategic option Interview with Herbert Stepic, Chairman of the Managing Board of Raiffeisen International Bank-Holding AG and Deputy Chairman of the Managing Board of Raiffeisen Zentralbank Why is Raiffeisen so deeply involved in Central and Eastern Europe? Because Central and Eastern Europe offers us exceptional opportunities. We have always cultivated excellent relations with our neighbours, whether as trade financiers or simply as Austrians. Geographically, the Ukrainian border and Sarajevo are closer to Vienna than Switzerland. And the hard facts also speak a clear language. The economies of Central and Eastern Europe are growing particularly rapidly, whether compared with Western Europe or with other high-growth regions like South America and Asia. Moreover, the healthy outlook in Central and Eastern Europe gets added leverage from the low supply density of existing banking services in the region. In a word, Central and Eastern Europe offers us sustainable and exceptionally good growth opportunities. Furthermore, Raiffeisen is growing much more quickly than the market as a whole and will continue to do so. How do you plan to continue to pursue this line? After all, capital is a scarce commodity? Our most important source of finance is internal, which means ploughing back profits. Moreover, our owner [the Raiffeisen Banking Group] has expressed a commitment to continuing to support our growth strategy. However, we cannot fuel our expansion in a market with a population of about 330 million people from Austria, which has a population of just eight million, for very long. Consequently, the board resolutions have been passed that will allow us to increase our capital base by taking in one or more minority partners and/or making an IPO for Raiffeisen International, which is the umbrella for the group s principal subsidiaries in Central and Eastern Europe. Does that mean that we will soon be seeing Raiffeisen International on the list, say, of the Vienna stock exchange? A capital increase by way of a stock exchange flotation is a realistic strategic option. However, so is taking in a banking partner or investor. The respective board resolutions give us the necessary, indeed the greatest possible flexibility, making it possible for us to shift up another gear and grow even more rapidly. It is of course clear that Raiffeisen Zentralbank will retain its majority stake in Raiffeisen International and that any stock exchange launch must be perfectly prepared. We don t want to leave anything to chance and it s also important to make sure that the climate in the stock market is right at the time. Segments Financial Statements Supervisory Board s Report Glossary Contacts 51

42 Interviews What level of acceptance do you expect? We are confident that we will be offering the market an extremely attractive investment. Raiffeisen International is a Central and Eastern European pure play with correspondingly good development potential and an outstanding track record. The initial position we have created is close to ideal. Raiffeisen International is one of Central and Eastern Europe s best performers and its statistics are excellent. We have a presence in virtually the whole region, are one of the five largest banks in most of our markets there and also boast an excellent growth outlook. Our network is balanced, so it also offers investors a well-diversified risk. Furthermore, our performance to date shows that we are very good at handling risks in Central and Eastern Europe. What are your other plans for expansion in Central and Eastern Europe? We want to develop a denser presence and win further market shares. As always, we will do so by way of organic growth and acquisitions. Our path will continue to be defined by a sense of proportion, business viability and compatibility with the existing network. In concrete terms, that means that we will not buy too expensively, even when our pockets are full, and bargains will also have to suit us if they are to be considered. We have done well on that basis to date. Geographically, we will be closing the very last remaining gaps in Central and Eastern Europe. Raiffeisen is one of the five largest banks in most of its markets. Which countries will that include? In the medium term, Macedonia and probably also Moldova, both of which can be effectively developed via our subsidiaries in neighbouring countries. Macedonia has among other things become a candidate because of our takeover of the Savings Bank of Albania. There are many synergistic possibilities, especially as the area is also coalescing economically; and then there are the Baltic countries, but their markets are already too densely populated. For that reason, we are not aiming to enter them at the moment unless a really good opportunity arises. Is it even worth entering small markets? It is of course more difficult to achieve economies of scale in small markets. However, we can largely make up for that by working together within the Group. At the same time, small markets offer us opportunities that do not exist in large ones. A newly founded bank can rapidly develop into a market leader even by way of organic growth if the market is small. That is for instance what we did in Slovakia, Croatia and Serbia. It is also possible to take over powerful local banks and thus acquire large market shares without having to spend huge amounts of money. That is what we did in Belarus, Kosovo and, most recently, in Albania. Furthermore, small markets are often neglected by our international competitors, further strengthening our position Preface Overview of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

43 Interviews And how does Raiffeisen operate in big markets? There are only four big markets in Central and Eastern Europe, namely Russia, the Ukraine, Poland and Romania. We are working them rather successfully but using quite different strategies. In Russia and the Ukraine, we are operating very selectively at the top end of the market. In both those countries, we are the foremost foreign-owned bank and among the banks that shape the market, even though we only launched in 1998 and have been growing purely organically since then. We occupy an excellent position in the Romanian market following a takeover, and we also have a nationwide banking network there. In fact, the turnaround of our acquisition in Romania is one of the region s major success stories. As for Poland, Raiffeisen is not only the country s eleventh largest bank with a presence in every major city and some 60 branches. It is also a leading provider of lease finance. That is a remarkable achievement, and it has been accomplished solely through organic growth on the part of the Raiffeisen Bank we founded. We will be offering the market an extremely attractive investment. Raiffeisen International was conceived as a steering unit for the network in Central and Eastern Europe. What marks it off from Raiffeisen Zentralbank? Raiffeisen International has all the structural elements it needs for autonomous control of our network, including for example Financial Controlling, Market Management and Productivity and Cost Management. However, Raiffeisen International is as lean as possible and exploits synergies with Raiffeisen Zentralbank and its group subsidiaries, which provide it with additional services. Service level agreements ensure well-ordered cooperation and regulate payment for those services. Raiffeisen International has its own managing board, with myself as the personal link between the managing boards of Raiffeisen Zentralbank and Raiffeisen International. Segments Financial Statements Supervisory Board s Report Glossary Contacts 53

44 Human resources Human resources The focuses of Group human resources management during 2003 were coping with the demands created by the RZB Group s continuing rapid growth in Central and Eastern Europe and securing the Group s successful growth path by implementing a modern and forwardlooking human resources strategy. A rapidly growing workforce The acquisition of Priorbank in Belarus and the enlargement as planned of RZB s branch network in Central and Eastern Europe increased the workforce by 4,419 or 26 per cent from 16,700 to 21,119 in the 12 months ended 31 December The Network Banks in Central and Eastern Europe accounted for 17,544 or 83 per cent of that total, which was 4,424 employees or 31 per cent more than at year-end The workforce at Raiffeisen Zentralbank grew by 18 people or 2 per cent during the year to total 1,186 on 31 December Fifty-six per cent of RZB s staff members are women, and 47 per cent of Raiffeisen Zentralbank s employees are female. At the Network Banks, that figure ranges from 47 per cent in Kosovo and the Ukraine to 78 per cent in Bosnia and Herzegovina. Because of the high proportion of women in the workforce, it is particularly important for RZB to make it easier to combine working and having a family. For example, in addition to allowing employees to work flexitime without defined core hours of work, Raiffeisen Zentralbank offers them part-time and teleworking models that contribute greatly to achieving a good work-life balance. The company s crèche and kindergarten also make things much easier for working parents. A strikingly low average staff age (34 years) remains typical of RZB. It is mainly due to the Group s rapid growth in recent years, which has gone hand-in-hand with intensive recruiting. The workforce at Raiffeisen Zentralbank has an average age of 36, compared with averages ranging from 29 to 41 at the Network Banks. The mean period of service to date is correspondingly low at five years. Staff at Raiffeisen Zentralbank have been with the company for an average of eight years. Because some of the Network Banks themselves are relatively new, the mean period of service at the Network Banks ranges between two and 12 years. Staff management The Management by Objectives system is in use throughout Raiffeisen Zentralbank as the Group-wide planning, steering and management instrument. The gradual process of implementing the system has now taken in least the second tier of management at the Network Banks. This instrument ensures a high degree of transparency and cohesion in the planning process itself as well as encouraging open communication between different levels of management. Combined with performance-related elements of compensation, it also ensures that staff are strongly achievement-orientated and helps to create a highly motivated workforce Preface Overview of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

45 Human resources University and college graduates in the workforce 80% 70% 83% 83% 81% 78% 60% 50% 70% 62% 40% 50% 46% 47% 46% 45% 30% 40% 40% 38% 20% 10% 0% Russia Ukraine Bulgaria Poland Romania Belarus Slovakia Serbia and Montenegro Hungary Raiffeisen Zentralbank Czech Republic Croatia Bosnia and Herzegovina Kosovo 31% Slovenia Network Banks by national market Following good results with young management staff, experienced management staff have also been brought into RZB s comprehensive feedback system. It is designed to facilitate personal self-observation by each member of management staff at the same time as providing a basis for further targeted staff development measures. Since RZB s highly qualified staff are a key competitive advantage, the Group continued to extend and refine its staff development tools during the year under review. As 56 per cent of the people working for the Group are university or college graduates, staff development work can build on very high initial qualifications. Forty-six per cent of staff at Raiffeisen Zentralbank are university or college graduates, and the figure at the Network Banks lies between 31 and 83 per cent. A number of new modules were added to RZB s Group-wide management training programme during the year under review, and the range of Group-wide professional courses was considerably extended in the interests of know-how sharing. The available modules range from a basic introduction to the financial markets to credit analysis, trade finance and project finance modules to courses covering the broad array of treasury topics. Most of the professional courses are held in English, which is the Group s official language, and English courses also constitute an important part of training. A special Introduction Workshop has been developed for staff-members in Central and Eastern Europe to help them get their bearings within RZB and to ensure faster assimilation. During the 2003 financial year, the staff of Raiffeisen Zentralbank spent an average of five working days in further training. RZB also stepped up employee exchanges within the Group. In addition to outward postings lasting several years, brief training stays, above all for employees of the recently acquired banks in Central and Eastern Europe, have proven very worthwhile. Besides facilitating the communication of banking skills, the resulting encounters between staff-members from different cultural backgrounds also do a great deal to foster the development of a more powerful shared corporate culture. Segments Financial Statements Supervisory Board s Report Glossary Contacts 55

46 Human resources Geographical distribution of staff Development of staffing (balance-sheet dates) Other CEE 7,208 (34%) Rest of world 238 (1%) Austria 2,513 (12%) 21,000 18,000 15,000 12,000 14,459 [2,462] 16,700 [2,720] [3,156] 21,119 [2,891] [3,565] [3,574] 9,000 17,544 Romania 3,623 (17%) Poland, Czech Rep., Slovakia, Hungary 7,537 (36%) 6,000 3,000 11,997 1,946 13,401 2,131 2,389 Workforce on 31 December 2003: total of 21,119 (without Savings Bank of Albania). 0 1,206 1,168 1, Raiffeisen Zentralbank Other Network Banks in CEE without Savings Bank of Albania Of which Tatra banka, Bratislava Of which Raiffeisen Bank, Bucharest Personnel marketing The expected trend reversal in the labour market predicted not least for demographic reasons in the medium term had yet to develop during the year under review. As before, there was a growing supply of qualified personnel but demand for them was limited. That was particularly true in Austria. Reflecting its commitment to sustainability, RZB kept up and intensified its cooperation with universities, technical colleges and other educational institutions of relevance to the bank. For instance, Raiffeisen Zentralbank became the sponsor for an academic year at the Center of Excellence within the scope of its alliance with the Vienna University of Economics and Business Administration. Reflecting the growing importance of technical colleges, Raiffeisen Zentralbank substantially increased its range of traineeship posts, enabling 22 vocational trainees to complete their compulsory traineeships within the company. In addition to name just one example 202 young people accumulated their first professional experience at Group Head Office during vacation traineeships. Thanks to staff The Managing Board is keenly aware of the crucial importance of highly trained and motivated employees if the Group is to continue to thrive. For that reason, it would like to express its appreciation and thanks to every member of staff for his or her work during Above all, it extends the same thanks to the Staff Council of Raiffeisen Zentralbank and the staff councils of the Network Banks. They effectively represented the interests of the workforce while at the same time facilitating the changes needed to ensure that the Group will prosper in the future Preface Overview of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

47 Management s Report on the Group Management s Report on the Group Economic conditions in general Economic growth remains restrained during was a turbulent year geopolitically, economically and for the financial markets. The eurozone s gross domestic product (GDP) is estimated to have grown by just 0.4 per cent. Real economic growth in Austria is also estimated to have been much slower than in 2002 at 0.7 per cent. The prior-year figure was 1.4 per cent. Growth in Austria was driven by the domestic economy. The increase in private consumption was subdued, but capital expenditure by domestic companies began to pick up again. On the other hand, the momentum of exports declined and the growth of imports accelerated. Inflation averaged just 1.3 per cent, and it should remain very low at an average of 1.4 per cent in 2004 despite increased tax outlay in the wake of the tax reform. Because of weak domestic demand in Europe, the strong euro continued to hamper economic recovery. The appreciation of the euro as predicted by RZB s analysts will restrain but not prevent economic recovery in the eurozone and thus also in Austria. Interest rates at a record low Reacting to the uncertainties surrounding the War on Iraq, the European Central Bank (ECB) reduced its key rate by an initial 25 basis points in March When the economic indicators still failed to improve after the end of the war, interest rates were cut by another half percentage point in June. The ECB s interest tender rate thus stood at its lowest level since the creation of the Monetary Union, and it is likely to stay at the current level of 2.0 per cent for the entirety of Low rates of inflation have given the ECB the leeway it needs to combat a sluggish recovery with sustained low interest rates. As the euro tends upwards, the ECB is likely to postpone interest rate hikes as long as possible and only intervene in the currency markets and/or cut interest The development of Euroland interest rates rates if the US dollar falls rapidly. Roller coaster in the bond markets 3-month money (EURIBOR) 10-year German Bund The euro bond market went through a series of steep rises and falls during It was initially hit by fears about the economy and deflation as well as interest-rate cuts, and was then in the sway of budding economic optimism and strong economic figures. Yields on 10-year government bonds rose by about 50 bps at the beginning of the War on Iraq, but despite robust equity markets, they then hit new lows in June. Massive sales of bonds set in as the forward indicators improved. Since then, yields on 10-year bonds have remained in a broad sideways movement taking them to about 4.5 per cent during highs and down to about 4 per cent during lows. In view of the economy s recovery, the prospect of a rise in yields in the longer term remains intact. Consequently, the bond market can expect another turbulent year. Segments Financial Statements Supervisory Board s Report Glossary Contacts 57

48 Management s Report on the Group Despite their initial upward movement following lows in the autumn of 2002, the Western equity markets all entered 2003 with price losses. In the wake of frustrated economic hopes and over-optimistic profit forecasts, the European equity markets had reached their lowest levels in six years by mid-march A massive countermovement followed, with added momentum coming from reallocations from the bond market to the equity market. After increases in profit forecasts towards year-end, the key equity indices closed 2003 near their highs for the year. Central and Eastern Europe asserts itself as a high-growth region The economies of Central and Eastern Europe (CEE) continued to assert themselves as high-growth markets during Despite continuing stagnation in the EU which is the region s most important trading partner and investor, accounting for around two thirds of its exports economic growth in Central and Eastern Europe increased overall to average 3.2 per cent in CEE-4 1 (2002: 2.1 per cent) and 3.4 per cent in CEE-8 2 (2002: 2.5 per cent). As in prior years, Russia achieved even faster GDP growth than CEE-8, namely 6.5 per cent. The principal motors of growth besides private consumption were investment and the region s growing exports. Growth should gain added momentum from the European Union s economic recovery in 2004, even though essential budget reforms will necessitate cuts in public spending. The process of disinflation in Central and Eastern Europe continued. Rates of inflation reached their lowest levels since the transformational process began, averaging 1.9 per cent over the year in CEE-4 (2002: 2.6 per cent) and 2.2 per cent in CEE-8 (2002: 2.9 per cent). In view of the hikes in administered prices and indirect taxes that are to be expected in the wake of accession to the EU, there is likely to be a small rise in rates of inflation in Central and Eastern Europe s overall current account performance improved during The larger part of the improvement was accounted for by Slovakia and Poland, whose exports grew rapidly. On the other hand, high current account and budget deficits in conjunction with rising inflation in Hungary led to a perceptible loss of confidence among investors. Whereas portfolio inflows played a decisive role in financing the current account deficit in Hungary, the ability of other countries to finance their deficits was largely ensured by foreign direct investment. EU accession on 1 May 2004 should trigger another rise in foreign direct investment. The biggest medium-term challenge will be to reduce budget deficits to below 3 per cent of GDP. When consolidating their budgets, the accession countries will have to exert themselves if they are to satisfy the Maastricht criteria in time for the euro s planned introduction between 2008 and CEE-4: Poland, Hungary, Czech Republic, Slovakia. 2 CEE-8: CEE-4, Estonia, Latvia, Lithuania, Slovenia Preface Overview of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

49 Management s Report on the Group Economic maturity of the Central and Eastern European countries 70% 71% Spain* 60% 50% 61% 53% 52% Greece* Portugal* 40% 30% 46% 41% 41% 39% * At time of EU accession 35% 33% 30% 20% 26% 10% 0% Slovenia Czech Republic Hungary Slovakia Estonia Poland Lithuania Croatia Latvia Bulgaria Russia Romania 20% Ukraine Per capita GDP (at purchasing power parities) in per cent of EU average Sources: Eurostat, WIIW, RZB Group Financial Research. The development of banking in RZB s principal markets Austria s banking industry continues to grow Reflecting the global trend, the Austrian banking industry has also gone through a process of concentration in recent years. Since the beginning of the 1990s, the Bank Austria Creditanstalt Group has for instance been created from Zentralsparkasse, Länderbank, Creditanstalt and SKWB Schoellerbank, and the Erste Bank Group has been created from Erste Österreichische Spar-Casse, GiroCredit, ÖCI and acquired savings banks. In addition, the takeover of Postsparkasse (post office savings bank) by Bank für Arbeit und Wirtschaft created the BAWAG/P.S.K Group. However, the country s two cooperative banking groups the Raiffeisen Banking Group and the Volksbanken Group have been largely untouched by mergers and takeovers. The shareholder structures of the Austrian banks changed little in The most striking development was the stock exchange comeback of Bank Austria Creditanstalt, whose parent HypoVereinsbank floated nearly one quarter of its stake on the stock exchange. Statistics published by Oesterreichische Nationalbank (OeNB) show that the balancesheet totals of the country s banks increased significantly again in 2003 after having declined by 2.5 per cent in At the end of December 2003, the aggregate balance-sheet total of the Austrian banks came to billion, which was 31.8 billion or 5.5 per cent more than at year-end The total does not include assets accounted for by subsidiaries in Central and Eastern Europe. Net interest margin below the EU average By the standards of other Western European countries, the Austrian banking industry suffers from structural deficits. The net interest margin in Austria has dropped steadily in recent years and has now levelled out at 1.24 per cent. That puts the Austrian banks at the bottom end of the European scale. The main reasons are probably the high degree of market saturation and the intensive competition for market share that it has created. Segments Financial Statements Supervisory Board s Report Glossary Contacts 59

50 Management s Report on the Group Room for consolidation Based on the dominance of its three biggest sectors (the Raiffeisen Banks, the Sparkasse banks and joint stock banks), the Austrian banking industry is already highly concentrated. Measured in terms of balance-sheet totals, those three sectors account for nearly 76 per cent of the market. However, the balance-sheet totals of the country s five largest banks account for just 45 per cent. That figure suggests that further consolidation in the banking industry is forthcoming because it is below the international average reported in a current European Banking Study published by the Economist Intelligence Unit, which cites figures of 85 per cent in the USA and 88 per cent in Sweden. Germany had the lowest level of concentration in the study of about one fifth. The economy s development shapes lending and saving behaviour According to the OeNB, borrowing by households grew by only a little over 3 per cent in 2003 despite extremely low interest rates. That was partially attributable to the economy s weakness and the associated uncertainty of the incomes outlook. The household saving ratio also reflected the economy s development, falling sharply over the past three years to just below 8 per cent in We can expect the saving rate to recover somewhat in the near future, and given current political debate about pensions, there is likely to be a shift towards longer-term saving variants. Stock exchange sentiment benefits Austrian banks Measured in terms of their non-consolidated operating results in the first three quarters of 2003, Austria s banks failed to benefit from the steepening term structure of interest rates. According to the OeNB, their net interest income came to 5.29 billion, which was slightly (0.4 per cent) down on the same period of Net interest income accounted for 51.6 per cent of total operating income, which was 1.6 percentage points less than in the first three quarters of On the other hand, the friendlier climate on the stock exchange was clearly reflected by the Austrian banks earnings. Earnings from financial instruments and equity participations, net commission income and earnings from financial investment operations improved considerably during the first three quarters. Excellent growth outlook in Central and Eastern Europe The development of the Central and Eastern European banking systems since the fall of the Iron Curtain has taken place in three phases. In part, they have overlapped. At the end of the 1980s and during the first half of the 1990s, the ground was prepared by the first Western banks to open up the region including Raiffeisen Zentralbank as a pioneer resulting in a crucial surge of development. They were followed by other Western banks as latecomers. Most of them secured market shares by acquiring stakes in major erstwhile state banks, but they were compelled to invest a lot of energy and resources in restructuring those banks and turning them around. With just a few exceptions such as Banca Commerciale 60 Preface Overview of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

51 Management s Report on the Group Romana and PKO Bank Polski the privatization of the major banks in Central Europe has now been completed, although the biggest banks in Eastern Europe are still state-owned. The third phase is a process of consolidation that has, for instance, become obvious in the Czech Republic and Hungary. At the same time, there has been a shift in the business policy thrust of most of the banking groups operating in Central and Eastern Europe. Servicing small and medium enterprises and retail customers segments that have been rather neglected by the banking industry is becoming an increasingly important part of business in Central Europe, and those segments also appears to harbour the most potential for growth. Reflecting that, product lines and branch networks have in recent years focused increasingly closely on those targets groups and/or have been enlarged with them in mind. A highly concentrated banking industry The banking industry in Central and Eastern Europe is already highly concentrated. For example, on average, the five largest banks in each market in the region have a market share of 50 per cent, and in some countries that market share is already accounted for by the three largest banks. Most big banks are in private hands or are internationally owned. The proportion of foreign-held stakes in banks in Central and Eastern Europe rose from 59 per cent in 2001 to 62 per cent in Although 2003 was not a year of major takeovers the largest in 2003 being the acquisition of Hungary s Postabank by Erste Bank the trend will continue. The sale to RZB of the Savings Bank of Albania (Banka e Kursimeve e Shqipërisë) was the most important bank privatization in South Eastern Europe. The first move into Belarus by a foreign bank was made in 2003, namely by RZB. Despite a broadening range of products, market penetration is still low in Central and Eastern Europe. Product segments such as asset management, mortgages and housing loans remain largely underdeveloped. Because the supply of banking services is still poor, sustained high rates of growth are to be expected. A study published by one of RZB s competitors predicts that the aggregate balance-sheet total of all the banks in the region will have grown by 42 per cent between year-end 2002 and year-end Narrowing margins cushioned The banking industry s performance benefited greatly from the success achieved in stabilizing inflation and monetary policy and from the prospect of convergence once the EU accessions of eight Central and Eastern European countries had been decided. With the exception of Poland, both lending volumes and savings deposits in those markets grew in Despite the continuing improvement in the level of monetarization measured using the ratio of M2 to gross domestic product (GDP) the region has a lot of ground to catch up compared with Euroland. Balance-sheet totals come to about 70 per cent of GDP in the CEE-8 countries, compared with 260 per cent in the eurozone. Lending in the CEE-8 countries stood at about 34 per cent of GDP, compared with approximately 114 per cent in the eurozone. Segments Financial Statements Supervisory Board s Report Glossary Contacts 61

52 Management s Report on the Group Summary of consolidated performance Since 2001, the Consolidated Financial Statements of RZB have been drawn up on the basis of the International Financial Reporting Standards (IFRS; formerly IAS). The legal position in Austria is such that consolidated financial statements drawn up in accordance with internationally accepted accounting principles have an exempting effect in that consolidated financial statements drawn up in conformity with BWG (banking act)/hgb (commercial code) are no longer required. However, RZB still publishes individual financial statements pursuant to Austrian law because they provide the formal basis for calculating distributions. RZB reported another record profit for fiscal Profit before tax increased by 42 per cent or 101 million from 243 million to 344 million. RZB owes that accomplishment largely to its long-term strategy of involvement in the vigorously growing markets of Central and Eastern Europe a strategy adopted many years ago from which most of the increase in profit again derived in the year under review. The Group units in Central and Eastern Europe already accounted for over two thirds ( 231 million) of its consolidated profit before tax. The table below reviews the development of the Consolidated Income Statement: Income Statement ( mn or per cent) 2003 Change Net interest income % Provisioning for possible loan losses (202.2) 33.8% (151.2) (112.1) Net interest income after provisioning for possible loan losses % Net commission income % Trading profit (loss) % Administrative expenses (1,017.4) 13.1% (899.9) (700.5) Profit before tax % Profit after tax % Consolidated profit % The increase in profit was mainly attributable to the advance in Operating profit, which increased by 131 million to 569 million. Operating income increased by 248 million, whereas Operating expenses only increased by 117 million. On the other side of the account, Provisioning for possible loan losses increased by 51 million. That was partly due to significant bad debt charges on loans to two Western European corporate clients who had been solidly rated but unexpectedly collapsed, and it was partly due to an increase in provisions to match the rise in credit volumes in Central and Eastern Europe. However, loan loss provisions to cover Austrian corporate customer business fell significantly. The improvement in RZB s operating performance was clearly apparent in its cost/income ratio, which fell by 3.1 percentage points from 67.2 per cent to 64.1 per cent. There was a minor change in the method of calculating that figure to bring it into line with the internationally most generally accepted practice. The change is explained in the Glossary Preface Overview of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

53 Management s Report on the Group Development of cost/income ratio mn 1,600 Operating income Operating expenses Cost/income ratio 67.2% 1,587 67% 1, % 1,338 1,200 1, Development of pre-tax segment earnings mn Corporate Customers Financial Institutions & Public Sector Structure of profits mn 1,600 1,400 1,200 1, % , % 54% Retail Customers Other operating profit Trading profit Net commission income Net interest income 7% 23% % Proprietary Trading 1,017 4% 20% 54% 22% 53% 50% 7% 19% 21% % 65% 64% 63% 62% Participations & Other 5% 18% 23% RZB changed the format of its Business Segment Reporting in It is now customer-segment based rather than product-segment based. The previous year s figures have been recalculated retrospectively to conform to the same format. Pre-tax figures show that RZB s two key business segments were still Corporate Customers, generating profit of 238 million (previous year: 201 million) and Proprietary Trading, generating profit of 142 million (previous year: 158 million). The Retail Customers segment, which is under development and exists almost exclusively in Central and Eastern Europe, was in the meantime delivering significantly improved results (loss of 19 million, as against loss of 59 million in 2002), even if it had yet to reach breakeven point. The structure of consolidated operating income which increased by 19 per cent from 1,339 million to 1,587 million remained largely unchanged. Commission income [ 359 million] accounted for 23 per cent thereof, which was two percentage points more than in Interest income [ 863 million] accounted for 54 per cent (previous year: 53 per cent). On the other hand, the proportion accounted for by Trading profit [ 293 million] fell from 19 to 18 per cent, and the same was true of Other operating profit [ 71 million], whose relative contribution to total operating income fell from 7 per cent to 5 per cent. Despite sustained powerful organic growth in Central and Eastern Europe and notwithstanding the acquisition of Priorbank JSC in Belarus at the beginning of the financial year, Administrative expenses remained within reasonable limits, rising by 13 per cent to 1,017 million. The increase in Income tax, which came to 65 million (rise of 5 per cent), was disproportionately small compared with the advance in profit. That was among other things due to the tax reform enacted in Slovakia during the year under review. As a result, Profit after tax increased by 54 per cent to 278 million. The advance in Profit after tax without taking into account an EU fine for alleged interest-rate collusion (which had dented profit by 23 million in 2002) came to 37 per cent or 75 million. Segments Financial Statements Supervisory Board s Report Glossary Contacts 63

54 Management s Report on the Group Consolidated profit attributable to Raiffeisen Zentralbank came to 216 million (previous year: 137 million), which led in turn to a sharp increase in earnings per share (EPS) of 46 per cent from 33.4 to That good result was also mirrored by RZB s substantially improved return on equity (ROE). ROE is profit before tax as a percentage of average equity employed. In the year under review, it came to 15.5 per cent, as against 12.5 per cent in The chart below shows the development of profit before tax applying previous accounting standards and according to IFRS, whose first-time application as of 2000 led to a one-off overlap with profit calculated in conformity with HGB/BWG (calculated for the last time as of 2000): The development of profit and return on equity mn ROE in % % % 10.4% 9.9% % % 14.4% 13.3% % 15.5% Profit before tax (HGB/BWG) Profit before tax (IFRS) ROE before tax (HGB/BWG) ROE before tax (IFRS) 64 Preface Overview of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

55 Management s Report on the Group Detailed review of items in the Income Statement Development of interest margins 1.6% 1.2% 0.8% 1.27% 1.32% 1.56% 1.68% RZB s Net interest income grew by 22 per cent from 709 million to 863 million. That increase was in line with the growth in RZB s balance-sheet total, which increased by 20 per cent. The Group s interest margin improved by 12 basis points from 1.56 per cent in 2002 to 1.68 per cent in % 0% Development of net commission income mn % 3% 37% 16% 24% Other banking services FX, notes/coin, precious metals business Securities business Breakdown of trading profit in 2003 Currency-related and FX valuations 81% (up 8 PP) 16% 4% 27% 22% 31% 18% 6% 22% 24% 30% 15% 16% 25% 38% % Credit processing and guarantee business Cash management operations Share-/indexrelated 8% (up 7 PP) Interest-rate related and credit products 11% (down 15 PP) Net Provisioning for possible loan losses came to 202 million in the year under review (previous year: 151 million). That was 34 per cent or 51 million up on Whereas provisioning for loans to Austrian customers came to just 25 million, provisioning for loans to customers in other countries increased by 177 million. The difference reflects the fact that almost all of the increase in lending volumes took place in countries outside Austria. Within Net commission income, which grew by a hefty 27 per cent or 76 million to 359 million, net commission income from cash management operations which came to 135 million, grew most rapidly both in absolute terms (increase of 50 million) and in relative terms (increase of 59 per cent). Net commission income from credit processing and guarantee business, which increased by 37 per cent to 92 million, also made a sizeable contribution to profits. The larger part of net commission income from cash management operations derived from Group units in Central and Eastern Europe, including in particular units operating in the retail segment. On the other hand, nearly all net commission income from securities business, whose relative contribution to total net commission income fell as the result of a small decline to 57 million, was earned by Raiffeisen Zentralbank and Bankhaus Kathrein. RZB s Trading profit has been high for years, and it grew by another 16 per cent or 40 million to 293 million in the 2003 financial year. The Group s trading profit includes both realized and unrealized gains and losses arising from positions in the trading portfolio net of refinancing costs. The larger part of trading profit was accounted for by FX trading, notes-and-coin trading and remeasurements of foreign-currency items. Earnings in this area increased by 28 per cent to 237 million. The increase was generated by the banking subsidiaries in Central and Eastern Europe, including in particular Poland and Slovakia. Segments Financial Statements Supervisory Board s Report Glossary Contacts 65

56 Management s Report on the Group Development of administrative expenses mn 1, , Trading profit from interest-rate-related and credit products decreased by 48 per cent to 33 million. That was mainly due to the marked year-on-year fall in interest rates in Slovakia and thus mainly affected Slovakia s Tatra banka. There was a sharp rise in trading profit from share-/index-related business, which increased from 3 million to 23 million as a result of the more favourable tone of the stock markets. It was largely generated by Raiffeisen Centrobank, which specializes in equity products Write-downs General outlay Staff expenses Breakdown of administrative expenses in 2003 IT Legal and consultancy 52mn Premises, rents 23mn (6%) (14%) 101mn (27%) Advertising 46mn (12%) Net income from financial investments declined from a loss of 22 million to a loss of 49 million. Whereas net income from equity participations remained more or less static at 28 million (previous year: 25 million), net income from financial instruments held-to-maturity fell, albeit virtually exclusively because of the failure of a single security, turning a profit of 3 million in 2002 into a loss of 21 million in Other operating profit came to 97 million, which was 3 per cent up on the year. The biggest changes included the increase in Net income from other available-for-sale financial assets, which rose from 1 million to 25 million. That conspicuous improvement was made possible by upward remeasurements of available-for-sale securities allowed by the positive market environment. Other general outlay 87mn (23%) Deposit guarantee costs 21mn (6%) Communication 32mn (9%) Office expenses 11mn (3%) Administrative expenses increased by 117 million or 13 per cent to 1,017 million. The biggest increase within that item of 17 per cent or 76 million took place in Staff expenses, which accounted for roughly one half of total administrative expenses. Four per cent of the increase was due to changes in the scope of consolidation (in particular the acquisition of Priorbank JSC, which had an average of 2,329 employees). General administrative outlay increased by a very modest 5 per cent to 373 million. The largest part of the increase had its roots in the extension of the branch network from 651 to 740 banking outlets. It was due to expenditure on premises (rents and maintenance), which rose by 14 per cent from 88 million to 101 million. Expenditure in all other areas rose only slightly or was static. The increase in depreciation/amortization/write-downs of tangible and intangible fixed assets was bigger, namely 25 per cent or 25 million, taking that item up to 125 million. Nearly half of the increase was due to an exceptional writedown to a software project Preface Overview of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

57 Management s Report on the Group Development of balance-sheet assets bn 60 8% 50 20% 9% 8% 40 18% 17% 9% 38% 30 17% 37% 37% 41% 20 34% 37% 10 37% 33% Other assets Securities, equity participations Loans and advances to customers Loans and advances to banks Structure of loans and advances to customers Corporate customers Retail customers 79% (down 6 PP) 13% (up 5 PP) Other 2% (unchanged) Balance-sheet development RZB s consolidated balance-sheet total grew by 21 per cent or 9.7 billion from 46.4 billion at year-end 2002 to 56.1 billion at the end of the year under review. Companies newly added to the Group contributed just 534 million to the increase. Growth in the balance-sheet total on the assets side of the Balance Sheet was generated mainly by Loans and advances to banks, which increased by 27 per cent or 4.1 billion to a total of 19.2 billion and grew primarily in the money-market segment. There was also growth in Loans and advances to customers, which showed a net increase after provisioning for possible loan losses of 12 per cent or 2.3 billion to 21.5 billion, and in holdings of Securities, which grew by 30 per cent or 2.5 billion to 11.0 billion. The fastest growing item in the credit segment was in lending to retail customers, which increased by 1.5 billion to 2.9 billion. In addition to motor-vehicle finance leasing, it was mainly attributable to numerous small personal loans. As we have said, RZB s retail banking activities are almost exclusively limited to Central and Eastern Europe. Development of balance-sheet liabilities bn % 4% 13% 19% 57% 6% 5% 10% 23% 56% 6% 7% 9% 27% 51% Public sector 6% (up 1PP) 8% 6% 7% 30% 49% On the liabilities side of the Balance Sheet, Deposits from customers increased by 34 per cent or 4.3 billion to 17.0 billion. The increase in deposits from corporate customers (growth of 3.0 billion to 10.5 billion) was substantially bigger than the increase in deposits from retail customers (growth of 1.2 billion to 5.8 billion). Deposits from banks increased by 17 per cent or 4.0 billion. The bulk of that increase was accounted for by interbank business. The structure of RZB s liabilities is determined by Raiffeisen Zentralbank s role as the central institution of the Raiffeisen Banking Group in that the Regional Raiffeisen Banks hold their mandatory reserves of liquidity at RZB. Raiffeisen Zentralbank does not do retail banking business in Austria Own funds Other liabilities Liabilities evidenced by paper Deposits from customers Deposits from banks Segments Financial Statements Supervisory Board s Report Glossary Contacts 67

58 Management s Report on the Group Development of equity Breakdown of consolidated equity mn , ,010 1,036 1, , Minority interests Earned capital inclusive of profit for the year Paid-in capital Equity inclusive of consolidated profit for the year and minority interests came to 2,445 million on the reporting date (2002: 2,275 million), which translates into a year-on-year increase of 7 per cent. Paid-in capital was unchanged at 876 million. Retained earnings fell by 6 per cent or 53 million to 819 million. The key reasons for the fall were the development of exchange rates in Central and Eastern Europe and RZB s net income from unrealized gains and losses arising from cash-flow hedges. Because of a hybrid Tier 2 issue carried out via RZB Finance (Jersey) II Ltd in August, which brought in 100 million, and because of minority interests in RZB s profit totalling 62 million, minority interests in equity increased by 37 per cent from 389 million to 533 million. Finally, Consolidated profit for 2003 was 57 per cent or 79 million up on the year at 216 million. The Managing Board will recommend to the General Meeting of Shareholders that a dividend of 50.4 million be distributed from profit for the 2003 financial year, which would translate into an increase of 7.3 million compared with the previous year Preface Overview of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

59 Management s Report on the Group Regulatory own funds pursuant to BWG (banking act) The own funds of the RZB Credit Institutions Group (RZB-Kreditinstitutsgruppe) within the meaning of Bankwesengesetz (BWG) came to 3,097 million at the end of the financial year, which was 8 per cent or 228 million up on the previous year s figure of 2,869 million. Besides the factors already outlined above, eligible subordinated liabilities at a net amount of 66 million also contributed to the increase. Those own funds compared with a regulatory own funds requirement of 2,431 million (2002: 2,238 million), giving excess own funds of 665 million or 27 per cent. Since 1994, RZB s excess own funds have developed as shown in the chart below: The development of own funds and excess own funds mn % of required own funds 3,500 3,000 2,500 47% 40% 36% 2,869 3, ,000 1,500 1, % 33% ,235 1,054 15% 1,214 1,244 13% 1,400 1,554 2,120 1,929 2,425 26% 2,238 2,431 28% 27% Required own funds Actual own funds Excess own funds The Group s core capital ratio measured in terms of its own funds requirement for the banking book came to 7.5 per cent for 2003, which was slightly up on the previous year. On the other hand, its own funds ratio fell slightly from 10.3 to 10.2 per cent. Staff report The number of people working for RZB reached another all-time high at year-end 2003, having grown by 26 per cent or 4,419 from 16,700 to 21,119 during the year. A detailed staff report is provided in the section on Human Resources beginning on page 54. Segments Financial Statements Supervisory Board s Report Glossary Contacts 69

60 Management s Report on the Group Outlook for 2004 Economic outlook reflects cautious optimism The indicators are signalling economic recovery around the world. However, the economies of the USA and Asia will grow more rapidly in 2004 than those of the eurozone, where consumer behaviour in particular is still rather cautious. The reforms of social systems that are in the pipeline in many countries in the EU are likely to continue to weaken private domestic demand in the near future. On the other hand, given the international economic recovery, exports will increase despite the strong euro and demand for capital goods in the corporate sector will rise again. RZB expects the eurozone economy to gradually gain momentum and is currently forecasting GDP growth of 1.7 per cent in Austria is expected to show real economic growth of 1.9 per cent. Once again, the momentum for growth is likely to come from the domestic economy. In RZB s opinion, growth in Central and Eastern Europe will remain much more rapid than Euroland s in EU enlargement will have an impact on the banking landscape Although one can assume that current trends in Austria will continue, a number of countries in Central and Eastern Europe are joining the European Union Single Market in Competition can be expected to intensify as a result, and as the region s interest rates grow closer to EU levels, net interest margins will narrow. However, action taken to enhance efficiency including for instance customer segmentation and the increased standardization of products should enable the banks operating in the region to cushion the pressure on their profits. RZB s expectations of further growth are based on the growing level of monetarization and rising disposable incomes and the emerging trend towards higher-grade financial products. RZB will profit from those developments. Further increase in profits expected RZB expects to continue to grow in In the present environment, that will mean moderate growth in Austria and more rapid growth in Central and Eastern Europe. Both its balance-sheet total and its consolidated profit for the year should show nearly double-digit growth Preface Overview of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

61 Management s Report on the Group Events after the balance-sheet date Acquisition offers under further examination The formal closing for the takeover of the Savings Bank of Albania (Banka e Kursimeve e Shqipërisë) will take place in April, making what is Albania s strongest bank by far a part of RZB s network in Central and Eastern Europe. The takeover is costing US$ 126 million. RZB will continue to examine takeover opportunities in Austria and Central and Eastern Europe during 2004 with the intention of continuing to strengthen its market position over and above what can be achieved by organic growth alone. The criteria applied when making decisions in this area will remain business viability and compatibility with Group strategy and the Group s evolved structure. See page 103 of the segment report on Participations and Other for comments regarding the acquisition of a stake in Indonesia s PT Lippo Bank Tbk. Capital increase at Raiffeisen International To give long-term strength to the Group s growth strategy in Central and Eastern Europe, RZB plans to attract investors as minority stakeholders within the scope of an increase in the capital of Raiffeisen International Bank-Holding AG. To that end, it is also considering making an IPO for the company, which is the Network Banks holding parent. However, that will not happen before See pages 36 and 51 for more information. Change in the Managing Board Karl Stoss will leave RZB s Managing Board in the autumn to become Chairman of the Managing Board of an Austrian insurance group. The process of choosing a successor was still underway at the time of writing of this Annual Report. *** This Management s Report on the Group is a part of the Annual Report certified by the Auditors KPMG Austria GmbH. Segments Financial Statements Supervisory Board s Report Glossary Contacts 71

62 Corporate Customers Segment Reports The basis for RZB s primary segment reporting within the meaning of IAS 14 is its internal management reporting system, whose primary reporting format was changed over from a product-orientated structure to a customer-orientated one in Customer segmentation at RZB now takes place as follows: Corporate Customers Financial Institutions and Public Sector Retail Customers Proprietary Trading Participations and Other RZB s homogeneous Group-wide product segments were unaltered by the change, but Group reporting was supplemented by the presentation of customer segments. Segment reporting in conformity with IFRS was thus refined in the direction of reporting along customersegment lines, which is far more informative and facilitates comparisons with competitors. The customer segments upon which RZB reports are to be found as organizational units in the organizational charts of all major Group units. In addition, Proprietary Trading also became a reporting segment. Corporate Customers 000 or per cent 2003 Change 2002 Net interest income 430, % 378,373 Provisioning for possible loan losses (141,600) 9.7% (129,065) Net interest income after provisioning for possible loan losses 288, % 249,308 Net commission income 193, % 145,596 Trading profit (loss) 80, % 74,225 Net income from financial investments (21,152) Administrative expenses (311,314) 17.1% (265,965) Other operating profit 8,271 (2,580) Profit before tax 238, % 200,584 Risk-weighted assets ( 22 BWG) 16,736, % 15,425,506 Average equity 1,223, % 1,069,949 Cost/income ratio 43.8% (0.8 PP) 44.6% Return on equity (ROE) before tax 19.5% 0.8 PP 18.7% Average workforce 5, % 3,864 The Corporate Customers segment encompasses business with Austria s Top 1,000 enterprises, multinational groups and medium-sized and large companies in Central and Eastern Europe. The criteria for inclusion are revenues, profits and size of workforce. This segment also includes smaller subsidiaries of larger enterprises and profit-orientated state-owned enterprises. The small corporate customers serviced by the Network Banks are part of the Retail Customers segment Preface Overview of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

63 Corporate Customers Corporate Customers Corporate customers business develops well Despite the still troubled economic climate, Raiffeisen Zentralbank s business with Austrian and multinational corporates developed very well during the year under review. Gross earnings (net interest income, net commission income and trading profit) from business with those customers, who are serviced from Vienna, were 4.6 per cent up on the comparable figure for the previous year, whereby risk-weighted assets increased by just 0.7 per cent. Close cooperation with the Network Banks proved particularly helpful in the account management field. The Network Banks gross earnings from business with customers serviced on a Groupwide basis grew disproportionately rapidly. That was above all due to growing volumes of direct investment by Austrian and foreign groups in the various markets of Central and Eastern Europe and the associated increase in business volumes. Development of lending to corporate customers serviced from Vienna Gains in market share in Austria mn 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1, ,200 Raiffeisen Zentralbank s success in 7,744 7,801 Austria was primarily attributable to its 7,486 clear focus on the country s Top 1,000 6,607 corporates. Raiffeisen Zentralbank is a well-positioned No. 2 in that segment in Austria and continued to reduce the market leader s edge last year as a result of faster-than-average growth. Its acknowledged expertise and solutionsorientated approach, flexibility and offerings of made-to-measure products were rewarded with gains in market share. In addition to winning new key accounts, business with existing customers gained sustainable added depth. In particular, Raiffeisen Zentralbank successfully extended its service line, thus compensating for the restraining effect of the prevailing economic climate on demand for credit. It was above all able to make significant progress in its treasury and FX operations and in the corporate bond and investment markets. 5, The figures for 1998 through 2002 differ slightly from those provided in the 2002 Annual Report because they have also been adjusted to include trade finance for the first time this year. Research into customer satisfaction carried out for Raiffeisen Zentralbank during 2003 continued to underscore its capabilities in this segment. Raiffeisen Zentralbank was the bestranked service provider in the key quality categories such as professional expertise and quality of back-office services. Segments Financial Statements Supervisory Board s Report Glossary Contacts 73

64 Corporate Customers Multinational corporate customers Business with foreign multinational corporates operating in Central and Eastern Europe continued to expand thanks to RZB s region-wide banking network and tried-and-tested client care model, known as the Global Account Management System (GAMS). GAMS provides internationally active enterprises including of course those with their Head Offices in Austria with a central point of contact within Raiffeisen Zentralbank that coordinates and manages the local availability of banking services within the Network Banks. The concept works equally well in the opposite direction: an enterprise with an international presence and with its Head Office in one of the countries with a Network Bank receives support from a principal contact at the particular bank, and that contact is responsible for all business with that customer transacted anywhere in the Group. Gross earnings from business with multinational corporate customers serviced from Vienna grew by about 4 per cent. That was above all due to the consistently stable business environment in Russia and positive economic developments in the markets of South Eastern Europe. This pleasing development more than made up for the US dollar s weakness. A particularly important contribution to growth came from the entry of international corporates into the Serbia and Montenegran market as well as a number of prestigious project finance deals. Increase in provisioning for possible loan losses It was not just economic conditions that necessitated the 44.2 per cent increase in Raiffeisen Zentralbank s provisioning for possible loan losses arising from business with Austrian and multinational corporate customers serviced from Vienna. Raiffeisen Zentralbank (like many other reputed banks) had receivables outstanding from two Western European groups whose unforeseeable collapses accounted for a substantial proportion of loan-loss provisioning, notwithstanding due diligence. Following the increase in provisioning in 2003, the relationship between RZB s provisions for possible loan losses and its risk-weighted assets is now roughly on a par with its peer group in Austria. Appropriate risk management and rating-dependent control of the loans portfolio limited the increase in aggregate Group provisions for possible loan losses in this segment to 9.7 per cent. A corporate finance specialist offering a line of innovative products Steady growth in project and structured finance business Raiffeisen Zentralbank has long been one of the leading banks in the project finance market in Central and Eastern Europe. Impressive proof of its preeminence has among other things been provided by its advance to second-ranked co-financing participant of the European Bank for Reconstruction and Development (EBRD) in London. Measured in terms of co-financed transaction volumes, Raiffeisen Zentralbank has thus become the EBRD s second most important partner bank worldwide, leaving many of its reputed international competitors far behind as 74 Preface Overview of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

65 Corporate Customers the only Austrian bank among the EBRD s top 20 participants. Nine so-called co-financing facility projects were completed with the EBRD in 2003, namely four in Russia and one each in Bulgaria, Kazakstan, Serbia and Montenegro, Hungary and Romania. Financing facilities for Severstal and the Chelyabinsk Tube Rolling Plant in Russia and for a real-estate project of GTC in Belgrade the first of its kind in Serbia and Montenegro were particularly striking examples. Raiffeisen Zentralbank completed numerous prestigious project finance transactions in Austria and Western Europe, including for instance in the hotel sector the new Le Meridien and the revitalized Hilton in Vienna and the new Mövenpick Dream Castle Hotel in the Disneyland Resort near Paris. The arrangement and structuring of the asset backed securities transaction for the Leasfinanz Group was Raiffeisen Zentralbank s first finance transaction with this new type of instrument in Austria. The special advantage of such transactions is that they optimize financing costs and the balance-sheet structures of the issuing companies. RZB as a climate protection specialist In the light of the ever-increasing urgency of the climate protection requirements agreed in the Kyoto Protocol, an alliance was set up between Raiffeisen Zentralbank and Austrian Carbon Management (ACM) in the spring of As a result, as well as offering industrial enterprises the best possible financing solutions, Raiffeisen Zentralbank can now also give them advice about reducing their greenhouse gas emissions to meet prescribed targets. Raiffeisen Zentralbank also maintains close contacts with all the Austrian and international subsidizing agencies, including AWS (Austria Wirtschaftsservice GesmbH ), Kommunalkredit Austria, the ERP Fund, Forschungsförderungsfonds, the European Investment Bank and the IFC (International Finance Corporation). That has enabled it to enhance many investment projects with an ideal mix of grants, guarantees and subsidized loans. Brisk demand for mezzanine capital fund There was brisk demand for Raiffeisen Zentralbank s mezzanine capital fund, which is under management by Raiffeisen Mezzanin Partners and funded at the amount of 60 million. Close contacts with a number of promising high-growth companies led to the granting of the first facility with a mezzanine volume of 2 million at the end of January The brisk demand for mezzanine capital was fuelled primarily by the capital needs of expanding companies and of new shareholders following changes in ownership. The attractions of this instrument compared with a conventional loan lie in the higher risk acceptance that results from the subordinated character of the instrument versus all other forms of borrowed capital, the waiving of security and, in particular, its superior flexibility when it comes to repayments and interest. Segments Financial Statements Supervisory Board s Report Glossary Contacts 75

66 Corporate Customers Growing interest in corporate bonds The trend towards capital market instruments as a supplement to classical borrowing was already apparent in the first half and continued as the year progressed. Austrian and multination corporate customers showed particular interest in financing opportunities in the corporate bond market. Raiffeisen Zentralbank was the only Austrian bank to belong the lead management groups for all six public issues whose placements focused on Austria. Raiffeisen Zentralbank was the lead manager for the 100 million bond floated by Heinzel Holding GmbH, successfully introducing a new issuer to the Austrian capital markets. Overall, Raiffeisen Zentralbank provided impressive proof of its outstanding placing power in cooperation with the Regional Raiffeisen Banks. The Network Banks are also players in the primary market for corporate bonds. That is above all true of Raiffeisenbank Austria in Moscow, which ranks second in the arrangement of local corporate bonds with a market share of over 8 per cent. Raiffeisenbank Austria floated the equivalent of US$ 250 million in 2003, making it an important contributor to the development of this market segment in Russia. The highlights were the bonds it arranged for Vimpelcom, Eastern Europe s second-largest mobile phone operator, and SUN Interbrew, the second-largest brewer in Russia and the Ukraine, whose volumes came to the equivalent of US$ 100 million and US$ 80 million, respectively. Raiffeisenbank (Bulgaria) was local market leader, arranging or co-arranging 40 per cent of the country s new corporate bonds. Successes in the IPO market Raiffeisen Centrobank recorded a number of noteworthy successes in the IPO market. Within this segment, it was co-manager in the syndicate for the secondary public offering (SPO) and convertible bond of voestalpine and was the only Austrian bank in the syndicate for the convertible bond of Österreichischen Industrieholding AG (ÖIAG) to finance Telekom Austria AG. Moreover, in the fourth quarter, Raiffeisen Centrobank successfully introduced Cross Holding to the stock exchange in its capacity as lead manager, and it also brought Topcall, SBOE and S&T back to the Vienna stock exchange. In addition, Raiffeisen Centrobank managed a number of delistings. Ceaseless and intensive customer support and work done to attract new customers have created the basis for a consistently successful market presence as the business environment improves. Raiffeisen Centrobank is a wholly-owned subsidiary of Raiffeisen Zentralbank and is the equity house of the Raiffeisen Banking Group. The sections on Financial Institutions and Proprietary Trading contain further details Preface Overview of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

67 Corporate Customers Global Treasury System enhances cost efficiency The implementation of the Global Treasury System Raiffeisen Zentralbank s new front-toback system was completed during the second half. That has both broadened the product line, further enhancing the quality of customer-bank relations, and optimized internal cost effectiveness. The image campaign initiated by Treasury Corporate Sales in the autumn was already generating a perceptible increase in earnings and gains in market share during the fourth quarter. Customers were mainly looking for made-to-measure solutions in the foreignexchange and interest-rate segments. Raiffeisen Zentralbank responded to those needs by offering a mix of so-called plain vanilla products with derivatives, enabling it to continue to build on its strong position in Austria s Top 1,000 corporates segment. Traditionally strong in the trade and export finance markets In recent years, Raiffeisen Zentralbank has made an excellent name for itself as a manager and financier of trade transactions, especially in connection with commodities like oil, oil products and metals. Starting from what was already a very high level, financed volumes in that area increased by another 15 per cent. That was not least due to smooth teamwork within Raiffeisen Zentralbank and between Raiffeisen Zentralbank and its various Network Banks, including above all the Raiffeisen Banks in Moscow and Kiev and, since last year, Priorbank in Minsk. Framework credit agreements facilitate exports Raiffeisen Zentralbank s many framework credit agreements, including agreements with banks in India, the CIS, Iran, Vietnam and the People s Republic of China, often give the exporters among its Austrian customers a decisive edge even as they canvas for business. As far as possible, those credit agreements are securitized by the Republic of Austria through Oesterreichische Kontrollbank AG (OeKB; Austria s export credit agency). RZB s local representatives provide important support to its clients and their customers, especially in countries where good relationships with the authorities play a decisive role in bringing a transaction to fruition and carrying it through smoothly. Volumes of tied loans among other things within the scope of the framework agreements mentioned above and business in the Export Funds and KRR Loans (Kontrollbank refinancing facility) market were both 10 per cent up on 2002 despite a slowly declining or stagnant overall market. That was partly thanks to Raiffeisen Zentralbank s marketing focus on export finance and partly a result of the intensified cross-selling work of its account management departments. Close cooperation with the Network Banks also enables Raiffeisen Zentralbank to finance exports out of third countries. For instance, it financed two deliveries to a state-owned enterprise in Romania with securitization provided by Norwegian export loan insurer GIEK and Canada s EDC. Segments Financial Statements Supervisory Board s Report Glossary Contacts 77

68 Corporate Customers Significant growth in L/C and guarantee business Raiffeisen Zentralbank was able to sustain the long-term growth trend in its documentary business with a 17 per cent increase in overall volumes. In particular, business with oil letters of credit, most of which were connected with deliveries from the CIS, grew very well, increasing by 45 per cent to over 4.3 billion. Guarantee business on behalf of Austrian and foreign customers grew by over 8 per cent, and earnings in that sub-segment grew by far more. Innovations in the field of corporate cash management RZB launched its new Cross-Border Cash Pooling line during the year under review. This product was first introduced in the Czech Republic und Poland. Hungary and Slovakia will follow in Cross-Border Cash Pooling lets corporate customers with a euro account at a Network Bank offset it against their principal account at Raiffeisen Zentralbank on a daily basis. Pooling is particularly popular with customers in the new EU members, where the legal prerequisites for such products are already in place. RZB is one of the first banks to include this instrument in its line. The Intergroup Payments facility offers special prices and value dates for customer transfers between Raiffeisen Zentralbank and its subsidiary banks and between the individual subsidiary banks. The voucher display function provided by RZB s electronic banking system is a major step forward in improving data quality. RZB s customers no longer have to wait to receive their vouchers by post together with their statements. That facilitates payment scheduling and coordination at the customer s end as well as speeding up payments and enhancing their quality. e.custody makes costs transparent Deposit volumes under management by Raiffeisen Zentralbank as a custodian for Austrian and foreign customers increased by 5 per cent to some 15.5 billion. As in other areas, the foundations for that growth were laid by unceasing product development work. For example, Raiffeisen Zentralbank is the only securities custodian who can provide bulletins and reminders about capital measures in real time, which it does via its e.custody Internet application. Users of e.custody also receive a detailed record of the fees they are charged, which is an important step forward towards achieving total costs transparency Preface Overview of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

69 Corporate Customers RZB again leading syndicated loans arranger in Central and Eastern Europe Margins charged to borrowers in the new EU member-states are still very narrow, and in the case of excellent risks, they may be even narrower than margins on comparable Western European transactions. Financing costs have also fallen continuously from a much higher level in the other countries in the region, including in particular Romania and Russia, and the feasible terms have simultaneously lengthened considerably. The trend is gaining very powerful momentum from competition in local banking markets and the sustained increase in Western banks interest in lending to Central and Eastern Europe. For example, the number of international banks vying to arrange syndicated loans in the region increased from 54 in 2002 to 67 in The trend is also being underpinned by substantial improvements in those markets ratings. Within that highly competitive environment, RZB continued to assert itself as the leading arranger of syndicated loans for corporate customers and banks in Central and Eastern Europe during RZB financed and internationally syndicated a volume of US$ 2.4 billion in a total of 32 transactions. Corporate Customers accounted for 15 of those transactions with a total volume of US$ 1.7 billion. Two particularly noteworthy examples were the joint arrangement with the EBRD for Hungary s Cora supermarkets (owned by the Franco-Belgian Louis Delhaize Group), which had a volume of 160 million, and the joint arrangement with the International Finance Corporation (IFC) for Kronostar, Russia, which had a volume of 86 million. The most striking corporate finance transactions included the 800 million stand-by facility for the Porsche Group the largest publically announced syndication for an Austrian enterprise to date and the 155 million facility for Croatia s Hrvatska Elektroprivreda (HEP). The most noteworthy trade finance transactions were the US$ 200 million syndicated loan for TNK and the US$ 150 million credit facility for Rosneft, both in Russia. Corporate business in Central and Eastern Europe The RZB Network Banks business with local and international corporate customers grew not just because of the network s enlargement and increased density but also because of the broadening of the associated product lines and even more intensive sales development work. Those factors significantly increased virtually every Network Bank s subjectively perceived market presence and objectively verifiable market share. In South Eastern Europe in particular, the successful transmission of Raiffeisen s fundamental values security and trustworthiness provided a reliable basis for steady growth in business volumes in every segment and served as a valuable prop during the acquisition of new banks. Segments Financial Statements Supervisory Board s Report Glossary Contacts 79

70 Corporate Customers Network Banks in strong market positions In terms of balance-sheet totals, RZB s Network Banks are consistently among the leading banks in their respective markets. Having carried out a focused marketing campaign, Raiffeisenbank Rt., Budapest, was able to increase its market share in the corporate loans market by 1.5 percentage points to nearly 10 per cent. Despite growing competition, Tatra banka in Slovakia was able to defend its 20 per cent market share in the corporate loans market, and Raiffeisen Bank Bosna i Hercegovina re-asserted its leadership in that market with a market share of about 17 per cent. Raiffeisenbank (Bulgaria) increased its loans portfolio by half and now has a market share of 9 per cent in the Corporate Customers segment, making it one of the country s most rapidly expanding banks servicing 45 per cent of the Top 200 accounts in the local marketplace. Raiffeisenbank, Belgrade, was the country s fastest growing lender, increasing its loan portfolio nearly fourfold to 194 million, and its market share in that market about 8.5 per cent taking small and medium-sized enterprises into account grew by nearly as much. Raiffeisenbank Ukraine s lending to corporate customers doubled although the market as a whole only grew by about 50 per cent. Raiffeisenbank Ukraine is one of the very few local banks to offer medium-term to long-term loans and project finance services in addition to structured trade finance. Corporate customer deposits at Raiffeisenbank Austria, Zagreb, grew by 47 per cent, outstripping the market s overall growth by 30 percentage points. Priorbank in Belarus is one of just two local banks to meet the requirements for the EBRD s SME finance facility. By year-end 2003, 520 loans with a total volume of the equivalent of over 25 million had been paid out within the scope of that programme. Significant growth in the loans portfolio Overall, the Network Banks lending business developed very well. Their risk-weighted assets in the Corporate Customers segment increased by nearly 38 per cent on the year to 7.3 billion. Despite that rapid growth, prudent lending and strict risk management limited the increase in provisioning for possible loan losses to just under 2 per cent. In contrast, net interest income after provisioning for possible loan-losses grew by over 28 per cent to million. The Network Banks return on equity before tax in this segment came to 37 per cent (increase of 1.1 percentage points), and their segment cost/income ratio fell by 2.2 percentage points to 45.9 per cent. Re-segmentation makes it impossible to provide an informative comparison with the development of risk-weighted assets over time for the period before Preface Overview of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

71 Corporate Customers Successful year for Raiffeisen-Leasing Raiffeisen-Leasing GmbH was already showing Austria s highest rate of growth in new business inclusive of cross-border finance in the first half of 2003, when it took over leadership of the market with a market share of 13 per cent. During the year, its staff of 279 achieved nearly 782 million of new business in the domestic marketplace from over 9,600 contracts. This translates into 9 per cent growth in volumes compared with Most of the total was accounted for by corporate key accounts. A broad range of services Supplementing the classical finance leasing segments motor-vehicle, movables and real estate Raiffeisen-Leasing developed innovative finance and service products using so-called operator models. Those structures make it possible to finance investments that used not to be feasible. They have created new possibilities, including in particular opportunities in Central and Eastern Europe. Raiffeisen-Leasing International continues to grow RZB has finance leasing subsidiaries in the Czech Republic, Slovakia, Poland, Hungary, Croatia, Russia, Slovenia, Romania and, since mid-year, in Serbia. In the fourth quarter of 2003, it was also decided to set up further finance leasing subsidiaries in Bulgaria and Bosnia and Herzegovina. Six hundred and eighty-eight staff members operate 95 offices in this sub-segment, most of which are on the premises of Network Banks. New business grew by 32 per cent to 1,038 million during 2003, with the motor-vehicle finance leasing segment growing fastest. The development of new business at Raiffeisen-Leasing International mn 300 Market share in per cent New business Serbia Romania Russia Slovenia Czech Republic Slovakia Croatia Poland Hungary Segments Financial Statements Supervisory Board s Report Glossary Contacts 81

72 Corporate Customers A leader among local finance leasing companies Virtually all of Raiffeisen-Leasing International s (RLI) local subsidiaries are among the leaders in their respective finance leasing markets. Raiffeisen-Leasing is the market leader in Croatia with a market share of one third, and it is second-placed in the Serbian and Polish markets with market shares of 30 and 10 per cent, respectively. The decline in new business volumes in Slovenia, the Czech Republic and Slovakia was due to increasing market saturation in those countries. The aggregate balance-sheet total of RZB s finance leasing subsidiaries rose to 1,449 million, which translates into growth of 52 per cent. It was possible to translate into customer business much of the facility agreed with the EBRD in 2002 for a total of 37 million for finance leasing in the Czech Republic, Slovakia, Romania, Slovenia and Poland. Because of their advantageous interest rates and terms, such facilities are of great importance, especially when it comes to the development of small and medium-sized enterprises. Goals for 2004 Based on a solid customer base, RZB will continue to work to attract new customers in Austria s Top 1,000 corporates market as well as customers with a strong presence in Central and Eastern Europe. RZB will exploit business potential more effectively by intensifying its cross-selling activities so as to increase the proportion of customers using it as their principal provider of banking services. The main focuses of that strategy will be services and foreign trade finance business. One can therefore expect continued growth from a high base during 2004, but it will go hand-in-hand with careful risk management. RZB will endeavour to be the leader in topical and cutting-edge areas such as Kyoto in order to promote its positive image and, in turn, to achieve further gains in customer loyalty and customer satisfaction Preface Overview of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

73 Financial Institutions and Public Sector Financial Institutions and Public Sector 000 or per cent 2003 Change 2002 Net interest income 82, % 57,177 Provisioning for possible loan losses (5,905) 834.3% (632) Net interest income after provisioning for possible loan losses 76, % 56,545 Net commission income 47,534 (23.0%) 61,724 Trading profit (loss) 13,937 (33.4%) 20,911 Net income from financial investments 25 Administrative expenses (114,739) (1.9%) (117,015) Other operating profit 1,706 (2,515) Profit before tax 25, % 19,650 Risk-weighted assets ( 22 BWG) 2,795, % 2,328,665 Average equity 204, % 161,522 Cost/income ratio 78.7% (6.3 PP) 85.0% Return on equity (ROE) before tax 12.3% 0.1 PP 12.2% Average workforce 1, % 642 This segment encompasses business with banks, financial service providers, insurers and public sector entities. Banks includes all Austrian and foreign corporate banks. This segment also includes supranational institutions like the World Bank, the European Bank for Reconstruction and Development (EBRD), the European Investment Bank (EIB), the International Monetary Fund (IMF) and the Kreditanstalt für Wiederaufbau (KfW). Financial service providers includes brokers and asset managers such as investment banks, investment fund companies, finance leasing companies and other companies that perform activities connected with the credit industry. Insurers encompasses all kinds of insurer and reinsurer. That includes property insurers, health insurers, life assurers and pension insurers. Public sector entities includes all public sector entities such as ministries, provinces, municipalities and similar public bodies. Expansion of business in Western and Southern Europe Besides stepping up business with established major banks in Western Europe and the USA, Raiffeisen Zentralbank continued to press ahead with the development of its business with medium-sized and small banks in Western Europe. Services for those banks consist mainly of designing made-to-measure loan and trade finance solutions that also make use of the global network of Raiffeisen Zentralbank and its specialist institutions. In this segment, transactions of that kind deliver more attractive margins than standard business transactions with major local and international banks. Raiffeisen Zentralbank also stepped up its operations in the markets of Southern Europe. Its focuses are Italy, Spain and Portugal, with a special emphasis on credit business. Large parts of the banking markets of Southern Europe are not yet consolidated. The number of banks still making decisions regarding their banking connections and business activities locally and autonomously is very big, especially in Spain and Portugal, facilitating the devel- Segments Financial Statements Supervisory Board s Report Glossary Contacts 83

74 Financial Institutions and Public Sector opment of new business relationships. RZB continues to play an important role as an escort into Central and Eastern Europe and as a service provider in the region, especially for smaller banks in Southern and Western Europe. Customer-orientated product innovations ensure a steady flow of business Raiffeisen Zentralbank achieved another big increase in its gross earnings from business with banks in the Central and Eastern European countries themselves which grew by over 20 per cent to 14.4 million by enlarging the customer base to include small and mediumsized banks. Made-to-measure product innovations and consistent customer-orientated marketing with a special focus on structured treasury products boosted customer loyalty, especially in Russia and Kazakstan. Framework loan agreements concluded with local banks in Vietnam, China, Algeria and Iran to provide export finance facilities guaranteed by Oesterreichische Kontrollbank (OeKB) created the basis for a steadily accelerating flow of business. That basis was broadened by an unbroken stream of new contracts in 2003, including agreements signed with SREI International Finance Ltd., India, ATF Bank and Bank TuranAlem in Kazakstan and Vneshtorgbank and Ural-Siberian Bank in Russia. Syndicated loan volumes more than double Aggregate loan volumes agreed with banks in the syndicated loans sub-segment increased by 127 per cent to approximately 1.1 billion. In particular, RZB was able to re-assert its position as a leader in the credit markets of Central Asia. RZB played a key role in the arrangement of numerous syndicated credit facilities for banks and the public sector in countries that included Russia, Slovenia, Kazakstan, the Ukraine, Bulgaria and Romania. A leading arranger of syndicated loans In addition to transactions in the Corporate Customers segment, Raiffeisen Zentralbank again asserted and reinforced its position as the leading mandated arranger of syndicated loans in Central and Eastern Europe, arranging a total of 32 facilities. In all, it arranged 17 internationally placed loans for banks. In that field, it was most active in Russia and Slovenia, arranging seven and four transactions, respectively. The most noteworthy transactions in this sub-segment were a US$ 150 million loan for Halyk Savings Bank, Kazakstan, a 47 million line for Icelandic bank SPRON (Reykjavik Savings Bank), and a US$ 38 million loan for Uralsib Bank, Russia. A US$ 30 million facility was arranged and successfully placed in the international marketplace in partnership with the EBRD for Bank TuranAlem, Kazakstan. The Russian syndications market is expected to remain vigorous in 2004, and there is also further potential in the Balkans, the Ukraine, Romania and Bulgaria and, more selectively, in Central Asia and Belarus Preface Overview of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

75 Financial Institutions and Public Sector Growing volumes of assets under custody Raiffeisen Zentralbank s intensive marketing of custody products increased deposits under management for customers in the Financial Institutions sub-segment by 49 per cent to billion. The development of custodian banking products also continued apace (fund accounting and pricing products for four Austrian investment fund companies). Raiffeisen Zentralbank reaffirmed its dominant role in the Austrian market with 39 new funds. Its success was based mainly on ceaseless development of the product line. For example, Raiffeisen Zentralbank implemented its Corporate Action Notification tool in the autumn. This instrument set a new standard in the market, allowing Raiffeisen Zentralbank to inform its customers about capital measures with even greater speed and flexibility. New functions such as Tax Reclaim Status Reporting were added to the e.custody Internet reporting tool. Raiffeisen Zentralbank was the first bank in Austria to offer its customers an online service of that kind. The Network Banks too continued to develop their custody operations. Raiffeisen Krekova Banka in Slovenia began to open up that market and was already able to make the Global Custody product available to local customers. At the moment, it is working on the implementation of its custodian banking product. In all, the Network Banks had over 3 billion of assets under custody at year-end. In a customer survey carried out by the prestigious international magazine Global Custodian, Raiffeisen Zentralbank and its Network Banks in Bulgaria, Croatia, the Czech Republic and Hungary were rated Commended. Breakdown of assets under custody Raiffeisen Bank Polska, Warsaw, 0.29% Tatra banka, Bratislava, 0.29% Raiffeisenbank Austria, Moscow, 0.33% Raiffeisenbank Austria, Zagreb, 0.22% Raiffeisen Zentralbank 97.69% 2.31% Raiffeisenbank, Prague, 0.14% Other, 0.13% Raiffeisen Bank, Budapest, 0.91% billion on 31 December 2003 Segments Financial Statements Supervisory Board s Report Glossary Contacts 85

76 Financial Institutions and Public Sector Branches deliver a growing contribution to profits The restructuring of Raiffeisen Zentralbank s London branch begun in the previous year to concentrate its activities on treasury business was completed with great success, resulting in a sizeable increase in its contribution to Group profits. Similarly, RZB Finance LLC in New York returned to profitability despite the troubled environment by concentrating on securitized corporate and trade finance for local medium-sized enterprises. The Beijing and Singapore branches in Asia successfully expanded their business activities. Above all, they intensified their collaboration with the Network Banks in the trade finance segment. The Beijing branch recorded a 50 per cent increase in gross earnings and became the country s fastest-growing foreign bank in business volume terms. Raiffeisen Centrobank - The equity specialist Raiffeisen Centrobank s activities in the Financial Institutions sub-segment concentrate on securities sales. Acceptance of its services among both Austrian and foreign investors is high, thanks in part to the systematic internationalization of its equities business. Its equities trading operations in Central and Eastern Europe grew by 35 per cent as a result. At the same time, Raiffeisen Centrobank was far and away Austria s largest issuer of structured financial instruments. It successfully developed an investment certificate line, and as a result of brisk demand, the issued volume of those certificates grew several times over. In addition, Raiffeisen Centrobank developed a pension and saving product to be sold by an insurance company that met with complete satisfaction on the part of the customer. In the IPO market, which is included as part of this segment, Raiffeisen Centrobank became one of just two Austrian banks to participate in the syndicate set up to place an equities issue by Bank Austria Creditanstalt. The issue had a volume of over 100 million. Raiffeisen Centrobank continued to intensify its cooperation with the Austrian Raiffeisen Banking Group, involving the Regional Raiffeisen Banks more closely in its sales activities as a result. At the same time, product development work by Raiffeisen Centrobank steadily extended RBG s line of securities services for its customers. Raiffeisen Centrobank s pleasing overall profit development (see also the report on the Proprietary Trading Segment below) reflects the special focus of its activities on new business development and customer support. The doubling of gross commission income confirmed the effectiveness of past and ongoing efforts in this segment. Investment Banking/Fixed Income A reliable ally in the capital markets Raiffeisen Zentralbank is a reliable ally with a long-standing track record serving both banks and the public sector in the capital markets. For instance, it played a key role as a colead manager for the 500 million floating rate note issue by the Republic of Slovakia. Other customers in this sub-segment included the European Investment Bank, Investkredit Bank AG in Vienna, Bank TuranAlem, Kazakstan, and MMK Finance in Russia Preface Overview of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

77 Financial Institutions and Public Sector Raiffeisen Zentralbank is still the prime point of contact for foreign investment funds in the Austrian third-party funds market. Alongside sales activities, the line includes consultancy, registration, representation, paying agent and tax representation services. In the investment market, Raiffeisen Zentralbank placed special emphasis on selling commercial paper to investors with a short investment horizon. It proved possible to increase sales several times over to some 500 million in Raiffeisen Zentralbank created a new credit derivatives product segment in the course of restructuring its Investment Banking/Fixed-Income Division. The segment s purpose is to bring new products such as credit linked notes closer to the investor as well as to ensure that credit risk transfers and/or credit risk management are also possible whenever derivative instruments such as credit default swaps are employed. A growing market in Central and Eastern Europe The volume of business transacted by the Networks Banks with other banks and the public sector is relatively small compared with the volume of transactions booked in Vienna, but it is growing rapidly. The risk-weighted assets of the Network Banks in this segment came to million at year-end 2003, compared with virtually non-existent business volumes one year earlier. Their gross earnings in the segment came to 17.1 million, as against 7.6 million in The development work done in a number of countries in the region in recent years was amply rewarded, especially when it came to financing municipalities and other regional authorities. For example, Raiffeisen Bank, Budapest, is already account manager for four out of 23 regional capitals as well as their institutions, and it financed a water utility project to the tune of 5.8 million for the city of Nyírmada in collaboration with Raiffeisen Zentralbank. Raiffeisenbank (Bulgaria) arranged the first corporate bond denominated in US dollars for the Bulgarian-American Credit Bank. Raiffeisenbank Austria, Zagreb, was one of three joint arrangers of a 200 million government bond created to finance Croatia s pension reform and is also one of the country s key market makers in the bonds segment. Short-, mediumand long-term infrastructure loans for the cities of Rijeka, Bakar and Velika Gora underlined Raiffeisenbank s growing importance in this market. Tatra banka, Bratislava, took part in the granting of a long-term and a short-term loan facility for the city of Koπice, enabling it to restructure its debts. A medium-term investment loan was granted to the city of Zilina. A strengthened position in the euro clearing market Raiffeisen Zentralbank s faster-than-average growth continued to reinforce and strengthen its position as a euro clearer, especially in Central and Eastern Europe. Accompanying the opening of further euro clearing accounts, Raiffeisen Zentralbank s principal focus during the year under review was on increasing the number of transactions with existing customers. Growth of nearly 30 per cent in commercial clearing transactions and of more than 40 per cent in interbank clearing transactions confirmed the success of its efforts. Quality of customer care and high-grade processing were customers key reasons for deciding to use Raiffeisen Zentralbank for those services. Segments Financial Statements Supervisory Board s Report Glossary Contacts 87

78 Financial Institutions and Public Sector Development of domestic payments Development of cross-border payments 200,000,000 5,000, ,000, ,000,000 50,000, ,842,536 83,090, ,572, ,153, ,248, ,092, ,696,908 4,000,000 3,000,000 2,000,000 1,000,000 1,238,626 1,403,879 1,835,025 2,279,430 2,847,205 3,976,025 5,047, Raiffeisen Zentralbank plus Network Banks (in No. of transactions) Raiffeisen Zentralbank plus Network Banks (in No. of transactions) New products in the run-up to EU enlargement The creation of a mass payments channel for cheap payments from and to Euroland was agreed with the new EU members, and it was already put it into place in Slovakia and the Czech Republic. The project s implementation makes it possible for Raiffeisen Zentralbank to pass on to a Network Bank mass payments (e.g. retirement benefit payments) that it has received from a correspondent. The service will increase business in the region, and at the same time, Raiffeisen Zentralbank will be using it to attract new customer groups and to strengthen the loyalty of existing customers in Western Europe. That will strengthen RZB s position as a link between Central and Eastern Europe at the same time as offering the new EU member-states an opportunity to interface with Europe-wide networks. Goals for 2004 Building upon its customer development work in recent years, RZB s focus during 2004 will be on providing sustained support to the customers it has attracted and on exploiting cross-selling opportunities. RZB will specially emphasize non-interest products which tie up comparatively little capital so as to generate another increase in its return on equity. In particular, it will be offering new treasury and investment banking products to medium-sized and smaller banks. Small improvement in gross earnings to be expected Given developments in the international financial markets and the continuing improvement in the state of the economy, RZB must expect competition to stiffen and margins to continue to narrow. Furthermore, the US dollar will remain weak, aggravating the situation and burdening earnings, including above all earnings from business with banks in the emerging markets. On the other hand, business in the trading segment should revive. RZB will continue to force the pace of fee-income business and interbank business collateralized by securities, probably leading to a small improvement in gross earnings and productivity Preface Overview of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

79 Retail Customers Retail Customers 000 or per cent 2003 Change 2002 Net interest income 249, % 174,125 Provisioning for possible loan losses (40,486) 211.3% (13,007) Net interest income after provisioning for possible loan losses 208, % 161,119 Net commission income 108, % 71,285 Trading profit (loss) 46, % 32,367 Net income from financial investments 3 (3,296) Administrative expenses (385,184) 12.7% (341,880) Other operating profit 1,961 (91.0%) 21,895 Profit before tax (19,259) (67.1%) (58,510) Risk-weighted assets ( 22 BWG) 4,022, % 3,033,470 Average equity 293, % 210,409 Cost/income ratio 94.9% (19.1 PP) 114.0% Return on equity (ROE) before tax (6.6%) 21.2 PP (27.8%) Average workforce 9, % 8,208 This segment focuses virtually exclusively on Central and Eastern Europe. It encompasses retail banking in general as well as the retail operations of Raiffeisen-Leasing International. It also encompasses the private banking activities of the Kathrein & Co banking house, operating out of Vienna, whose profit from ordinary activities in 2003 was static on the year at 3.2 million (applying the accounting and reporting standards of Austria s HGB: Austrian commercial code). Applying IFRS, Kathrein & Co s profit after tax increased from 3.0 million to 3.1 million. With the exception of Kathrein & Co., all activities in the retail banking market are steered by Raiffeisen International Bank-Holding AG. According to the prescribed allocation of tasks and responsibilities within the Raiffeisen Banking Group (RBG), Raiffeisen Zentralbank does not provide retail banking services in Austria. However, it supports RBG s activities in the segment by rendering central services for instance within the scope of nationwide marketing campaigns and by providing products through its specialist subsidiaries. The capital outlay connected with development of retail business does of course also affect this segment s performance. The segment still showed a loss for the year in 2003, although the general trend was positive. If that trend continues, the segment could already be showing a profit in 2004, and the same applies to its return on equity, which should likewise become positive in The segment s cost/income ratio also reflects the high costs of entering this promising field of business. Segments Financial Statements Supervisory Board s Report Glossary Contacts 89

80 Retail Customers Enormous potential for growth in Central and Eastern Europe Retail banking operations will continue to grow rapidly in Central and Eastern Europe over the next few years. Rising spending power will not only boost consumption. It will also increase demand for financial services. RZB offers the customer groups that are in the middle of that process made-to-measure products and services. However, broad customer segments have yet to be convinced of the usefulness of a wide range of products and services. Most of the markets in which RZB operates have yet to achieve that maturity. As the table below shows, the proportion of personal loans to GDP is still well below the EU average even in the countries that are about to join the EU. Maturity of retail banking markets in Central and Eastern Europe % 44.5% 44.8% % 28.3% 24.4% 11.2% 35.6% 10.7% 26.0% 6.9% 19.0% 6.8% 17.7% 5.6% 10.2% 3.8% 15.8% 1.6% 7.0% 1.0% 7.6% Euroland Austria Croatia Poland Slovenia Czech Republic Hungary Slovakia Bulgaria Russia Romania and Personal loans in % of GDP Personal loans in % of total lending RZB plans to exploit that growth potential. RZB identified it at an early stage and launched an extensive retail banking programme in Since then, it has been successively extending the programme both geographically and in product terms. RZB now provides retail banking services in all the Central and Eastern European markets in which it has a bank. In doing so, RZB also benefits from the strength of the Raiffeisen brand and public familiarity with it. RZB therefore cultivates its market presence under the well-established Raiffeisen banner everywhere in the region but Slovakia, where RZB s subsidiary operates as Tatra banka. That name looks back on a long tradition in Slovakia and is very well-known. In Belarus too, Priorbank will use its old name for the time being, but as a rule, acquired banks are given the Raiffeisen name at the earliest possible opportunity. For example, American Bank of Kosovo has been trading as Raiffeisen Bank Kosovo since the spring of In that case, the reason for rapid rebranding was that many people in Kosovo were familiar with the Raiffeisen brand and had positive associations with it. The same will also apply to the Savings Bank of Albania (Banka e Kursimeve e Shqipërisë), which was not yet recognized in the accounts for The number of retail customers serviced by the RZB Network Banks rose rapidly during 2003 to end the year at about 3.2 million. Since Priorbank only added about 400,000 cus Preface Overview of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

81 Retail Customers tomers to that number, over two thirds of the increase of 1.3 million customers can be attributed to organic growth. That growth was spread relatively evenly across the whole of Central and Eastern Europe and was slightly above average in South Eastern Europe. Network Bank branches in Central & Eastern Europe 92* * Banka e Kursimeve, Tirana. The bank branch as the key to winning market shares In many Central and Eastern European markets, RZB is seen as a pioneer in the technology and alternative banking services fields. Nonetheless, the bank branch is still at the centre of customer relations. The branch is where advice is provided and sales take place, and it also plays an important part in brand positioning. For those reasons, RZB has been focusing on the (cost-intensive) development of the branch network in recent years and continued to press rapidly ahead with the network s development in At year-end 2003, RZB s Network Banks had 697 outlets, which was 93 outlets or 15 per cent more than at year-end Deducting the 63 outlets added by Priorbank in Belarus, that translates into organic growth of 30 outlets or 5 per cent. The takeover of the Savings Bank of Albania will add another 92 branches in The speed with which RZB has enlarged its branch network in Central and Eastern Europe is reflected by the fact that the number of RZB outlets has increased more than sevenfold in just five years. Fostering customer loyalty through quality of service RZB continued to apply its Superior Customer Service Quality approach during It is designed not only to ensure the highest possible standards of service but also and above all to create a basis for durable customer relationships. The intention is to strengthen customer loyalty through quality. Training of sales staff is at the centre of that endeavour. In addition, numerous staff in sales and services attended train-the-trainer courses during A total of 15,000 training days were carried out over the year, focusing mainly on Romania, Bosnia and Herzegovina and the Ukraine. In addition, RZB developed retail sales training, sales management and coaching programmes that were mainly rolled out in Croatia, Romania and Hungary. All training methods were assessed on a service standard measurement basis. Measurements showed that all training measures improved quality. Segments Financial Statements Supervisory Board s Report Glossary Contacts 91

82 Retail Customers Focus on small and medium-sized enterprises RZB s retail banking activities in Central and Eastern Europe focused particularly closely on small and medium-sized enterprises (SMEs). Those are companies with annual revenues of up to 6 million. As in Austria, where the Raiffeisen Banking Group is the leading financier of that important companies segment, RZB intends to become the principal point of contact for SMEs in Central and Eastern Europe. The framework loan agreement signed with the European Bank for Reconstruction and Development (EBRD) in 2002 came fully to bear in That facility gives SMEs access to cheap loans. Indeed, the loans proved so popular, for instance in Poland, that the facility was exhausted in just a few months. RZB also has similar agreements set up to help SMEs with other organizations such as the International Finance Corporation (IFC) and the Kreditanstalt für Wiederaufbau (KfW ). Credit cards as a strategic product By the standards of the existing EU member-states, credit cards are not very widespread in Central and Eastern Europe. However, the general increase in mobility and the trend towards cashless payments makes high rates of growth particularly likely in this product segment. It is a stated goal of RZB s retail banking strategy to increase familiarity with the exceptionally attractive credit card products and to make a material contribution to their penetration of Central and Eastern European markets. By year-end 2003, 155,000 credit cards had been distributed via RZB s network in Central and Eastern Europe. RZB is playing a pioneering role in this field. For instance, it introduced the first credit card to the Czech market that also includes full insurance protection in the event of theft or loss. In Poland, it launched a so-called affinity card in collaboration with US company National Geographic. That card is also to be launched in other markets, and further alliances of a similar kind are being planned. Alongside a focus on various aspects of marketing and sales, emphasis is also placed on keeping back-office processes as efficient and cost-effective as possible. For that reason, RZB set up a processing centre in Slovakia back in 2002 to which all the Network Banks will be interfaced. Besides ensuring low processing costs, the centre also points the way ahead at a product development level. Finance leasing is flying high RZB has finance leasing companies in the Czech Republic, Slovakia, Poland, Hungary, Croatia, Russia, Slovenia, Romania and Serbia und Montenegro, and further companies are being set up in Bosnia and Herzegovina and Bulgaria. In addition to handling business with key accounts, those units also service retail customers and SMEs. Because it is simpler to implement than classical lending, finance leasing has enjoyed a real boom in recent years. That is especially true of motor-vehicle leasing, which accounts for the lion s share (about 70 per cent) of Raiffeisen-Leasing s new retail business in Central and Eastern Europe Preface Overview of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

83 Retail Customers Overall, Raiffeisen-Leasing s new business grew by over one quarter between 2002 and In new business terms, Raiffeisen-Leasing is one of the ten leading providers of finance leasing services in every market in the region but the Czech Republic, and it is actually market leader in Croatia and No. 2 in Poland and Serbia and Montenegro. That success is among other things attributable to the EBRD facilities granted for the Czech, Slovakian, Romanian, Slovenian and Polish markets. Achieving positive results with the help of clear goals RZB s focuses in 2004 will be defined by the continuing expansion of its retail business in Central and Eastern Europe, albeit with differences depending on each market s maturity and the particular Network Bank s position in that market. Further key focuses will be the continued development of business with SMEs and of finance leasing activities and the penetration of markets with credit cards. The goal will be to sustain the momentum of 2003 and even to increase it. At all events, RZB intends to achieve substantially faster growth in this segment than its competitors. Its goals are particularly ambitious in the credit cards sub-segment, where it intends at least to double the number of cards in use. They totalled 155,000 at yearend The customer base should also continue to grow rapidly in 2004, although it will expand by slightly less than in The Savings Bank of Albania will add several hundred thousand customers to RZB s customer base during The total number of retail customers is expected to grow from 3.2 million to about 4.2 million. Another important challenge will be to assimilate the Albanian market into RZB s retail banking strategy and to build on Raiffeisen s strong position in that market. Finally, all the activities outlined above are designed to generate an overall profit. If that goal is achieved as planned, the segment s losses of past years should quickly be cancelled out. Segments Financial Statements Supervisory Board s Report Glossary Contacts 93

84 Proprietary Trading Proprietary Trading 000 or per cent 2003 Change 2002 Net interest income 95, % 82,764 Provisioning for possible loan losses (11,314) 125.7% (5,013) Net interest income after provisioning for possible loan losses 84, % 77,751 Net commission income 4, % 4,848 Trading profit (loss) 129,196 (6.1%) 137,609 Net income from financial investments (10,185) 73 Administrative expenses (89,884) 8.2% (83,087) Other operating profit 23, % 21,085 Profit before tax 142,208 (10.2%) 158,279 Risk-weighted assets ( 22 BWG) 5,634,511 (6.0%) 5,993,451 Average equity 411,751 (1.0%) 415,741 Cost/income ratio 39.0% 5.3 PP 33.7% Return on equity (ROE) before tax 34.5% (3.6 PP) 38.1% Average workforce 1, % 723 The Proprietary Trading segment encompasses proprietary trading in the Treasury and Investment Banking divisions of Raiffeisen Zentralbank, Raiffeisen Centrobank, the Network Banks and the Group s investment companies in Central and Eastern Europe. Raiffeisen Centrobank has been acting as the Raiffeisen Banking Group s equity house since Raiffeisen Zentralbank concentrates on fixed income business, which is closer to the corporate banking sector. The Treasury sub-segment encompasses RZB s own positions in on-balance-sheet and offbalance-sheet interest-rate and currency products. The sub-segment s prime goal is to maximize earnings with the help of carefully targeted positionings within the prescribed boundaries and the limits set by the available capital resources. As an internationally acknowledged market maker quoting competitive prices for the key global currencies and the Central and Eastern European currencies, the Treasury Division makes an important contribution to maintaining the international balance of liquidity in all the products it trades. The Investment Banking sub-segment encompasses the management of Raiffeisen Zentralbank s own securities positions as well as market making and trading in credit products. Iraq crisis triggers exchange-rate fluctuations The start of the 2003 financial year was marred by uncertainties in connection with the War on Iraq and the troubled economic climate that resulted. Initially, central banks continued to lower key interest rates, for instance taking the US Fed rate down to a 50-year low of 1 per cent in June. The European Central Bank (ECB) took its key rate down to its present level of 2 per cent per cent in two stages. Because of upbeat economic data coming in from the USA and Europe, the euro and US dollar interest rate term structures initially inverted at the short end turned around, resulting in a flat curve. Budding optimism about the economy was particularly apparent at the long end, sometimes taking 10-year yields up to 4.5 per cent in euro markets and nearly 5.0 per cent in US dollars. The euro continued to fly high during 94 Preface Overview of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

85 Proprietary Trading The EUR versus USD, JPY, PLN and HUF 3M Interest 10Y yield 3M Money (EURIBOR) German Government, 10Y 30% 25% 20% 15% 10% 5% 0% January 2003 April 2003 July 2003 October 2003 January to reach its peak of US$ at the end of December. The US dollar also slid sharply against the Japanese yen during 2003 to stand at just at year-end. Good earnings from Treasury operations Despite the troubled economic climate, Raiffeisen Zentralbank was able to increase its earnings from proprietary trading, especially in the Treasury sub-segment. Following a record year in 2002, the Treasury Division returned its second-best result of all time in 2003, notwithstanding the difficult environment, whereby the biggest contributor to profits was Proprietary Trading. Flat and in part inverted interest rate term structures were only partially detrimental to money-market business, and Raiffeisen Zentralbank was able to sustain its proprietary trading profits in that market segment. It proved possible to exploit elevated volatilities so as to generate earnings in various areas. Sales of structured products continue to grow Sales of structured products to Austrian banks continued to grow rapidly during Raiffeisen Zentralbank s excellent results reaffirmed its leadership in this product segment. Structured products which make it possible to meet customers needs exactly by employing and combining a wide variety of derivatives were issued as private placements, as deposits and as swaps. Thanks to Raiffeisen Zentralbank s healthy long-term liquidity position, the volume of its own issues remained low. Continuous Linked Settlement At the end of 2003, Raiffeisen Zentralbank decided to join the Continuous Linked Settlement system (CLS). The system is used by the major corporate banks to facilitate their interbank trading. It will be implemented by Raiffeisen Zentralbank in the course of CLS largely eliminates settlement risk in foreign exchange transactions and thus reduces credit risks, enhances liquidity management and cuts operating costs. Segments Financial Statements Supervisory Board s Report Glossary Contacts 95

86 Proprietary Trading Using Tier 2 collateral To further increase its liquidity leeway, Raiffeisen Zentralbank has been using so-called Tier 2 collateral in its monetary dealings with the ECB since the end of In other words, Raiffeisen Zentralbank has been making use of the possibility of employing non-fungible assets including in particular claims against trade and industry as underlying collateral. Increased business in credit spread products The Investment Banking/Fixed Income Division was also affected by the poor market climate. The troubled economic environment, the War on Iraq and the associated crisis of confidence in the international equity markets damaged sentiment among market players. The division s response during 2003 included stepping up its activities in the field of basket structures the bundling of financial instruments and assets of a specific kind such as credit default swaps. The Network Banks and branches report a successful year The Network Banks and Raiffeisen Zentralbank s branches again reported good results in 2003, fulfilling our ambitious expectations. Following the successes of 2002, the Network Banks pre-tax profit from treasury and investment banking operations fell just marginally by 2.8 per cent to a total of over 83.9 million. Here too, the increase in earnings from trading on behalf of customers was due not least to the extension of the product line. Operations at the London branch now focus exclusively on treasury business. Raiffeisen Centrobank is No. 1 on the Vienna stock exchange Raiffeisen Centrobank stuck firmly to the goal it set itself in 2002, namely to become Austria s leading local investment bank. The high level of acceptance of Raiffeisen Centrobank s services among both domestic and foreign investors was evidenced among other things by its predominant share of around one quarter of total turnover on the Vienna stock exchange. That compared with about one fifth the year before. At the same time, Raiffeisen Centrobank was by far the most active market maker in Vienna. Securities business also developed well from a profit and product placements point of view during 2003, exceeding already ambitious targets. Austria s largest issuer of structured products Last year, Raiffeisen Centrobank particularly enlarged its line of structured products. It is already far and away the biggest issuer of these financial instruments in Austria. Raiffeisen Centrobank s products are listed in Austria and in Germany, and demand for them among investors in both countries is brisk. Rapid growth in this sub-segment is reinforced by the high product quality reflected by the Zertifikate Award given to Raiffeisen Centrobank by Germany s Zertifikatejournal. Raiffeisen Centrobank was the only Austrian bank to win that award Preface Overview of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

87 Proprietary Trading Raiffeisen Centrobank continued to systematically internationalize its equities business and did so with great success. For example, its share of trading in Germany doubled during Raiffeisen Centrobank s membership of the Zurich and London stock exchanges (Virt-x) reinforces its status in the international equities market, and further memberships of EU stock exchanges will follow next year. That should allow the company to open up additional customer segments and continuously extend the line of securities services available from the Raiffeisen Banking Group. Depending on their origins, Raiffeisen Centrobank s profits are booked to the Proprietary Trading, Corporate Customers or Financial Institutions segment. Goals for 2004 Having already done very well in prior years, RZB adapted its proprietary trading strategies to the possibilities created by rising interest rates in The systematic pursuit of those strategies will continue in Raiffeisen Centrobank will continue to press ahead with the internationalization of its equities business with the medium-term goal of establishing itself as an emerging Europe specialist. Even closer collaboration between the Group s equity house, Raiffeisen Zentralbank s 15 banking subsidiaries and RZB s local investment banking units in Central and Eastern Europe will reinforce RZB s already strong position in the region. Participations and Other 000 or per cent 2003 Change 2002 Net interest income 5,079 (69.2%) 16,499 Provisioning for possible loan losses (2,910) (16.2%) (3,471) Net interest income after provisioning for possible loan losses 2,169 (83.3%) 13,028 Net commission income 4,905 (172) Trading profit (loss) 22,911 (11,630) Net income from financial investments (17,504) (8.6%) (19,155) Administrative expenses (116,290) 26.4% (91,979) Other operating profit 60, % 55,621 Extraordinary items (23,113) Profit before tax (42,810) (44.7%) (77,400) Risk-weighted assets ( 22 BWG) 1,199, % 1,191,761 Average equity 87, % 82,663 Average workforce 2, % 1,797 Segments Financial Statements Supervisory Board s Report Glossary Contacts 97

88 Participations and Other There follows a description of the equity participations in this segment that are of most significance to business policy and make the biggest contribution to profits. The list of interests in the Notes (page 166 et seq) provides an overview of all equity participations as well as their size and structure (direct and indirect stakes). Development of recurring premium income UNIQA Versicherungen AG. UNIQA Group Austria is one of Central Europe s leading insurance groups. mn Total premiums without single premiums Of which from abroad Besides listed group parent UNIQA Versicherungen AG, the group also includes UNIQA Sachversicherung AG, 2,500 UNIQA Personenversicherung AG, Raiffeisen Versicherung AG, Salzburger Landes-Versicherung AG, CALL DIRECT 2,000 Versicherung AG, FinanceLife Lebensversicherung AG (previously MLP-Lebensversicherung AG) and numerous 1,500 service and finance companies. Abroad, UNIQA has subsidiaries in Croatia, the Czech Republic, Hungary, Italy, Liechtenstein, Poland, Slovakia, Spain and Switzerland. 1,000 The UNIQA Group Austria s recorded recurring premium income in 2003 (exclusive of single premiums and special 500 life assurance products) was 13.4 per cent up on the year at 2,763 million. The surge in its growth was attributable 0 both to growth in foreign business (23.1 per cent increase in premium income to million) and the group s development in Austria (premium growth of 12 per cent to 2,389.5 million). The takeover of the Austrian AXA Group and its subsidiaries in Hungary and Liechtenstein completed during 2003 made an important contribution to that advance in premium income. The proportion of the group s recurring premium income accounted for by its foreign subsidiaries increased to 13.5 per cent in 2003, and it is budgeted to rise to 20 per cent by UNIQA Group Austria publishes IFRS-compliant accounts. It posted provisional profit before tax of 68.3 million in 2003 (2002: 35.3 million). 2, , , , New business at Raiffeisen Bausparkasse Number of new contracts 300, , , , ,000 50, , , , , , , Raiffeisen Bausparkasse Gesellschaft m.b.h. This company bettered even its new business performance in 2002 which had been its record year to date by about 5,300 contracts, giving a total of 306,420 new building society contracts concluded for contracted saving volumes totalling about 1.6 billion. Raiffeisen Bausparkasse thus recorded a market share of 31.8 per cent of new contracts. Deposits came to 5.3 billion at year-end (market share of 32.5 per cent), and outstanding lendings came to 4.0 billion (market share of 33.2 per cent). Loan allocations of 655 million significantly stimulated the private new construction and renovations sectors in Austria. Raiffeisen Bausparkasse has also been operating successfully abroad for some years. It is currently active in Slovakia, the Czech Republic and 98 Preface Overview of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

89 Participations and Other Croatia, where it employs a total of 657 people. It is the most successful Austrian building society operating in those markets, recording a total of about 545,000 new building society contracts there in The balance-sheet total of Raiffeisen Bausparkasse, whose financial statements are drawn up in conformity with the provisions of HGB, came to 5.8 billion (year-end 2002: 5.5 billion). It had equity of million. Profit before tax of 10.8 million resulted in a return on equity (before tax) of 8.0 per cent (2002: 3.5 per cent). The company employed an average workforce of 340 in Austria. Market shares in Austrian securities fund markets Raiffeisen Kapitalanlage-Gesellschaft m.b.h. (Raiffeisen KAG). Raiffeisen KAG is a specialist in the issuance and management of investment funds. It offers asset management Other Raiffeisen KAG 45.81%* 21.35% products for high-net-worth private and corporate customers via Raiffeisen Vermögensverwaltungsbank AG. Together with its three wholly-owned subsidiaries newly founded Raiffeisen Immobilien Kapitalanlage-GmbH., Raiffeisen Vermögensverwaltungsbank AG and foreign sales subsidiary Raiffeisen International Fund Advisory (RIFA) Raiffeisen KAG has been trading under the umbrella of the Raiffeisen Capital Management brand since November Funds under management by Raiffeisen KAG increased by 10.5 per cent to 20.8 billion during 2003, thus growing by more than the overall Austrian market average. In detail, funds under management in the retail funds segment grew by 11.0 per cent to 9.1 billion (market share of 17.2 per cent), and Competitor # % Competitor # % funds under management in the institutional segment grew by 10 per cent to approximately 11.6 billion (market share of 26.3 per cent). Raiffeisen KAG continued to build on its * Of which 5.21 PPs accounted for by other RBG investment fund companies. As on 31 December position as the clear leader in the domestic investment funds market with an overall market share of 21.4 per cent. Numerous awards and prizes spread over the year demonstrated the company s qualitative supremacy. Raiffeisen KAG, which draws up financial statements in conformity with HGB, reported revenues growth of 6.7 per cent to 111 million and profit from ordinary activities of 3.8 million (2002: 3.5 million). Its balance-sheet total grew to 81.2 million (yearend 2002: 74.0 million), and its equity increased to 19.8 million (year-end 2002: 19.3 million). Its return on equity before tax came to 19.4 per cent (2002: 18.3 per cent). The company employed an average of 166 people. Raiffeisen Investment AG (RIAG). RIAG continued to complete the business policy reorientation begun in It now concentrates on the industrial sector and is shifting its focus from the privatization segment to a broader M&A corporate finance base. The Central and Eastern European region remains its geographical focus. RIAG successfully handled numerous privatization mandates above all in Serbia and Montenegro, but also in other countries in the region as well as acquisition mandates from international corporations operating in Central and Eastern Europe. In Austria, the company acquired a strategic stake in Sweden s listed All Cards Service Center for Austria Card. In addition, it developed a Central and Eastern European concept with Österreichische Post AG, and the Province of Styria gave RIAG the mandate for a further stage of the partial privatization of Styrian energy utility ESTAG. Based on gross Segments Financial Statements Supervisory Board s Report Glossary Contacts 99

90 Participations and Other fees of 9 million, profit for the year of 0.6 million, a balance-sheet total of 23.5 million and a workforce of about 60, RIAG is well armed to face the challenges of the current year, which will bring with it not only an intensification of M&A activities in Central and Eastern Europe but also an increase in acquisitions by Eastern European companies in the EU. Leipnik-Lundenburger Invest Beteiligungs AG (LLI). LLI s core segments Flour and Milling and Vending (hot beverages and food from vending machines) result from its strategic interests in the food and beverage industries. LLI s subsidiaries are the Austrian market leaders in those fields, and they are aiming for markets shares of about 25 per cent in each of the countries that neighbour Austria. LLI also has interests in the Agrana Group and an indirect stake in Casinos Austria. The acquisition of a 29.1 per cent stake in Germany s VK Mühlen AG in February 2003 not only significantly boosted the LLI Group s revenues and earnings in its Flour and Milling segment. It also made the company market leader in the European milling market. As a result of qualitative growth and a carefully considered niche policy, revenues and earnings in the Vending segment during fiscal 2002/03 were up on the previous fiscal year. Following acquisitions in prior years, the company has now entered a period of optimization of its countries portfolio. To that end, it aims to acquire interests in the Czech Republic and Slovakia in the Flour and Milling segment and has carried out the organizational amalgamation of its Hungaromill and Pannon Gabona milling groups in Hungary. The group s consolidated revenues increased to million in fiscal 2002/03 (2001/02: million) and its profit from ordinary activities grew to 18.1 million (2001/02: 16.1 million). The LLI Group, which draws up its financial statements in conformity with HGB, had an average of 1,552 employees during the year under review. Its balance-sheet total increased to million (year-end 2001/02: million). It posted profit for the financial year of 11.2 million (2001/02: 10.5 million) and a return on equity before tax of 33.3 per cent (2001/02: 41.3 per cent). ÖPAG Pensionskassen AG. ÖPAG is a multi-company pension fund. It achieved a yield of about 9.5 per cent for its general investment and risk associations during 2003, again outdoing the industry average. Since ÖPAG like all pension funds needs to replenish the reserves used up in prior years, the pensions payable to ÖPAG Group beneficiaries in 2004 are likely to remain unchanged or rise only slightly, reflecting the group s earnings position in Moreover, Austrian pension funds are obliged by law to allocate a so-called minimum profit reserve. Annual allocations to that reserve began in 2003 and must be taken out of company profits. ÖPAG has a market share of about 25 per cent in terms of the number of beneficiaries and of about 22 per cent in terms of assets under management. Notartreuhandbank AG. This bank is the only specialist bank authorized by the Austrian chamber of notaries to manage the fiduciary deposits of the country s 466 notaries. The company helps them not just in their fiduciary work but also by providing remote and on-the-spot maintenance of other products such as a digital documents archive, a register of trusts and wills, land and company registers and a notary vacancies programme. Fiduciary deposits under management peaked at 826 million and averaged million in The company s market share increased to an average of about 80 per cent. Notartreuhandbank AG posted a balance-sheet total of million (year-end 2002: million). The placement of a variable-rate supplementary Tier 2 capital bond ( 9.5 million) increased the Preface Overview of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

91 Participations and Other bank s equity to 19.0 million. It posted profit from ordinary activities of 4.5 million (2002: 5.5 million), giving a return on equity before tax of 47 per cent (2002: 58 per cent). Raiffeisen Wohnbaubank AG. The purpose of this specialist bank, whose shareholders comprise all the Regional Raiffeisen Banks alongside Raiffeisen Zentralbank and Raiffeisen Bausparkasse, is to issue tax-privileged home construction bonds. Since the beginning of 2002, the bank has been issuing convertible bonds for its partner banks within the scope of a fiduciary model. Raiffeisen Wohnbaubank more than doubled business volumes on the year with a placed volume of issues of over 238 million (2002: 110 million). Business is handled by the staff of Raiffeisen Zentralbank and Raiffeisen Bausparkasse. The company draws up its financial statements in conformity with HGB. According to provisional figures, it had a balance-sheet total of 706 million at year-end 2003 (year-end 2002: 466 million) and equity of 5.6 million (year-end 2002: 5.5 million) and posted profit from ordinary activities of 0.79 million (2002: 0.62 million). That translates into a return on equity before tax of 14.2 per cent (2002: 11.3 per cent). VISA-Service Kreditkarten AG. VISA reported aggregate turnover of 3.4 billion (2002: 3.2 billion) by 943,000 cardholders (increase of 16,000) at 89,000 points of sale (increase of 8,000). 2.6 billion of that turnover was generated in Austria (2002: 2.5 billion), where the company has a market share of 44 per cent. To make buying in the Internet more secure, VISA has introduced a new security standard called Verified by VISA. The line of cards was enlarged by the addition of the VISA Electron Prepaid Card. The introduction of the international EMV (Europay, Mastercard, VISA) Chip on VISA cards from 2004 should make VISA transactions even safer. Europay Austria Zahlungsverkehrssysteme GmbH. Europay Austria is wholly owned by Austrian banks. It focuses on three business segments, namely MasterCard credit cards, Maestro debit cards and the Quick electronic purse. The number of MasterCard cards and transactions rose, but turnover fell slightly. Following rapid growth in recent years, the number of Maestro cards reached a saturation point of 6.2 million. The number of Quick payment transactions continued to grow. Austrian Payment Systems Services (APSS) GmbH. This specialist company provides IT services in connection with card-based payments (credit and debit cards). In addition, it is active in the field of electronic bank communications and operates and services the ATM and POS terminals network. During 2003, the company developed and implemented an STPcapable system for mass payments of up to 12,500 within the EU on behalf of Oesterreichische Nationalbank. In addition, it developed, linked up and is operating ASFINAG s fully electronic road pricing system using APSS payments technology. In the medium term, APSS plans to provide back-office services for card payments in Central and Eastern Europe, starting in the Czech Republic. The company employed an average of 172 people in 2003 and recorded earnings of 38.6 million (2002: 37.1 million). It had a balance-sheet total of 52.1 million (year-end 2002: 58.1 million). Segments Financial Statements Supervisory Board s Report Glossary Contacts 101

92 Participations and Other Raiffeisen evolution project development GmbH. This company acts as a property and project developer in the commercial and residential real estate segments in Austria and Central and Eastern Europe. It was created as of 1 August 2003 through the amalgamation of Concorde, Raiffeisen Property Invest and the Strabag AG project development division for Austria and Eastern Europe. Raiffeisen evolution intends to achieve market leadership in Central and Eastern Europe. The company plans to complete a project volume of 800 million by the end of It commenced marketing of real estate with a total value of over 400 million in Raiffeisen evolution had a workforce of 141 on the balance-sheet date, 105 of whom were working in Austria. Outside Austria, it has branches in Belgrade, Budapest, Bucharest, Kiev, Moscow, Prague, St. Petersburg, Sofia, Warsaw and Zagreb. Raiffeisen evolution posted revenues of 8.6 million and a loss from ordinary activities of 3.1 million in 2003, which was a short fiscal year. Raiffeisen Informatik Zentrum GmbH (RIZ). This company s core task is the operation of a computing centre for the Austrian Raiffeisen Banking Group. Helped by many years of experience, RIZ has developed into one of the country s largest private computing centre operators and Austria s third-largest provider of IT services. Together with its subsidiaries and the companies in which it holds interests, RIZ makes up an IT group that has established itself as an IT full-service provider offering a broad line of services. The company s most prominent task in 2003 was undoubtedly the implementation and start-up of the truck toll system for Austria s expressways. In addition, RIZ assumed responsibility for operative IT services at UNIQA at the end of August within the scope of a partnership agreement. RIZ had a total of over 1,300 employees at year-end (whole group), more than 800 of whom were working in core operations. It draws up financial statements in conformity with HGB. It recorded revenues of million in 2003 (increase of 24.2 per cent versus 2002). Its balancesheet total grew by 11.3 per cent to million and it recorded profit from ordinary activities of 0.4 million (2002: loss of 1.1 million). All figures for 2003 are provisional. RSC Raiffeisen Daten Service Center GmbH. RSC helps Austrian banks and insurers process payment, securities, treasury and cash management transactions and assists them in the film archiving, postal dispatch and logistics fields. Its regional focuses are the Provinces of Vienna, Lower Austria and Burgenland. In 2002, RSC became the first Austrian back-office operator to be ISO 9001:2000 certified in every business division. By fulfilling the ISO standards, the company already satisfies a large part of the quality requirements laid down in Basel II. The company draws up its financial statements in conformity with HGB. It posted revenues of 34.7 million in 2003 (2002: 34.1 million) and unchanged profit from ordinary activities of 0.1 million. RSC ended the year with a balance-sheet total of 8.5 million (year-end 2002: 11 million) and employed an average of 477 people (2002: 494 employees). Software Daten Service GmbH (SDS). SDS is the manufacturer of the GEOS banking software, which is a product for maximizing the automation of securities settlements. Almost every bank and banking group in Austria uses GEOS. The BAWAG/P.S.K. Group joined the customer base in 2003, and the Anglo-Irish-Bank and BA-CA are preparing to use the software. There are also licensees in Switzerland and Germany. The meagre order situation in the software market also affected SDS, which draws up its financial statements in conformity with HGB. As a result, revenues fell from 35.9 million to 22.1 million, and profit from Preface Overview of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

93 Participations and Other ordinary activities of 7.6 million in 2002 became a loss of 8.9 million in The company s balance-sheet total fell from 21.6 million to 10.6 million. Profit for the year also turned into a loss. The company had an average workforce of 288 in master-talk. RZB holds a 25.1 per cent stake in master-talk Austria Telekom Service GmbH & CoKG via Capreolus Beteiligungs GmbH. In 2002, master-talk won the contract for the ADONIS project, put out for tender by the Bundesministerium für Inneres (federal ministry of the interior), which involves setting up and operating a nationwide digital packet radio service for authorities and organizations working in the emergency service and security fields. Because of growing difficulties completing the project, the contract with the Bundesministerium für Inneres was cancelled mutually by the contracting parties in June F.J. Elsner & Co GmbH. and F.J. Elsner Trading GmbH. These two companies make up the Handelshaus Elsner trading house, which engages in traditional East-West trade with Vienna as its linchpin. F.J. Elsner & Co GmbH. (general trading business) which sold its Polish fruit and vegetable cold stores in fiscal 2002/03 recorded revenues of 36 million and profit from ordinary activities of 0.05 million. Its balance-sheet total came to 32.9 million at year-end. The sale of the facilities in Poland reduced the workforce from the previous average of 723 to an average of 538. Eleven of those employees were working in Austria. F.J. Elsner Trading GmbH. (trade with steel and chemical products) recorded revenues of million and profit from ordinary activities of 2.8 million in fiscal 2002/03. It ended the year with a balance-sheet total of 33.8 million. Its return on equity before tax came to per cent. The company employed an average of 23 staff, 14 of whom were working in Austria. Raiffeisen Reisebüro GesmbH. Raiffeisen Reisebüro is a fully licensed IATA travel agent with 28 branches. It is one of Eastern Austria s three largest travel companies. During the year under review, it purchased two branches of Moserreisen GesmbH in Linz, as well as Reisebüro Primus GesmbH (Vienna and Mödling) and Reisebüro Schauerhuber GesmbH, which has three outlets in Lower Austria. The company posted revenues of 63.6 million and a loss for the year of 3.3 million. It employed an average workforce of 143. In February 2004, a consortium made up of RZB, Switzerland s Swissfirst Bank AG and institutional investors won the bid for approximately 52 per cent of Indonesia s PT Lippo Bank Tbk. RZB has a computed stake of 12.5 per cent in this newly privatized bank, which is listed in Jakarta. The purchase price was US$ 143 million, and RZB s share thereof was US$ 35 million. Bank Lippo has 379 branches spread throughout Indonesia and employs a workforce of about 6,000. Indonesia is the Singapore branch s second most important market. Since Asia is only a complementary territory and not part of RZB s core market, RZB did not try to acquire a majority stake in Lippo Bank. However, the bank s privatization was an attractive opportunity to gain a direct foothold in that aspiring banking market and thus to profit from its enormous potential, above all by selling RZB products. Segments Financial Statements Supervisory Board s Report Glossary Contacts 103

94 Financial Statements Financial Statements (IFRS-compliant consolidated financial statements) Income Statement Notes 1/1 31/12 1/1 31/12 Change Interest income 2,081,496 1,993, % Interest expense (1,218,623) (1,284,936) (5.2%) Net interest income (1) 862, , % Provisioning for possible loan losses (2) (202,215) (151,188) 33.8% Net interest income after provisioning 660, , % Commission income 455, , % Commission expense (96,423) (86,690) 11.2% Net commission income (3) 359, , % Trading profit (loss) (4) 293, , % Net income from financial investments (5) (48,813) (22,378) 118.1% General administrative expenses (6) (1,017,411) (899,926) 13.1% Other operating profit (loss) (7) 96,646 93, % Extraordinary profit (loss) (8) (23,113) Profit before tax 343, , % Income tax (9) (65,204) (62,099) 5.0% Profit after tax 278, , % Minority interests in profit (62,201) (43,116) 44.3% Consolidated profit 216, , % Notes Change Earnings per share (10) % Preface Management Raiffeisen Zentralbank Raiffeisen Banking Group Interviews Human Resources

95 Financial Statements Balance Sheet Assets Notes 31/12 31/12 Change Cash reserve (12) 2,811,825 2,006, % Loans and advances to banks (13, 31, 32) 19,152,263 15,028, % Loans and advances to customers (14, 31, 32) 22,179,846 19,785, % Provision for possible loan losses (15) (658,826) (553,503) 19.0% Trading assets (16, 31, 32) 3,460,554 2,512, % Other available-for-sale financial assets (17, 31, 32) 4,266,945 3,129, % Financial investments (18, 21, 31, 32) 3,240,436 2,822, % Intangible fixed assets (19, 21) 158, , % Tangible fixed assets (20, 21) 502, , % Other assets (22) 936,927 1,057,150 (11.4%) Total 56,050,830 46,405, % Equity and Liabilities Notes 31/12 31/12 Change Deposits from banks (23, 31, 32) 27,422,997 23,471, % Deposits from customers (24, 31, 32) 16,990,216 12,673, % Liabilities evidenced by paper (25, 31) 3,506,174 4,410,195 (20.5%) Provisions for liabilities and charges (26) 257, ,557 (12.1%) Trading liabilities (27) 1,733, , % Other liabilities (28) 2,667,504 2,107, % Subordinated capital (29, 31) 1,028, , % Minority interests 533, , % Equity (30) 1,695,238 1,748,465 (3.0%) Consolidated profit 216, , % Total 56,050,830 46,405, % Segments Financial Statements Supervisory Board s Report Glossary Contacts 105

96 Financial Statements Statement of Changes in Equity Subscribed Capital Retained Of which Consolidated Total 000 capital reserves earnings exchange diffs. profit 2003 Equity on 1/1/ , , ,453 (102,105) 137,388 1,885,853 Transferred to retained earnings 94,297 (94,297) Distributed profit (43,091) (43,091) Consolidated profit 216, ,235 Exchange differences (94,431) (94,431) (94,431) Cash-flow hedges (57,561) (57,561) Other changes 4,468 4,468 Equity on 31/12/ , , ,226 (196,536) 216,235 1,911,473 Subscribed Capital Retained Of which Consolidated Total 000 capital reserves earnings exchange diffs. profit 2002 Equity on 1/1/ , , ,051 (43,794) 163,634 1,620,484 Capital increases (decreases) 36, , ,213 Transferred to retained earnings 123,915 (123,915) Distributed profit (39,719) (39,719) Consolidated profit 137, ,388 Exchange differences (58,311) (58,311) (58,311) Cash-flow hedges 31,892 31,892 Other changes 47,906 47,906 Equity on 31/12/ , , ,453 (102,105) 137,388 1,885,853 The issued share capital of Raiffeisen Zentralbank pursuant to its Articles of Association came to 349,192 thousand. That total was subdivided into 4,805,173 no-par shares, comprising 4,289,513 registered ordinary shares and 515,660 non-voting bearer preference shares. The other changes in retained earnings were due, inter alia, to effects caused by hyperinflation economies. Furthermore, they included the changes in the equity of associated undertaking that must be taken into account on a prorated basis but not recognized in the income statement in conformity with IAS Preface Survey of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

97 Financial Statements Cash Flow Statement Profit 216, ,388 Non-cash positions in profit and transition to net cash from operating activities: Write-downs/write-ups of tangible fixed assets and financial investments 188, ,592 Net provisioning for liabilities and charges and for possible loan losses 243, ,831 Gains (losses) from disposals of tangible fixed assets and financial investments (7,363) (10,695) Other adjustments (net) 156,462 (230,286) Subtotal 797, ,830 Change in assets and liabilities arising from operating activities after corrections for non-cash positions: Loans and advances to banks and customers (10,065,236) (4,459,952) Trading assets (840,007) (639,133) Other assets (1,344,697) 50,778 Deposits from banks and customers 11,393,273 3,427,259 Liabilities evidenced by paper (825,918) (346,374) Other liabilities 1,150, ,454 Interest income and dividends 2,235,001 2,156,308 Interest expenses (1,250,518) (1,304,623) Income tax (33,187) (9,764) Net cash from operating activities 1,216,214 (527,218) Proceeds from sales of: Financial investments and equity participations 738, ,480 Tangible and intangible fixed assets 269,421 63,772 Purchases of: Financial investments and equity participations (1,148,188) (875,263) Tangible and intangible fixed assets (216,757) (248,194) Acquisitions of subsidiaries (22,142) (42,464) Net cash from investing activities (378,929) (126,669) Inflows from capital increases 146,213 Inflows (outflows) of subordinated capital 82, ,023 Dividends paid and other (43,091) (39,719) Net cash from financing activities 39, ,517 Cash and cash equivalents at end of previous period 2,006,502 2,418,439 Net cash from operating activities 1,216,214 (527,218) Net cash from investing activities (378,929) (126,669) Net cash from financing activities 39, ,517 Effect of exchange rate changes (71,093) (38,567) Cash and cash equivalents at end of period 2,811,825 2,006,502 Segments Financial Statements Supervisory Board s Report Glossary Contacts 107

98 Financial Statements The Cash Flow Statement shows the composition of and changes in cash and cash equivalents during the financial year. It is subdivided into three sections, namely operating activities, investing activities and financing activities. Net cash from operating activities comprises inflows and outflows associated with loans and advances to banks and customers, trading assets, other available-for-sale financial assets and other assets. Inflows and outflows associated with deposits from banks and customers, liabilities evidenced by paper and other liabilities are likewise a part of operating activities. Interest and dividend payments arising from operating activities are also shown as components of Net cash from operating activities. Net cash from investing activities shows inflows and outflows associated with financial investments, tangible fixed assets and intangible fixed assets and outlay on the acquisition of subsidiaries. Net cash from financing activities relates to inflows from capital increases less dividend payments and inflows and outflows of subordinated capital. Cash and cash equivalents includes the cash reserve recognized on the Balance Sheet, which consists of cash in hand and demand deposits at central banks. It does not include loans and advances to banks that are due at call, which are classed as being within the domain of operating activities. Acquisitions of subsidiaries during the reporting period and prior-year periods had the following effects on cash and cash equivalents: Assets 273, ,690 Liabilities (216,250) (379,592) Equity 57,571 47,098 Of which RZB s share 28,786 43,917 Capital consolidation (1,849) (19,514) Effect on cash and cash equivalents: Net cash used for company acquisitions (22,142) (42,464) Preface Survey of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

99 Financial Statements Notes The enterprise Raiffeisen Zentralbank Österreich AG (Raiffeisen Zentralbank) is the central institution of the Austrian Raiffeisen Banking Group. It is registered in the companies register at Handelsgericht Wien (Vienna commercial court) under companies register number FN t. The company s address is Am Stadtpark 9, A-1030 Vienna, Austria. The Regional Raiffeisen Banks hold stakes in Raiffeisen Zentralbank under the umbrella of a separate company called Raiffeisen-Landesbanken-Holding GmbH (RLBHOLD). This company holds 81 per cent of Raiffeisen Zentralbank via its subsidiary R-Landesbanken-Beteiligung GmbH. The consolidated financial statements of RLBHOLD are deposited in the companies register in accordance with Austrian disclosure regulations and published in the Austrian Raiffeisen-Zeitung (Raiffeisen journal). Within Austria, RZB specializes in corporate and investment banking. It sees itself as Austria s foremost corporate finance and export and trade finance bank. Cash and asset management and treasury operations are further components of the product line. RZB is a highly specialized financial engineer. Its principal focus is on servicing corporate key accounts both within Austria and abroad, multinationals and providers of financial services. The companies within the RZB Group are also active in the private banking, capital investment, finance leasing, real-estate, travel and banking-related IT service fields. RZB also operates in Central and Eastern Europe (CEE) through 14 banking subsidiaries known as Network Banks. They have a network of branches that spans the region. In addition, RZB has branches, specialized subsidiaries and representative offices in the world s major financial centres, at selected locations in Western Europe and in a number of key Asian markets. The principles underlying the Consolidated Accounts Policies The Consolidated Financial Statements for the 2003 financial year and the comparative values for the 2002 financial year were prepared in conformity with the International Financial Reporting Standards (IFRS) published by the International Accounting Standards Board (IASB), inclusive of such interpretations by the International Financial Reporting Interpretations Committee (IFRIC) as were already applicable. The Consolidated Financial Statements satisfy the requirements of 245a HGB (Austrian commercial code) and 59a BWG (Austrian banking act) regarding exempting consolidated financial statements that comply with internationally accepted accounting principles. The Consolidated Financial Statements were drawn up on the basis of standards applied throughout the Group and the individual IFRS-compliant financial statements of all the fully consolidated Group-members. With the exception of four subsidiaries integrated as of 30 September or 31 October, the fully consolidated companies drew up their annual financial statements as of and for the period ended 31 December. Figures in the Financial Statements are stated in 1,000s of euros. Segments Financial Statements Supervisory Board s Report Glossary Contacts 109

100 Financial Statements Employed IFRS and IFRIC interpretations We observed all the International Financial Reporting Standards and IFRIC interpretations that were of relevance to the banking group and were already mandatory. Consolidation methods Capital consolidation took place at carrying amounts, with the costs of purchasing stakes in subsidiaries offset against subsidiaries equity on a prorated basis as at the time of acquisition. Differences remaining on the assets side of the Balance Sheet constituting goodwill are shown under intangible fixed assets and are being amortized over a period of ten years, affecting profit, in accordance with their expected useful lives. Differences remaining on the assets side of the Balance Sheet that had come into existence prior to 1 January 1995 were cleared against retained earnings in conformity with IAS 22. Negative goodwill arising from first-time consolidation that corresponded to a reliably measurable future loss or expense were recognized as income at the amount of the pertinent loss or expense. Negative goodwill that did not arise from expected future losses or restructuring expenses was captured at once and recognized in the Income Statement. Material interests in associated undertakings were accounted for using the equity method and recorded under Financial investments on the Balance Sheet. Profits of companies accounted for using the equity method were recorded under Net interest income, whereas losses recorded by such companies were recognized under Net income from financial investments (net remeasurements of equity participations). The same rules were applied to companies accounted for using the equity method (date of first-time consolidation, offsetting of acquisition costs against equity on a prorated basis) as to fully consolidated companies. The process was founded on the pertinent local financial statements of the associated undertakings concerned. Shares in subsidiaries not integrated into the Consolidated Financial Statements because of their minor significance and of interests in associated undertakings not accounted for using the equity method are shown under Financial investments and were carried at cost. Shares in other companies were recognized at fair value. If the fair value was not available or could not be reliably measured, they were recognized at amortized cost. Debt consolidation consisted of offsetting intra-group receivables and payables. Remaining temporary differences are shown under Other assets/other liabilities on the Consolidated Balance Sheet. Expenses and income arising from transactions with fully consolidated entities were eliminated, and remaining differences were recorded in the Consolidated Income Statement under Other operating profit (loss). Intercompany profits arising from transactions within the Group were eliminated insofar as they made a material contribution to measuring profit Preface Survey of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

101 Financial Statements Scope of consolidation The fully consolidated members of the RZB Group were all significant subsidiaries in which Raiffeisen Zentralbank held direct or indirect stakes of more than 50 per cent and companies on whose business and financial policies it exercised a controlling influence. Material interests in associated undertakings companies upon whose business and financial policies the Group exercised a significant influence were accounted for using the equity method. Given their relative insignificance, the domestic financial statements of companies that did not draw up IFRS-compliant financial statements were not reassessed to make them compliant with IFRS. The number of companies integrated into the Consolidated Financial Statements has changed as follows: Number of companies Fully consolidated Equity method As of 1 January First integrated in the year under review Merged in the year under review (2) (2) Excluded in the year under review (1) (2) As of 31 December Of the 97 entities in the Group, 61 were headquartered in Austria (2002: 59) and 36 abroad (2002: 31). The inclusion of the subsidiaries integrated for the first time in the year under review affected the Consolidated Financial Statements as follows*: Assets 825,073 Profit after tax 18,912 * As affecting the Group s aggregated financial statements. Segments Financial Statements Supervisory Board s Report Glossary Contacts 111

102 Financial Statements The following companies were brought into the Consolidated Group for the first time as of the 2003 reporting year: Stake Reporting Name held date Reason Banks: Priorbank JSC, Minsk (Belarus) 61.38% 1/1 Acquisition Financial institutions: Raiffeisen Leasing d.o.o., Belgrade (Serbia and Montenegro) 88.88% 1/3 New RZB Finance (Jersey) II Ltd, St. Helier (Jersey) 0.02% 21/8 New Banking-related ancillary services: Tatra Group Finance, s.r.o., Bratislava (Slovakia) 68.87% 1/1 First consolidation Tatra Group Servis spol.s.r.o., Bratislava (Slovakia) 72.06% 1/1 First consolidation Other: Ericio Handels- und Beteiligungs GmbH, Vienna (Vienna) % 30/4 New R.B.T. Beteiligungsgesellschaft m.b.h, Vienna (Vienna) % 1/1 First consolidation Raiffeisen-RBHU Holding GmbH, Vienna (Vienna) 70.31% 5/8 New Sinesco Kft., Budapest (Hungary) 79.93% 1/1 First consolidation At the beginning of the year, RZB acquired 50 per cent of Priorbank JSC, Minsk (Belarus) during a capital increase. It underwent first-time integration as of 1 January Further shares were acquired continuously during the year under review, with the result that the Group now holds a stake of 61.4 per cent. During a hybrid Tier 2 issue, RZB founded RZB Finance (Jersey) II Ltd., St. Helier, in August RZB holds 100 per cent of its voting share capital. Effective 1 January 2003, Raiffeisenbank HPB d.d., Mostar was merged with Raiffeisen Bank d.d. Bosna i Herzegovina, Sarajevo, and in September, Raiffeisen e-broker Holding GmbH, Wien, was merged with Salvelinus Handels- und Beteiligungsgesellschaft mbh, Vienna. Three hundred and twenty-one subsidiaries were excluded from the Consolidated Financial Statements by reason of their minor importance in giving a view of the Group s assets, financial state and profit position (2002: 284 subsidiaries). They were recognized at amortized cost under Financial investments as Interests in subsidiaries. The balance-sheet totals of excluded companies came to less than 2 per cent of the Group s aggregated balance-sheet total. Two subsidiaries were excluded for cost/benefit reasons. They are accounted for in the Consolidated Financial Statements using the equity method. See Equity Participations from page 166 for a list of fully consolidated companies, companies accounted for using the equity method and other equity participations Preface Survey of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

103 Financial Statements Foreign-currency translation The financial statements of fully consolidated companies drawn up in foreign currencies were translated employing the modified current-rate method in conformity with IAS 21, whereby equity was translated at a weighted historical exchange rate and all other assets and liabilities and declarations in notes were translated at the exchange rate ruling on the balance-sheet date. Exchange differences arising from the translation of components of equity (applying weighted historical exchange rates) were cleared against retained earnings and were not recognized in the Income Statement. Items in income statements were translated at the average rate of exchange during the year calculated on the basis of end-of-month rates. Exchange differences between the exchange rate ruling on the balance-sheet date and the average rate of exchange employed in the Income Statement were charged against equity and were not recognized in the Income Statement. Because of the prevailing macroeconomic conditions, IAS 29 (Financial Reporting in Hyperinflationary Economies) was applied in the case of two companies (Raiffeisen Bank S.A., Bucharest, und Priorbank JSC, Minsk). In the case of two subsidiaries, (Raiffeisen Leasing SRL, Bucharest, und GSI Group Software Investment AG, Zug), the euro was the reporting currency for measurement purposes given the economic substance of the underlying transactions. The following exchange rates were applied during foreign-currency translations: Rates in units per B-sheet date Average B-sheet date Average Hungarian forint (HUF) Czech crown (CZK) Slovakian crown (SKK) Russian ruble (RUB) Polish zloty (PLZ) Bulgarian leva (BGN) Ukrainian hryvna (UAH) Romanian lei (ROL) 41, , , , Croatian kuna (HRK) Bosnian marka (BAM) Slovenian tolar (SIT) US dollar (USD) Serbian-Montenegran dinar (CSD) Swiss franc (CHF) Belarussian ruble (BYR) 2, , Segments Financial Statements Supervisory Board s Report Glossary Contacts 113

104 Financial Statements General accounting and valuation principles Receivables Receivables were recognized at their nominal values without deductions for remeasurements. Accrued interest was only recognized in the Income Statement if there was a high likelihood that it would actually be received. Provision for possible loan losses Allowance was made for credit risks by allocating specific and generalized individual loan-loss provisions. Instead of being charged against the corresponding receivables, they were disclosed on the Balance Sheet. Provisions for the borrower risks associated with loans and advances to banks and customers were allocated at the amounts of expected losses applying homogeneous Group-wide standards. A risk of loss was deemed to exist if (taking collateral into account) the discounted probable future repayment inclusive of interest payments was less than the claim s carrying value. The transfer risk (country risk) associated with loans to foreign borrowers was measured employing an internal rating system that takes into account the economic, political and regional situation of the country concerned. The entirety of the provision for possible loan losses arising from on-balance-sheet receivables was shown as a separate item on the assets side of the Balance Sheet, below receivables. The provision for possible losses arising from off-balance-sheet transactions was recorded as a provision. Trading assets Trading assets serve the exploitation of short-term fluctuations in market prices. Securities and derivative instruments held for trading were recognized at their fair values. In the case of listed securities, fair value was based on stock-exchange prices. If such prices were not available, primary financial instruments and futures were internally priced on the basis of present value calculations and options were valued using appropriate option price models. Present value calculations were based on the zero-coupon curve. The employed option price formulae were Black-Scholes 1972, Black 1976 and Garman-Kohlhagen. Derivative instruments held for trading were also shown as financial instruments held for trading. Where market prices inclusive of interest deferrals were positive (dirty prices), they were assigned to Trading assets. Negative fair values were recorded under Trading liabilities on the Balance Sheet. Positive and negative fair values were not reconciled. Changes in dirty prices were recognized in the Income Statement under Trading profit (loss) Preface Survey of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

105 Financial Statements Other available-for-sale financial assets This item contains the following instruments, which were recognized as outlined below: 1) Securities neither held for trading nor held as financial investments (i.e. available-for-sale financial assets): These assets were measured to fair value in accordance with IAS 39. They are shown under Other available-for-sale financial assets, and current income therefrom was reported under Net interest income. The effects of remeasurements and gains/losses upon their disposal are shown under Other operating profit (loss) (Net income from other availablefor-sale financial assets). 2) Derivative instruments insofar as not held for trading: a) Fair value hedges within the meaning of IAS 39 Interest-rate swaps that satisfy the prerequisites for hedge accounting are contracted to hedge against the interest-rate risks arising from issued bonds. Hedges are formally documented, continuously assessed and rated to be highly effective. In other words, throughout the term of a hedge, one can assume that changes in the fair value of a hedged item will be nearly completely offset by a change in the fair value of the hedging instrument and that the actual result will lie within a band of 80 to 125 per cent. Derivative instruments held to hedge the market values of individual balance-sheet items in the banking book were recognized under Other available-for-sale financial assets at their fair values (dirty prices). Changes in the carrying amount of the hedged item (asset or liability) are netted against amount of the gain or loss on the hedged item attributable to the hedged risk under this heading pursuant to the section of IAS 39 on Hedge accounting. Both the effect of changes in the carrying values of positions requiring hedging and the effect of changes in the clean prices of the derivative instruments were recorded under Other operating profit (loss) (Net income from other available-forsale financial assets), affecting profit. b) Cash flow hedges within the meaning of IAS 39 Derivatives held to hedge against fluctuating cash flow arising from specific variable interest-rate items are recognized as follows: The hedge is recognized at its fair value and the change in its clean price is booked as a separate item under Equity and not recognized in the Income Statement. c) Other derivative instruments Derivative instruments held to hedge against market risks in the banking book that are based on an inhomogeneous portfolio do not satisfy the requirements for hedge accounting within the meaning of IAS 39. They were measured as follows: Positive dirty prices were recognized under Other available-for-sale financial assets and nega- Segments Financial Statements Supervisory Board s Report Glossary Contacts 115

106 Financial Statements tive dirty prices were recorded under Other liabilities. The effect of remeasuring those derivative instruments on a clean-price basis was shown under Other operating profit (loss) (Net income from other available-for-sale financial assets); interest was recorded under Net interest income. Financial investments Financial investments includes all assets recognized at amortized cost or fair value or using the equity method: a) securities held to maturity; b) securities that represent loans and receivables originated by the enterprise; c) equity participations. Intangible fixed assets Intangible fixed assets acquired for consideration were capitalized at cost less amortization. Self-originated intangible fixed assets consisted exclusively of software and were capitalized if it was likely that the Group could derive an economic benefit from them in the future and if their conversion costs could be reliably measured. Amortization assumes the following useful lives: Useful life Years Software 4 6 Goodwill 10 The expected useful life of major software projects may also be longer. Tangible fixed assets Tangible fixed assets were capitalized at cost of acquisition or conversion less depreciation. Depreciation is carried out on a straight-line basis and assumes the following useful lives: Useful life Years Buildings Office furniture and equipment 5 10 Hardware Preface Survey of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

107 Financial Statements Tangible fixed assets acquired in the first half of the year were written-down by the full annual amount. Such assets as were acquired during the second half were written-down by half the full annual amount. If a permanent impairment was to be expected, exceptional write-downs were carried out. In the event that the reason for the write-down no longer applies, a write-back will take place up to the amount of the asset s amortized cost. Investment property was recognized at amortized cost in accordance with IAS 40. Inventory Inventory was recognized at cost subject to the Niederstwertprinzip (principle of recognition at the lower of cost and market). Write-downs were carried out insofar as the depreciated cost on the balance-sheet date was above the stock-exchange or market value or if limited usability or longer periods of storage had impaired the value of items of inventory. Payables Payables were recorded at amortized cost. Discounted debt securities and similar obligations were shown at present value. Provisions for liabilities and charges All provisions for so-called social capital (provisions for retirement benefits, severance payments and anniversary bonuses) were measured using the projected unit credit method in accordance with IAS 19 Employee Benefits. The actuarial computation of retirement benefit commitments for active employees was based on an interest rate of 5.25 per cent per cent and an effective salary increase of 3 per cent per annum or an individual career trend of 1.5 per cent per annum. The parameters for pensioners were an interest rate of 5.25 per cent and an anticipated increase in retirement benefits of 1.5 per cent per annum. Our calculations were based on an assumed retirement age of 60 for women and 65 for men, subject to transitional statutory requirements and special arrangements contained in individual contracts. The computation of severance payments and anniversary bonuses was likewise based on an interest rate of 5.25 per cent, an average salary rise of 3 per cent per annum and an individual career trend of 1.5 per cent per annum. The biometrical basis for the computation of all provisions for social capital was provided by AVÖ 1999-P-Rechnungsgrundlagen für die Pensionsversicherung (computational framework for pension insurance) Pagler & Pagler, using the variant for salaried employees. Other provisions were allocated for indefinite liabilities to third parties at the amount of the expected entitlement. Because of the insignificance of the interest effect to be expected from discounting them, provisions for liabilities and charges were not discounted. Segments Financial Statements Supervisory Board s Report Glossary Contacts 117

108 Financial Statements Deferred taxes Income tax was recognized and calculated in conformity with IAS 12 applying the balancesheet orientated liability method. Deferred taxes were computed on the basis of all temporary differences in recognition and measurement between the Consolidated Balance Sheet and the tax base that were going to balance out in subsequent periods under consideration of the tax scales applicable in the countries concerned. Deductible temporary differences were capitalized with respect to tax loss carryforwards insofar as taxable profits at the equivalent amount were to be expected within the same company in the future. Deductible temporary differences were offset against taxable temporary differences on a subsidiary-by-subsidiary basis. Income tax credits and income tax obligations were recorded under Other assets or Tax provisions. Repurchase agreements Under genuine repurchase agreements (repo transactions), the Group sells assets to a counterparty and agrees at the same time to repurchase those assets at an agreed time and price. The assets remain on the Group s Balance Sheet and are measured applying the rules governing the particular balance-sheet item. At the same time, a liability at the amount of the received payment is carried as a liability. In the case of reverse repo transactions, assets are acquired subject to an obligation to sell them in the future. They are shown on the Balance Sheet as Loans and advances to banks or Loans and advances to customers. Interest expenses incurred in connection with repo transactions and interest income receivable in connection with reverse repo transactions were recorded under Net interest income on an accrual accounting basis (linear over their term). Trust activities In conformity with IAS 30, transactions based on the management or placement of assets for third parties were not recorded on the Balance Sheet. Commission arising from such transactions was recorded under Net commission income. Finance leases According to IFRS, a finance lease exists if substantially all the risks and rewards incident to ownership of an asset are transferred to the lessee. In conformity with IAS 17, the present value of future lease payments and any residual values were recorded in the lessor s accounts under Loans and advances to banks or Loans and advances to customers. Lessees under a finance lease recognize the assets under the pertinent tangible fixed assets heading and balance the entry with a corresponding lease liability Preface Survey of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

109 Financial Statements Notes to the Income Statement (1) Net interest income Interest income 2,010,524 1,918,090 From loans and advances to banks 518, ,088 From loans and advances to customers 1,115,688 1,058,992 From available-for-sale financial assets 82, ,642 From financial investments held-to-maturity 93,444 94,188 From receivables under finance leases 106,781 85,343 From derivative financial instruments (non-trading) 93, ,837 Current income 65,881 69,601 From shares and other variable-yield securities 3,933 5,116 From interests in subsidiaries 19,208 23,780 From companies accounted for using the equity method 32,748 31,077 From other equity participations 9,992 9,628 Other interest-like income 5,091 6,183 Interest and similar income, Total 2,081,496 1,993,874 Interest expenses (1,205,860) (1,281,613) On deposits from banks (600,628) (647,829) On deposits from customers (379,699) (367,252) On liabilities evidenced by paper (175,944) (226,187) On subordinated capital (49,589) (40,345) Other interest-like expenses (12,763) (3,323) Interest expenses and similar charges, Total (1,218,623) (1,284,936) Net interest income 862, ,938 (2) Provisioning for possible loan losses Provisioning for possible loan losses arising from on-balance-sheet and off-balance-sheet transactions and country risks broke down as follows: Allocated to provision for possible loan losses (433,490) (387,821) Released from provision for possible loan losses 253, ,242 Direct write-downs (28,456) (18,219) Recovery of written-down claims 6,368 11,610 Total (202,215) (151,188) Details of the provision for possible loan losses are provided under point 15 (Provision for possible loan losses). Segments Financial Statements Supervisory Board s Report Glossary Contacts 119

110 Financial Statements (3) Net commission income Payment transfers business 135,440 85,239 Credit processing and guarantee business 91,659 66,728 Securities business 56,720 63,819 Foreign exchange, notes-and-coin and precious-metals business 20,025 16,482 Other banking services 55,453 51,013 Total 359, ,281 (4) Trading profit (loss) Trading profit (loss) captures all interest and dividend income, funding costs, commission and changes in the value of trading portfolios Interest-rate contracts 32,590 62,744 Currency contracts 237, ,089 Share-/index-related contracts 22,846 2,795 Other contracts 403 2,854 Total 293, ,482 (5) Net income from financial investments Net income from financial investments captures gains and losses on remeasurements and sales of securities in the portfolio of financial investments and of equity participations. They included interests in subsidiaries, companies accounted for using the equity method and other companies: Net remeasurements of securities held-to-maturity (22,305) (1,358) Net proceeds from disposals of securities held-to-maturity 1,440 1,014 Net proceeds from sales of securities originated by the enterprise (26) 3,057 Net remeasurements of equity participations (29,297) (30,340) Of which arising from companies accounted for using the equity method (6,006) (9,638) Net proceeds from sales of equity participations 1,375 5,249 Total (48,813) (22,378) Preface Survey of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

111 Financial Statements (6) General administrative expenses The Group s consolidated general administrative expenses comprised staff expenses, other general outlay and depreciation/amortization/write-downs of tangible and intangible fixed assets. They broke down as follows: Staff expenses (519,184) (443,590) Of which wages and salaries (397,414) (338,584) Of which social security costs (94,522) (78,546) Of which voluntary fringe benefits (15,793) (15,914) Of which expenditure on severance payments and retirement benefits (11,455) (10,546) Other general outlay (373,328) (356,342) Of which on premises (100,634) (88,351) Of which IT and communication costs (84,301) (90,154) Of which legal and consultancy costs (23,066) (25,033) Of which advertising and entertainment expenses (46,321) (48,164) Of which deposit guarantee costs (20,560) (9,622) Of which other items (98,446) (95,018) Depreciation/amortization/write-downs of tangible and intangible fixed assets (124,899) (99,994) Of which of tangible fixed assets (76,969) (68,051) Of which of intangible fixed assets (47,162) (31,233) Of which of let items (768) (710) Total (1,017,411) (899,926) (7) Other operating profit (loss) Among other things, Other operating profit (loss) captures revenues and expenses arising from non-banking activities and revenues and expenses arising from the disposal of tangible and intangible fixed assets. Net income from other available-for-sale financial assets, likewise included in this item, results from remeasurements of those instruments and any gains (losses) upon their sale, whereas the interest component of other available-for-sale financial assets is recorded under Net interest income Revenues from non-banking activities 467, ,611 Expenses arising from non-banking activities (405,349) (478,366) Net income from other available-for-sale financial assets 25, Other operating income 120,363 98,903 Other operating expenses (111,171) (96,377) Total 96,646 93,506 Segments Financial Statements Supervisory Board s Report Glossary Contacts 121

112 Financial Statements Other operating income includes the sum of 1,742 thousand from the release of negative goodwill that arose within the scope of first-time consolidation. Other operating expenses contains write-downs of goodwill arising from capital consolidation at the amount of 5,830 thousand. Write-downs of goodwill, previously recorded under General administrative expenses, are now recorded under Other operating expenses, and the figures for the previous year has been adjusted accordingly. However, write-downs of acquired goodwill at the amount of 86 thousand was still recorded under General administrative expenses. (8) Extraordinary profit (loss) In the 2002 financial year, we allocated a provision of 23,113 thousand for fines arising from a breach of European competition law. (9) Income tax Expenditure on income tax broke down as follows: Current income tax (54,088) (51,082) Of which in Austria (5,883) (7,539) Of which abroad (48,204) (43,543) Deferred taxes (11,116) (11,017) Total (65,204) (62,099) The following transitional account shows the connection between profit for the year and the effective tax burden: Profit before tax 343, ,603 Theoretical income tax expense in the financial year based on a domestic income tax rate of 34 per cent (116,838) (82,485) Effect of divergent foreign tax rates 12,543 ( 374) Reduction in the tax burden because of tax-exempt income from equity participations and other tax-exempt income 82,569 71,029 Increase in the tax burden because of non-tax-deductible expenses (44,242) (35,062) Other 764 (15,207) Effective tax burden (65,204) (62,099 No tax deferrals were capitalized for the tax loss carryforwards of 73,240 thousand because there appeared to be no prospect of being able to realize them within a reasonable period at the time. The Consolidated Financial Statements contain capitalized benefits from to date unused tax loss carryforwards at the amount of 83,136 thousand. The bulk of tax loss carryforwards were capable of being carried forward for an unlimited period Preface Survey of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

113 Financial Statements (10) Earnings per share Profit ( 000) 216, ,388 Less preference dividend ( 000) (6,745) (10,116) Earnings in the accounting period ( 000) 209, ,272 Average number of ordinary shares outstanding during period 4,289,513 3,809,325 Earnings per share ( ) There were no conversion or option rights in circulation, so undiluted earnings per share were identical with diluted earnings per share. (11) Segment reporting The basis for primary segment reporting within the meaning of IAS 14 is RZB s internal management reporting system, whose primary reporting format was changed over from a product-orientated structure to a customer-orientated one in Customer segmentation at RZB now takes place as follows: Corporate Customers Financial Institutions and Public Sector Retail Customers Proprietary Trading Participations and Other The Corporate Customers segment encompasses business with Austria s Top 1,000 enterprises, multinational groups and medium-sized and large companies in Central and Eastern Europe (so-called large corporate und middle-market companies). The criteria for inclusion are revenues, profit and size of workforce. This segment also includes smaller subsidiaries of larger enterprises and profit-orientated state-owned enterprises. The allocation of customers to the Corporate Customers segment will depend on the size of the particular group unit. The Financial Institutions and Public Sector segment encompasses business with banks, financial service providers, insurers and public sector entities. Banks includes all Austrian and foreign corporate banks. This segment also includes supranational institutions like the World Bank, the European Bank for Reconstruction and Development (EBRD), the European Investment Bank (EIB), the International Monetary Fund (IMF) and the Kreditanstalt für Wiederaufbau (KfW). Financial service providers includes brokers and asset managers such as investment banks, investment fund companies, finance leasing companies and other companies that perform activities connected with the credit industry. Segments Financial Statements Supervisory Board s Report Glossary Contacts 123

114 Financial Statements Insurers encompasses all kinds of insurer and reinsurer. That includes property insurers, health insurers, life assurers and pension insurers. Public sector includes all public sector entities such as ministries, provinces, municipalities and similar public corporations. Embassies and trade representations also belong to this sub-segment. The Retail Customers segment encompasses retail banking operations in Central and Eastern Europe, the retail operations of Raiffeisen-Leasing in Central and Eastern Europe und Austria, and private banking operations in Central and Eastern Europe und Austria. According to the prescribed allocation of tasks and responsibilities within the Raiffeisen Banking Group (RBG), Raiffeisen Zentralbank does not provide retail banking services in Austria. Retail banking targets all private individuals (consumers), small and medium-sized enterprises and the self-employed (professionals). The line includes largely standardized products like passbooks, saving deposits, time deposits and current and salary accounts, personal loans, overdrafts, mortgages and other loans granted for specific purposes. Precise segment allocation depends on the size of the country and Group-member and on local market conditions. Private banking operations in Austria are the domain of Bankhaus Kathrein & Co. In Central and Eastern Europe, this sub-segment is handled by individual Network Banks, which employ an individualized advisory approach that targets high net worth individuals and provide asset management services. The Proprietary Trading segment encompasses proprietary trading in the Treasury and Investment Banking divisions of Raiffeisen Zentralbank, Raiffeisen Centrobank AG, the Network Banks and the Group s investment companies in Central and Eastern Europe. The Treasury sub-segment encompasses RZB s own positions in on-balance-sheet positions (e.g. money-market deposits, notes and coin) and off-balance-sheet interest-rate and currency products (futures, options). In addition, the sub-segment encompasses the management of portfolios of equities, bonds, funds, short- and long-term alternative investments (combinations of securities products with derivative instruments) and hybrid securities. The Investment Banking sub-segment encompasses the management of the bank s own security positions in its books as well as market making. In addition, it includes securities lending and repo transactions with foreign counterparties. Besides non-banking activities, the Participations and Other segment mainly encompasses RZB s extensive portfolio of equity participations. It also includes the associated undertakings that are accounted for using the equity method. In addition, the segment encompasses other cross-segment activities Preface Survey of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

115 Financial Statements RZB employs two central steering instruments: Return on equity states the relationship between profit before tax and average equity employed. It expresses the return on equity employed in the segment concerned. The cost/income ratio expresses the cost efficiency of business segments. The cost/income ratio is measured using the ratio of general administrative expenses to the total of net interest income, net commission income, trading profit (loss) and the operating profit (loss). Segment reporting is based on our internal management reporting system, which takes the form of a multi-stage contribution income statement. Income and expenses are allocated according to their causes. The income items are Net interest income, Net commission income, Trading profit (loss) and Other operating profit (loss), whereby net interest income is calculated using the market-interest-rate method. The interest reward from equity is assigned to individual segments on the basis of regulatory capital requirements and recognized under Net interest income. Provisioning for possible loan losses is made up of net allocations to valuation reserves for borrower risks and direct write-downs as well as amounts recovered from written-down claims and country remeasurements. General administrative expenses includes direct and indirect costs. Direct costs (staff costs and other general outlay) are incurred by individual business segments, whereas indirect costs are allotted on the basis of agreed ratios. Secondary segment reporting breaks down income components and assets/liabilities along geographical lines. Assignments to regions are based on the corporate domiciles of the Group-members concerned. Segments Financial Statements Supervisory Board s Report Glossary Contacts 125

116 Financial Statements a) Business segments 2003 financial year Financial Corporate Institutions & Retail Proprietary Participations 000 Customers Public Sector Customers Trading & Other Total Net interest income 430,184 82, ,299 95,713 5, ,873 Provisioning for possible loan losses (141,600) (5,905) (40,486) (11,314) (2,910) (202,215) Net interest income after provisioning for possible loan losses 288,584 76, ,813 84,399 2, ,658 Net commission income 193,574 47, ,313 4,972 4, ,297 Trading profit (loss) 80,382 13,937 46, ,196 22, ,262 Net inc. from financial investments (21,152) 25 3 (10,185) (17,504) (48,813) General administrative expenses (311,314) (114,739) (385,184) (89,884) (116,290) (1,017,411) Other operating profit (loss) 8,271 1,706 1,961 23,710 60,999 96,646 Profit before tax 238,345 25,157 (19,259) 142,208 (42,810) 343,640 Own funds requirement 1,338, , , ,761 95,953 2,431,093 Basis of assessment under 22 BWG 16,736,771 2,795,603 4,022,368 5,634,511 1,199,412 30,388,665 Cost/income ratio 43.8% 78.7% 94.9% 39.0% 64.1% Average equity 1,223, , , ,751 87,649 2,220,701 Return on equity (ROE) before tax 19.5% 12.3% 34.5% 15.5% Average number of staff 5,875 1,490 9,481 1,021 2,175 20, financial year Financial Corporate Institutions & Retail Proprietary Participations 000 Customers Public Sector Customers Trading & Other Total Net interest income 378,373 57, ,125 82,764 16, ,938 Provisioning for possible loan losses (129,065) (632) (13,007) (5,013) (3,471) (151,188) Net interest income after provisioning for possible loan losses 249,308 56, ,119 77,751 13, ,750 Net commission income 145,596 61,724 71,285 4,848 (172) 283,281 Trading profit (loss) 74,225 20,911 32, ,609 (11,630) 253,482 Net inc. from financial investments (3,296) 73 (19,155) (22,378) General administrative expenses (265,965) (117,015) (341,880) (83,087) (91,979) (899,926) Other operating profit (loss) (2,580) (2,515) 21,895 21,085 55,621 93,506 Extraordinary profit (loss) (23,113) (23,113) Profit before tax 200,584 19,650 (58,510) 158,279 (77,400) 242,603 Own funds requirement 1,234, , , ,476 95,341 2,237,828 Basis of assessment under 22 BWG 15,425,506 2,328,665 3,033,470 5,993,451 1,191,761 27,972,853 Cost/income ratio 44.6% 85.0% 33.7% 67.2% Average equity 1,069, , , ,741 82,663 1,940,283 Return on equity (ROE before tax) 18.7% 12.2% 38.1% 12.5% Average number of staff 3, , ,797 15, Preface Survey of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

117 Financial Statements b) Geographical markets Regional breakdown by domicile of each Group unit taking funding costs into account: 2003 financial year Austria Central and Other Total 000 Eastern Europe Net interest income 282, ,622 45, ,873 Provisioning for possible loan losses (98,729) (87,582) (15,904) (202,215) Net interest income after provisioning for possible loan losses 183, ,040 29, ,658 Net commission income 124, ,809 16, ,297 Trading profit (loss) 53, ,675 13, ,262 Net income from financial investments (49,736) (48,813) General administrative expenses (317,189) (662,030) (38,191) (1,017,411) Other operating profit (loss) 89, ,294 96,646 Profit before tax 84, ,926 28, ,640 Basis of assessment under 22 BWG 15,666,913 12,356,106 2,365,645 30,388,665 Average number of staff 2,530 17, , financial year Austria Central and Other Total 000 Eastern Europe Net interest income 296, ,441 43, ,938 Provisioning for possible loan losses (83,746) (52,184) (15,258) (151,188) Net interest income after provisioning for possible loan losses 212, ,257 27, ,750 Net commission income 129, ,605 15, ,281 Trading profit (loss) 43, ,844 8, ,482 Net income from financial investments (19,912) (1,894) (572) (22,378) General administrative expenses (348,309) (513,060) (38,557) (899,926) Other operating profit (loss) 104,921 (8,630) (2,785) 93,506 Extraordinary profit (loss) (23,113) (23,113) Profit before tax 104, ,122 5, ,603 Basis of assessment under 22 BWG 15,912,940 9,824,172 2,235,741 27,972,853 Average number of staff 2,511 12, ,235 Segments Financial Statements Supervisory Board s Report Glossary Contacts 127

118 Financial Statements Notes to the Balance Sheet (12) Cash reserve Cash in hand 440, ,513 Balances at central banks 2,370,975 1,739,989 Total 2,811,825 2,006,502 (13) Loans and advances to banks Giro and clearing business 901, ,591 Money-market business 15,807,103 12,634,966 Loans to banks 2,301,291 1,603,672 Purchased receivables 127,410 60,288 Accounts receivable under finance leases 14,531 15,522 Total 19,152,263 15,028,039 Purchased receivables comprised receivables of 115,527 thousand (2002: 60,288 thousand) classified as available-for-sale and receivables of 11,883 thousand classified as held-to-maturity. Loans and advances to banks broke down along geographical lines as follows: Austria 6,997,022 6,832,554 Other countries 12,155,241 8,195,485 Total 19,152,263 15, (14) Loans and advances to customers Loans and advances to customers broke down as follows: Credit business 15,811,934 14,473,190 Money-market business 2,286,186 2,055,990 Receivables under mortgage loans 1,928,462 1,321,575 Purchased receivables 445, ,837 Accounts receivable under finance leases 1,707,768 1,281,652 Total 22,179,846 19,785, Preface Survey of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

119 Financial Statements Purchased receivables comprise receivables of 13,068 thousand (2002: 10,494 thousand) classified as available-for-sale and receivables of 432,428 thousand (2002: 642,343 thousand) classified as held-to-maturity. Loans and advances to customers broke down into sectors as follows: Public sector 1,324,832 1,050,663 Corporate customers 17,476,181 16,775,435 Retail customers 2,948,852 1,482,003 Other 429, ,143 Total 22,179,846 19,785,244 Loans and advances to customers broke down along geographical lines as follows: Austria 6,170,080 5,895,509 Other countries 16,009,766 13,889,735 Total 22,179,846 19,785,244 (15) Provision for possible loan losses Provisioning for possible loan losses was carried out applying homogeneous Group-wide standards and covered all recognizable borrower risks. Change in Transfers, On scope of exchange On January consolidation Allocated** Released Used differences 31 December Borrower risks 547,488 9, ,981 (213,954) (98,124) (11,889) 654,583 Loans/advances to banks 18, ,368 (157) (4,117) ,604 In Austria 485 (1) 484 In other countries 17, ,368 (156) (4,117) ,120 Loans/advances to customers 529,348 8, ,613 (213,797) (94,007) (12,117) 637,979 In Austria 287,945 60,706 (35,834) (50,796) 11, ,231 In other countries 241,403 8, ,907 (177,963) (43,211) (23,327) 364,748 General provisions* 6, (1,987) (178) 4,243 Subtotal 553,503 9, ,373 (215,941) (98,124) (12,067) 658,826 Risks arising from offbalance-sheet items 50, ,541 (37,423) (3,070) (8,538) 30,608 Country risks 14,571 3,664 (3,177) 15,057 Total 618,154 9, ,578 (253,363) (101,194) (23,782) 704,492 * General risks within the meaning of IAS ** Allocations inclusive of direct write-downs and recoveries of receivables already written down. Segments Financial Statements Supervisory Board s Report Glossary Contacts 129

120 Financial Statements (16) Trading assets Trading assets comprised the following securities and derivative instruments held for trading: Debt securities and other fixed-interest securities 1,804,651 1,864,336 Of which public-authority bills eligible for refinancing 857, ,151 Of which other debt instruments issued by the public sector 541, ,638 Of which bonds and debt securities issued by other issuers 389, ,520 Of which debt securities originated by the enterprise 16,680 12,027 Shares and other variable-yield securities 288, ,028 Of which shares and other securities 124, ,429 Of which investment fund units 39, ,349 Of which other securities 124, Positive fair values arising from derivative financial instruments 1,142, ,468 Of which interest-rate contracts 147,807 47,485 Of which exchange-rate contracts 962, ,966 Of which share-/index-related contracts 32,253 26,017 Overnight and fixed deposits held for trading 224,605 Total 3,460,554 2,512,832 (17) Other available-for-sale financial assets Other available-for-sale financial assets contained the following available-for-sale securities: Debt securities and other fixed-interest securities 1,816,385 1,514,880 Of which public-authority bills eligible for refinancing 418, ,508 Of which other debt instruments issued by the public sector 222, ,934 Of which bonds and debt securities issued by other issuers 1,042, ,624 Of which debt securities originated by the enterprise 132, ,813 Shares and other variable-yield securities 216, ,209 Of which shares 114,753 47,975 Of which investment fund units 80,826 92,277 Of which other variable-yield securities 21,221 27, Preface Survey of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

121 Financial Statements Fair value of derivative hedging instruments within the scope of fair-value hedges within the meaning of IAS , ,926 Of which interest-rate contracts 145, ,926 Changes in the carrying amounts of hedged items within the scope of fair-value hedges within the meaning of IAS 39 (96,325) (139,783) Of which arising from loans and advances to banks 1, Of which arising from loans and advances to customers 79 1,526 Of which arising from liabilities evidenced by paper (98,023) (142,301) Positive fair values of other derivative financial instruments 172,250 51,148 Of which interest-rate contracts 10,686 39,775 Of which exchange-rate contracts 155,439 11,373 Of which share-/index-related contracts 6,125 Positive fair values of derivative financial instruments within the scope of cash-flow hedges 2,012,324 1,331,821 Of which interest-rate contracts 904,101 1,112,507 Of which exchange-rate contracts 1,108, ,314 Total 4,266,945 3,129,201 Insofar as they satisfy the prerequisites for hedge-accounting within the meaning of IAS 39, derivative financial instruments were measured to their fair values (dirty price) in their function as hedging instruments. The hedged items underlying fair-value hedges are loans and advances to banks and customers, deposits from banks and customers and, above all, liabilities evidenced by paper. The hedged risks were interest-rate risks. Under IAS 39, this item also includes the positive fair values of derivative financial instruments that are neither held for trading nor fair-value hedging instruments within the meaning of IAS 39. (18) Financial investments Debt securities and other fixed-interest securities 2,370,023 1,960,471 Of which public-authority bills eligible for refinancing 336, ,641 Of which other debt instruments issued by the public sector 372, ,850 Of which bonds and debt securities issued by other issuers 1,622,914 1,447,980 Of which debt securities originated by the enterprise 38,760 Equity participations 870, ,281 Of which interests in subsidiaries 131, ,623 Of which interests in companies accounted for using the equity method 447, ,336 Of which other equity participations 291, ,322 Total 3,240,436 2,822,752 Equity participations measured at amortized cost for which fair values could not be reliably ascertained totalled 35,057 thousand (year-end 2002: 46,708 thousand). Segments Financial Statements Supervisory Board s Report Glossary Contacts 131

122 Financial Statements (19) Intangible fixed assets Goodwill 35,680 34,984 Other intangible fixed assets 123, ,224 Total 158, ,208 (20) Tangible fixed assets Land and buildings used by the Group for its own operations 232, ,196 Other land and buildings 14,783 19,270 Other tangible fixed assets, office furniture and equipment 224, ,386 Let leased assets 30,168 26,756 Total 502, ,608 Obligations arising from the use of tangible fixed assets not shown on the Balance Sheet during the 2004 financial year will come to 36,122 thousand (previous year: 30,646 thousand). Such obligations during the five years following the year under review will come to 175,514 thousand (2002: 151,641 thousand) Preface Survey of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

123 Financial Statements (21) Development of fixed assets Cost of acquisition or conversion Effect of On changes in Exchange On 1/1/2003 scope of differences Additions Disposals Transfers 31/12/ consolidation Financial investments 2,789,984 7,746 (44,108) 1,168,188 (694,563) 3,227,247 Debt securities and other fixed-interest securities 1,980,377 (42,420) 1,040,991 (571,188) 2,407,760 Interests in subsidiaries 197,437 5,200 (416) 68,903 (77,735) 193,389 Interests in companies accounted for using the equity method 387,017 2,546 (264) 16,311 (2,863) 402,747 Other equity participations 225,153 (1,007) 41,984 (42,778) 223,351 Intangible fixed assets 288, (6,861) 73,801 (40,615) (204) 314,615 Goodwill 42,179 6,612 48,791 Other intangible fixed assets 246, (6,861) 67,189 (40,615) (204) 265,824 Tangible fixed assets 868,012 42,170 (23,925) 142,956 (122,610) ,807 Land and buildings used by the Group for its own operations 346,190 18,366 (3,532) 31,364 (48,123) 7, ,079 Other land and buildings 27,171 (1,469) 832 (3,529) ,446 Of which land value of developed land 3,995 3,995 Other tangible fixed assets 461,570 23,804 (18,785) 104,521 (69,025) (8,051) 494,033 Let leased assets 33,081 (138) 6,240 (1,933) 37,249 Total 3,946,186 50,219 (74,894) 1,384,945 (857,788) 4,448,669 Write-ups, write-downs, remeasurements Carrying amounts On On 000 Cumulative Write-ups Write-downs 31/12/ /12/2002 Financial investments 13,189 15,872 (73,387) 3,240,436 2,822,752 Debt securities and other fixed-interest securities (37,738) 3,717 (28,716) 2,370,023 1,960,471 Interests in subsidiaries (62,398) 1,033 (15,342) 131, ,623 Interests in companies accounted for using the equity method 44,664 (8,655) 447, ,336 Other equity participations 68,661 11,122 (20,674) 291, ,322 Intangible fixed assets (155,922) 4 (52,992) 158, ,208 Goodwill (13,111) (5,916) 35,680 34,984 Other intangible fixed assets (142,811) 4 (47,076) 123, ,224 Tangible fixed assets (404,639) 34 (77,737) 502, ,608 Land and buildings used by the Group for its own operations (119,245) (11,737) 232, ,196 Other land and buildings (8,663) (1,598) 14,783 19,270 Of which land value of developed land 3,995 3,995 Other tangible fixed assets (269,651) 34 (63,634) 224, ,386 Let leased assets (7,081) (768) 30,168 26,756 Total (547,373) 15,910 (204,116) 3,901,296 3,439,569 Segments Financial Statements Supervisory Board s Report Glossary Contacts 133

124 Financial Statements (22) Other assets Tax assets 96,846 84,413 Of which current tax assets 37,784 27,438 Of which deferred tax assets 59,063 56,975 Receivables arising from non-banking activities 83, ,540 Prepayments and other deferrals 106,393 66,235 Other assets 649, ,962 Total 936,927 1,057, Deferred tax assets 59,063 56,975 Provisions for deferred tax liabilities (21,561) (20,117) Net deferred tax assets 37,502 36,858 Net deferred tax assets broke down as follows: Provision for possible loan losses 15,701 12,728 Financial investments 16,985 21,318 Tangible and intangible fixed assets 131, ,361 Other assets 15,272 8,352 Provisions for liabilities and charges 9,630 5,161 Other liabilities 12,163 23,617 Tax loss carryforwards 83,136 77,030 Other balance-sheet items 50,101 19,333 Deferred tax assets 334, ,900 Loans and advances to customers 115, ,249 Trading assets 16,412 25,648 Other available-for-sale financial assets 33,610 26,444 Financial investments 41,257 37,662 Other liabilities 34,827 30,022 Other balance-sheet items 55,822 30,017 Deferred tax liabilities 297, ,042 Net deferred tax assets 37,502 36, Preface Survey of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

125 Financial Statements (23) Deposits from banks Deposits from banks broke down as follows: Giro and clearing business 2,078,001 1,874,982 Money-market business 21,750,281 18,553,004 Long-term finance 3,594,715 3,043,367 Total 27,422,997 23,471,353 Deposits from banks broke down along geographical lines as follows: Austria 10,896,293 10,582,700 Other countries 16,526,704 12,888,654 Total 27,422,997 23,471,353 Segments Financial Statements Supervisory Board s Report Glossary Contacts 135

126 Financial Statements (24) Deposits from customers Deposits from customers broke down into product groups as follows: Sight deposits 6,352,163 5,074,504 Time deposits 9,740,373 6,780,100 Savings deposits 897, ,487 Total 16,990,216 12,673,091 Deposits from customers broke down into customer segments as follows: Public sector 546, ,635 Corporate customers 10,480,527 7,472,462 Retail customers 5,775,561 4,570,792 Other 187, ,202 Total 16,990,216 12,673,091 Deposits from customers broke down along geographical lines as follows: Austria 2,512,447 1,664,230 Other countries 14,477,769 11,008,861 Total 16,990,216 12,673,091 (25) Liabilities evidenced by paper Issued debt securities 2,746,209 3,546,009 Issued money-market instruments 573, ,368 Other liabilities evidenced by paper 186, ,818 Total 3,506,174 4,410, Preface Survey of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

127 Financial Statements (26) Provisions for liabilities and charges Change in Transfers, On scope of exchange On January consolidation Allocated Released Used differences 31 December Severance payments 28,722 2,295 (119) (879) ,149 Retirement benefits 42,687 1,949 (4) 44,632 Tax 37, ,310 (9,016) (5,441) (2,000) 36,440 Of which current 17, ,519 (7,046) (5,441) (623) 14,879 Of which deferred 20,117 4,791 (1,970) (1,377) 21,561 Other 183, ,358 (44,378) (49,990) (14,862) 145,958 Total 292, ,912 (53,513) (56,314) (16,732) 257,179 Provisions for severance payments and similar obligations developed as follows: Present value (DBO) on 1 January 28,722 25,062 Effect of changes in the scope of consolidation 201 Service cost 3,150 2,849 Interest cost 1,674 1,475 Payments (3,206) (1,979) Actuarial gain (loss) (191) 1,114 Present value (DBO) on 31 December (= provision) 30, Provisions for pensions developed as follows: Present value (DBO) on 1 January 42,687 42,357 Effect of changes in the scope of consolidation 92 Service cost 1,247 1,243 Interest cost 4,011 3,919 Payments (3,979) (1,467) Change in plan assets (567) (4,543 Actuarial gain (loss) 1,233 1,086 Present value (DBO) on 31 December (= provision) 44,632 42,687 Segments Financial Statements Supervisory Board s Report Glossary Contacts 137

128 Financial Statements (27) Trading liabilities Negative market values arising from derivative financial instruments 1,346, ,832 Of which interest-rate contracts 160,172 68,018 Of which exchange-rate contracts 962, ,528 Of which share-/index-related contracts 223,488 30,286 Short sales of trading assets 82,418 21,675 Overnight and fixed deposits held for trading 304,884 Total 1,733, ,507 (28) Other liabilities Liabilities arising from non-banking activities 90,492 88,096 Deferred items 97,652 91,051 Negative fair values arising from other derivative financial instruments 227,977 46,374 Of which arising from interest-rate contracts 40,442 32,603 Of which arising from exchange-rate contracts 187,535 13,771 Negative fair values arising from other derivative financial instruments used in cash-flow hedges 1,901,654 1,281,436 Of which arising from interest-rate contracts 817,279 1,020,391 Of which arising from exchange-rate contracts 1,084, ,045 Other liabilities 349, ,021 Total 2,667,504 2,107,978 (29) Subordinated capital Subordinated obligations 868, ,985 Supplementary capital 125, ,507 Capital associated with special dividend rights (Genussrechtkapital) 34,687 34,687 Total 1,028, , Preface Survey of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

129 Financial Statements (30) Equity On 31 December 2003, the subscribed capital of Raiffeisen Zentralbank broke down as follows: Units (nominal) Registered ordinary shares 4,289, ,718, Bearer preference shares 515,660 37,473, Total 4,805, ,191, The bearers of non-voting preference shares receive a preference dividend based on the stake in issued share capital represented by their shares. The preference dividend for the 2003 financial year was per preference share (resulting in a distribution of 6,745 thousand). The Managing Board will recommend to the General Meeting of Shareholders that a dividend of per ordinary share be distributed from the Profit for the 2003 financial year as recorded by Raiffeisen Zentralbank (resulting in a distribution of 43,624 thousand) and that the remaining 1,404 thousand be carried forward to a new account. As in 2002, shares originated by the enterprise and held by a company accounted for using the equity method (UNIQA Versicherungen AG) accounted for 9,029 thousand thereof. The development of consolidated equity is shown on page 106. Segments Financial Statements Supervisory Board s Report Glossary Contacts 139

130 Financial Statements Additional notes pursuant to IFRS (31) Breakdown of remaining terms to maturity Maturities breakdown as of 31 December 2003: Due at call or of Up to 3 More than 3 More than 1 More than 000 unspecified maturity months months to 1 year to 5 years 5 years Loans and advances to banks 984,820 13,100,211 3,260,877 1,216, ,272 Loans and advances to customers 1,443,665 5,586,159 3,807,435 7,227,552 4,115,035 Trading assets 187,018 1,164, , , ,738 Other available-for-sale financial assets 227, , ,061 2,030, ,905 Financial investments 870, , ,398 1,518, ,874 Deposits from banks 2,163,863 19,183,337 2,455,775 2,167,228 1,452,794 Deposits from customers 6,961,534 8,306,817 1,080, , ,893 Liabilities evidenced by paper 922, ,719 1,734, ,820 Subordinated capital 36, , ,378 Maturities breakdown as of 31 December 2002: Due at call or of Up to 3 More than 3 More than 1 More than 000 unspecified maturity months months to 1 year to 5 years 5 years Loans and advances to banks 1,135,801 11,250,421 1,273, , ,187 Loans and advances to customers 1,562,827 5,589,855 2,892,731 5,993,303 3,746,528 Trading assets 490, , , , ,844 Other available-for-sale financial assets 161, , ,978 1,359, ,933 Financial investments 862, , ,038 1,105, ,419 Deposits from banks 1,455,907 17,186,447 1,657,705 1,839,412 1,331,882 Deposits from customers 5,570,084 5,774, , , ,764 Liabilities evidenced by paper 1,241, ,365 2,011, ,645 Subordinated capital 31,207 43, , , Preface Survey of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

131 Financial Statements (32) Receivables and payables vis-à-vis related parties Loans and advances to banks Companies accounted for using the equity method 207, ,511 Other equity participations 530, ,635 Loans and advances to customers Subsidiaries 772, ,147 Companies accounted for using the equity method 10,259 4,955 Other equity participations 311, ,009 Trading assets Companies accounted for using the equity method 3, Other equity participations Other available-for-sale financial assets Subsidiaries 20,374 2,580 Companies accounted for using the equity method 15 7 Other equity participations 10,889 11,185 Financial investments Companies accounted for using the equity method 2, Deposits from banks Companies accounted for using the equity method 862, ,172 Other equity participations 2,710,270 2,370,477 Deposits from customers Subsidiaries 126, ,532 Companies accounted for using the equity method 420 9,189 Other equity participations 54,523 35,120 (33) Foreign-currency items The Consolidated Financial Statements contain the following volumes of assets and liabilities denominated in foreign currencies: Assets 24,264,320 21,981,515 Liabilities 24,835,340 21,977,374 Segments Financial Statements Supervisory Board s Report Glossary Contacts 141

132 Financial Statements (34) Foreign assets/liabilities Assets and liabilities vis-à-vis counterparties outside Austria broke down as follows: Assets 36,381,419 27,904,912 Liabilities 34,274,961 26,522,269 (35) Subordinated assets Assets contains the following subordinated assets: Loans and advances to banks 4,740 4,813 Loans and advances to customers 111,088 57,771 Trading assets 3,734 1,578 Other available-for-sale financial assets 41,767 6,204 Financial investments 39,443 9,259 Total 200,772 79,625 (36) Expenditure on subordinated obligations During the year under review, expenditure on subordinated obligations totalled 46,639 thousand (2002: 48,181 thousand) Preface Survey of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

133 Financial Statements (37) Contingent liabilities and other off-balance-sheet items The following off-balance-sheet items existed at year-end: Contingent liabilities 6,909,677 6,811,178 Of which arising from endorsed bills 5,966 9,278 Of which arising from guarantee credits 4,598,193 4,819,231 Of which arising from other guarantees 1,225,096 1,061,710 Of which arising from letters of credit 1,026, ,372 Of which other contingent liabilities 53,792 5,587 Commitments 7,207,970 6,424,142 Of which arising from revocable loan promises/stand-by facilities 6,006,764 5,663,012 Up to 1 year 3,236,979 3,014,515 More than 1 year 2,769,785 2,648,497 Of which arising from non-genuine repurchase agreements 105,708 Of which other commitments 1,095, ,130 Raiffeisen Zentralbank is a member of Raiffeisen-Kundengarantiegemeinschaft Österreich. The members of this association have undertaken a contractual obligation to guarantee jointly and severally the punctual fulfilment of the entirety of an insolvent association member s commitments arising from deposits from customer deposits and its own financial issues up to the limit of the sum of the individual capacities of the remaining association members. The individual capacity of an association member is measured on the basis of its freely available reserves subject to the pertinent requirements of BWG. (38) Genuine repurchase agreements The following repurchase and redelivery commitments were in place on 31 December: Genuine repurchase agreements (as borrower) Deposits from banks 1,151, ,839 Deposits from customers 7,786 6,946 Total 1,158, , Genuine reverse repurchase agreements (as lender) Loans and advances to banks 2,362,903 1,577,809 Loans and advances to customers 163, ,269 Total 2,526,447 1,949,078 Segments Financial Statements Supervisory Board s Report Glossary Contacts 143

134 Financial Statements (39) Assets pledged as collateral The following obligations were securitized by assets shown on the Balance Sheet: Deposits from banks 1,739,756 1,386,868 Deposits from customers 17,669 3,654 Liabilities evidenced by paper 170, ,810 Other liabilities 27,647 57,971 Contingent liabilities and commitments 17,768 8,683 Total 1,972,976 1,656,986 The following assets on the Balance Sheet were furnished as collateral for the abovenamed obligations: Loans and advances to banks 551, ,965 Loans and advances to customers 668, ,086 Trading assets 14,987 Other available-for-sale financial assets 38,421 57,829 Financial investments 696, ,331 Total 1,954,988 1,660,198 That total includes instruments arising from repurchase agreements totalling 505,851 thousand. (40) Assets accepted as collateral that could be sold or repledged Collateral at the amount of 2,982,873 thousand was accepted during the year under review. 1,614,884 thousand of the assets accepted as collateral was passed on or sold. (41) Trust activities Volumes of fiduciary business outstanding on the balance-sheet date that were not shown on the Balance Sheet developed as follows: Loans and advances to banks 42,197 3,968 Loans and advances to customers 321, ,401 Financial investments 6,093 7,545 Other fiduciary assets 7,210 Fiduciary assets 377, ,914 Deposits from banks 163, ,418 Deposits from customers 200, ,956 Other fiduciary liabilities 13, Fiduciary liabilities 377, , Preface Survey of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

135 Financial Statements (42) Non-interest-bearing assets The following generally interest-bearing loans were deemed to be non-interest-bearing because the counterparty s financial situation was such that no recovery of funds was to be expected: Loans and advances to banks 36,868 31,142 Loans and advances to customers 729, ,027 Provision for possible loan losses (292,040) (292,990) Total 473, ,179 (43) Finance leases Receivables arising from finance leases developed as follows: Gross investment value 1,990,375 1,566,627 Minimum lease payments 1,839,746 1,449,883 Up to 3 months 155, ,966 From 3 months up to 1 year 414, ,145 From 1 year up to 5 years 1,006, ,476 Over 5 years 263, ,296 Non-guaranteed residual values 150, ,744 Unrealized financial income 273, ,608 Up to 3 months 27,980 23,366 From 3 months up to 1 year 69,966 61,680 From 1 year up to 5 years 130, ,386 Over 5 years 45,005 76,176 Net investment value 1,716,856 1,259,019 Write-offs of unrecoverable minimum lease payments outstanding came to 11,211 thousand during the year under review (2002: 10,761 thousand). Assets let within the scope of finance leases broke down as follows: Vehicles leases 821, ,193 Real-estate leases 400, ,607 Movables leases 495, ,219 Total 1,716,856 1,259,019 Segments Financial Statements Supervisory Board s Report Glossary Contacts 145

136 Financial Statements Notes on financial instruments (44) Risks arising from financial instruments (Risk Report) Overall risk management and structure A bank s ability to extensively capture and measure risks, to monitor them in real time and to manage them is increasingly becoming a decisive competitive factor. To ensure the long-term success of the RZB-Kreditinstitutsgruppe (credit institutions group) and to allow RZB s selective growth in its respective markets, RZB s risk management and risk controlling activities are directed at ensuring the careful handling and professional management of credit and country risks, market and liquidity risks, equity risks and operational risks. In particular, RZB s risk management concept takes into account the legal framework provided by the Austrian Bankwesengesetz (BWG: banking act) and the requirements imposed on banks with regard to the limiting of banking risks, whereby special consideration is given to the type and scale of the particular transaction. The Managing Board of Raiffeisen Zentralbank is responsible for the implementation of risk policy as is appropriate to each type of risk. RZB s risk policy is an integral part of its overall bank management procedures, which means that earnings and risk management in all divisions are systematically linked. The stipulation of risk policy, changes therein and its integration into overall bank strategy and bank management procedures are recorded and imparted within the RZB-Kreditinstitutsgruppe so that similar risk management procedures can be applied throughout the group. Risk policy encompasses plans for the development of the bank s business as a whole, among other things according to industry focus, geographical distribution and segmental subdivision as well as according to exposure size class. In particular, the Managing Board and Supervisory Board lay down limits for all pertinent risks, and they limit agglomerated risks by setting lower and upper limits for major exposures. The Managing Board of Raiffeisen Zentralbank decides which procedures are to be employed in the capturing, measuring and monitoring of risks and defines the associated regulatory framework. RZB measures all risks on a Group-wide basis applying a value-at-risk (VaR) approach. The Managing Board is supported in those tasks by independent risk-controlling and risk management units and dedicated committees. The Risk Management Committee (RMK) reports directly to the Managing Board on a monthly basis and assesses the current risk situation with reference to the risk-bearing capacity of the RZB-Kreditinstitutsgruppe and the commensurate risk limits. It assists the Managing Board with the allocation of the risk budget and with risk management. As a cross-divisional body, the RMK is responsible for the ongoing refinement and implementation of means of risk measurement and the refinement of the instruments of management and for the maintenance and updating of the regulatory framework Preface Survey of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

137 Financial Statements Interest-rate risk and risks arising from the structure of the balance sheet are evaluated by the Assets/Liabilities Committee. The Credit Committee assesses credit risks and the effectiveness of risk management. The Risk Management Department is a service unit that performs the central and independent risk controlling functions required by the Bankwesengesetz (BWG: banking act). This department s responsibilities consist of drawing up and implementing the common Group-wide risk management guidelines, Group-wide capturing of all risks (credit, country, equity and market risks, operational risks) on a VaR basis, and making impartial risk profile reports to the Managing Board as a whole and to those responsible for individual business divisions. The aggregation of those risks into an assessment of overall banking risk and the weighing of that risk against RZB s risk-bearing capacity also provides the basis for risk-adjusted capital allocations and performance measurement. Risk-bearing capacity and managing overall banking risk Once each quarter, the available covering assets and funds (earnings, reserves, equity) are compared with RZB s aggregated risk on a value-at-risk basis in a multistage process. RZB s risk-bearing capacity thereby sets a ceiling on its aggregated overall banking risk. In addition to actual measured risk, existing risk limits are also taken into account. When estimating unexpected losses on an annual basis (so-called economic capital), RZB employs a confidence interval of per cent. That figure is based on the probability of default implied by RZB s rating. The purpose of calculating economic capital is to ascertain the amount of capital required for the bank s continued existence on a going concern basis even applying extreme-loss scenarios. Based on that level of risk, RZB can then carry out a risk-adjusted performance measurement (RAPM). That in turn is used as a parameter in overall bank management and for the associated capital allocations. Economic capital is currently calculated division-by-division. Further extension of this management instrument is in hand. Individual risk types in relation to RZB s economic capital on 31 December 2003: Country risk 5% Market risk 8% Operational risk 13% Equity risk 10% Credit risk 64% Segments Financial Statements Supervisory Board s Report Glossary Contacts 147

138 Financial Statements In parallel with that procedure, risk (VaR) is also calculated on the basis of a confidence interval of 99 per cent. The resulting figure is likewise weighed against a commensurate estimate of risk-bearing capacity. Market risk RZB defines market risk as the risk of possible losses arising from changes in the market due to fluctuating or changing interest rates, foreign exchange rates, share prices and prices in general. This risk category encompasses both trading book and banking book positions. Risky positions are the result either of business done for customers or of RZB s deliberate assumption of positions and are managed by the Treasury and Investment Banking Divisions. RZB approves, measures, monitors and manages all market risks by setting a variety of limits. The overall limit is set by the Managing Board as a whole on the basis of the bank s risk-bearing capacity and income budgeting. This limit is apportioned on the basis of a coordinated proposal made by the particular department, Central Risk Management and the responsible member of the Managing Board. The individual limits set at book level will vary according to the different risk factors. Besides value-at-risk (VaR) limits, those limits may include volume and position limits as well as sensitivity limits (basis-point value, delta, gamma, vega) and stop-loss limits, depending on the type of transaction. Options may only be entered into by appropriately trained dealers. Positions and limits undergo daily scrutiny throughout the Group. Value-at-risk is of central importance in setting limits. It is calculated daily for Raiffeisen Zentralbank and weekly for RZB as a whole using a variance-covariance matrix and applying a confidence interval of 99 percent. Options are captured using delta-gamma approximations. Market data are taken from the preceding year applying a retention period of 10 days. The informative value and reliability of the value-at-risk approach based on past market developments for Raiffeisen Zentralbank are checked daily using appropriate backtesting. The ascertained value-at-risk figures forecast maximum losses under normal market conditions but do not provide any specific information about the effects of exceptional extreme market movements. To take such events into account, RZB carries out weekly defined stress tests that capture the biggest daily market movements in the preceding five years. That procedure allows the simulation of crisis situations and of major fluctuations in market parameters and the application of those simulations to positions. The results are an important substructure for the management of risks. Risk figures (99%, VaR, 10-day) for market risk in trading books, by risk type: 000 VaR on 31/12/2003 Average VaR Minimum VaR Maximum VaR Interest-rate risk 4,327 13,790 4,327 21,370 Currency risk 18,817 15,564 7,730 20,906 Price risk 2,049 1, , Preface Survey of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

139 Financial Statements RZB uses the standard methodology within the meaning of the Capital Adequacy Directive to calculate its own funds requirement for the trading book. RZB s management and monitoring of market risks and, in particular, the calculation of the associated own funds were audited by Oesterreichische Nationalbank (OeNB: Austrian national bank) in The results of the audit were satisfactory. Alongside value-at-risk measurement, interest-rate risk in the banking book is also estimated using classical means of capital and interest maturity analysis. Furthermore, because of the special importance and complexity of interest-rate risk in the banking book, RZB also employs interest-income scenarios and simulations. Managing the structure of the Balance Sheet is a core task of Central Treasury and of the local banks, which receive assistance from the Assets/ Liabilities Committee in the performance of that task. Since 2002, interest-rate risk has been the subject of quarterly reporting within the scope of the interest-rate risk statistics submitted to the supervisory authorities. The reports also capture the change in the present value of the banking book as a percentage of own funds in line with the requirements of Basel II. Interest maturity gaps at RZB as of 31 December 2003 ( 000): Maturity gap 6 12 Mon 1 2 Yr 2 5 Yr > 5 Yr EUR 2,628, , ,397 (381,158) USD 850,060 (47,265) (155,740) (5,434) JPY 3,174 36,998 (18) CHF 132,025 (8,302) 469 Other (122,189) 88, ,745 95,802 The change in the present value of RZB s banking book in the period ended 31 December 2003 in 000 given a one-basis-point simultaneous increase in interest rates: Change in present value 6 12 Mon 1 2 Yr 2 5 Yr > 5 Yr EUR (572.1) (156.2) (9.6) USD (135.2) (7.1) JPY (0.4) (7.1) 0.0 CHF (9.5) 1.3 (0.4) (0.0) Other 9.8 (3.0) (56.6) (53.0) Credit risk Credit risks within the RZB-Kreditinstitutsgruppe consist mainly of the default risks that arise from business with retail and corporate customers, other banks and sovereign borrowers. Default risk is the risk that a customer will not be able to fulfil contractually agreed financial obligations. However, one also distinguishes between migration risks (caused by deteriorations in customers creditworthiness) and country risks. Country risks include transfer and convertibility risks and political risk. RZB s proactive management of country risks takes place on the basis of the country risk policy laid down by the Managing Board (as prepared Segments Financial Statements Supervisory Board s Report Glossary Contacts 149

140 Financial Statements by the Country Risks Committee). The Country Risks Committee is made up of representatives of the various divisions and Risk Management. The measurement of risks associated with sovereign institutions is based on a ten-class rating model that captures both macroeconomic factors and qualitative indicators. Each country limit takes into account transfer risks arising from transactions net of any third-country collateral. Loans and advances to banks and customers inclusive of securities and off-balance-sheet transactions broke down by region (country risk) as follows: Per cent 2002 Per cent Austria 18,100, ,162, European Union 14,297, ,453, Central and Eastern Europe 22,573, ,253, Far East 4,539, ,341, North America 2,007, ,909, Other 2,620, ,270, Total 64,139, ,390, Raiffeisen Zentralbank s credit risks are monitored and analyzed both on an individual loan and customer-by-customer basis and on a portfolio basis. Credit risk management and lending decisions are based on the credit risk policy approved by the Managing Board. Besides new lending, the areas to which lending decisions pertain also include overdrafts, increases in credit lines, renewals and risk-relevant changes in circumstance compared with the time an original decision to lend was made (e.g. with regard to collateral, purpose of loan) as well as the setting of limits for particular borrowers (e.g. issuer limits) and equity participations. Depending on the type, scope, complexity and risk content of the credit exposure, two votes of approval from Front Office and Back Office are always required for a loan to be granted and to ratify the regular re-evaluation of counterparty risks within the RZB-Kreditinstitutsgruppe. In the event that the individual authorized parties vote differently, the structure of authorities within the group provides for escalation to the next level of authority. RZB s internal system for controlling credit risks encompasses every form of monitoring measure that is directly or indirectly integrated into the processes that require monitoring. Against the background of the new capital adequacy framework for banks that is currently coming into being (Basel II), the seamless management, monitoring and control of credit risks within the RZB-Kreditinstitutsgruppe are thus assured. A separate Work-Out Unit is responsible for processing troubled loans. It mainly handles medium-sized to large cases. However, troubled loans are also handled by RZB s in-house Legal Department and/or with the help of external specialists (working together with the Work-Out Unit). The Work-Out Unit plays a decisive role in charting and analyzing provisions for possible loan losses (write-downs, value adjustments, provisioning), making it possible to reduce the amount of losses arising from troubled loans. All cases in which restructuring or settlements take place are analyzed by Raiffeisen Zentralbank to ascertain their causes. Lending processes are then adapted as necessary on the basis of the results of such analyses Preface Survey of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

141 Financial Statements The RZB-Kreditinstitutsgruppe employs risk-classification procedures for assessing default risk (rating procedures, scoring models) when assessing creditworthiness so as to provide independent assessment of credit risk (as required among others by Basel II) and, in future, to calculate regulatory own funds using an internal ratings based approach (IRB). The analysis of customer creditworthiness is thus at the heart of credit risk management. The rating models for corporate customers and financial institutions rank creditworthiness in ten classes. They are employed throughout the Group. In addition, a separate rating model currently in trial operation has been developed for special financing transactions. In future, it too is to be used to implement the IRB approach throughout the RZB-Kreditinstitutsgruppe. All of the bank s default definitions have been adapted in readiness for the IRB approach and the revised definitions have been applied thought the RZB-Kreditinstitutsgruppe within the scope of its Basel II project. According to the definition employed by the RZB-Kreditinstitutsgruppe, default takes place if a customer is overdue with respect to a material financial obligation to a bank for at least 90 days, if the customer is the subject of insolvency or similar proceedings, if a value adjustment or direct write-down has been carried out to a customer account receivable, or if Credit Risk Management have adjudged a customer account receivable to be not wholly recoverable and the Work-Out Unit is considering nursing the customer s account. A separate rating and defaults database was set up to capture and evaluate customer defaults within the scope of the Basel II project. It is to be put into operation for backtesting purposes within the RZB-Kreditinstitutsgruppe at the end of Migration risk will be measured using the credit metrics method, and additional portfolio assessments will also be carried out. In addition to a breakdown of customer creditworthiness, a breakdown into industrial segments will also be carried out in accordance with ÖNACE classification rules. The following figures detail loans and advances to customers inclusive of securities as well as RZB s off-balance-sheet transactions: Per cent 2002 Per cent Manufacturing 7,705, ,498, Retailing and wholesaling 6,352, ,518, Credit and insurance 5,543, ,965, Public administration, social insurance 5,411, ,368, Real estate 4,098, ,045, Private households 2,701, ,040, Transport and telecommunications 1,578, ,769, Construction 1,253, ,465, Energy and water utilities 851, ,067, Mining and quarrying 643, , Agriculture and forestry 382, , Other 262, , Total 36,784, ,277, Segments Financial Statements Supervisory Board s Report Glossary Contacts 151

142 Financial Statements Equity risk The banking book also contains risks arising from listed and unlisted equity participations. They are captured separately under this risk heading. The methodology used for the value-at-risk measurement and risk-capital assessment of equity participations is comparable to the methodology used to capture the price risks of shareholdings. However, in the light of the longer-term strategic nature of equity participations, annual volatilities based on periods of observation of several years are also brought into the calculation. RZB does not include strategically and operatively controlled Group subsidiaries under this risk heading because their risks are calculated with precision under the other risk headings during consolidation and are captured by that process. Liquidity risk RZB defines liquidity risk as the risk that the bank could be unable to meet its current and future financial obligations in full or in good time. The tasks of managing liquidity and liquidity risk and, in turn, of ensuring the bank s solvency at all times are performed both centrally by the Treasury Division in Vienna and on a decentralized basis by the local banks. An internal monitoring system records and analyzes cash flows by currency both for each location and globally on a weekly basis. The bank maintains extensive liquid holdings of securities to ensure its liquidity in various currencies, carries out liquidity balancing at regular intervals and makes cash-flow forecasts. Operational risks In line with Basel II, RZB defines operational risk as the risk of unexpected losses resulting from inadequate or failed internal processes, people and systems or from external events. As is the case with other types of risk, the principle of functional separation into risk management and risk controlling is also applied to operational risk. Based on the existing rough approximation of operational value-at-risk, the bank s own historical data for each defined category and the requirements that will be imposed by the new Capital Accord, RZB is working on the refinement of its quantification methods to allow it to generate more precise predictions regarding distributions of incidences and loss volumes. The use of questionnaire-based Risk Control Self Assessment (RCSA) as a qualitative evaluation tool will be supplemented by quality management and process optimization projects designed above all to allow the early detection of flaws Preface Survey of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

143 Financial Statements (45) Derivative financial instruments The total volume of unsettled derivative financial instruments broke down as follows on 31 December 2003: Nominal amounts by maturity Fair values Up to From more than More than year 1 to 5 years 5 years Total Positive Negative Total 88,684,131 25,223,386 12,898, ,805,700 2,433,231 (2,195,821) a) Interest-rate contracts 48,670,733 23,952,517 12,714,094 85,337,344 1,219,725 (1,029,874) OTC products: Interest swaps 44,188,171 20,790,022 10,131,700 75,109,893 1,194,019 (1,001,197) Interest futures 3,420, ,635 3,705,563 5,500 (7,439) Interest options buys 84, ,935 1,124,019 2,073,811 19,929 Interest options sells 385,291 1,770,539 1,301,475 3,457,305 (18,943) Products traded on a stock exchange: Interest futures 591, , , , (2,295) b) Exchange-rate and gold contracts 39,292,259 1,239,633 58,903 40,590,795 1,023,041 (1,031,062) OTC products: Currency and interest swaps 595, ,543 53,377 1,475,042 37,449 (41,488) Forward exchange deals 36,387, ,917 5,526 36,776, ,134 (962,992) Currency options buys 1,083,885 10,488 1,094,373 19,051 Currency options sells 1,183,212 18,685 1,201,897 (26,123) Products traded on a stock exchange: Currency futures 42,547 42, (459) c) Securities-related contracts 721,139 31, , , ,465 (134,885) OTC products: Share-/index-related options buys 208,649 24, , , ,169 Share-/index-related options sells 12, ,525 29,432 (5,016) Products traded on a stock exchange: Share/index futures 59, ,632 33,326 (47,712) Share/index options 441,186 5, ,330 10,969 (82,156) Segments Financial Statements Supervisory Board s Report Glossary Contacts 153

144 Financial Statements The total volume of unsettled derivative financial instruments broke down as follows on 31 December 2002: Nominal amounts by maturity Fair values Up to From more than More than year 1 to 5 years 5 years Total Positive Negative Total 53,493,183 22,623,857 10,903,737 87,020,777 1,811,853 (1,550,555) a) Interest-rate contracts 32,208,384 21,923,904 10,892,261 65,024,549 1,393,163 (1,081,450) OTC products: Interest swaps 22,222,972 18,090,381 10,588,277 50,901,630 1,374,188 (1,043,498) Interest futures 4,976,882 1,168,109 6,144,991 14,501 (23,943) Interest options buys 608, ,096 74,474 1,135,297 4,367 Interest options sells 1,926, ,977 77,042 2,600,809 (6,446) Products traded on a stock exchange: Interest futures 2,473,013 1,616, ,468 4,241, (7,563) b) Exchange-rate and gold contracts 21,099, ,337 11,476 21,784, ,130 (439,363) OTC products: Currency and interest swaps 1,127, ,109 4,849 1,370,974 46,317 (63,051) Forward exchange deals 18,631, ,142 6,627 19,022, ,646 (355,565) Currency options buys 615,587 23, ,548 16,350 Currency options sells 686,358 26, ,483 (20,354) Products traded on a stock exchange: Currency futures 39,060 39, (393) c) Securities-related contracts 185,665 25, ,281 33,560 (29,742) OTC products: Share-/index-related options buys 27,010 24,063 51,073 25,004 Share-/index-related options sells 6, ,780 (605) Products traded on a stock exchange: Share/index futures 35, , (1,057) Share/index options 116, ,804 8,255 (28,080) Preface Survey of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

145 Financial Statements (46) Fair values of financial instruments Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm s length transaction. Insofar as market prices were available (which was mainly the case for securities and derivative instruments traded on stock exchanges and functioning markets), they were used. All other financial instruments were valued using internal measurement models, including in particular present value models or accepted option price models, or use was made of external expert opinions (e.g. in the case of tangible fixed assets held for investment). Fixed-interest receivables from and payables to banks or customers were only remeasured to fair values different from their carrying amount on the Balance Sheet if they had a remaining term of more than one year. Variable-rate receivables and payables were only taken into account if they had an interest rollover period of more than one year. Only in those cases does discounting based on an assumed interest rate in line with market rates have a significant effect. Carrying 2003 Carrying Fair value amount Difference Fair value amount Difference Assets Loans and advances to banks 19,124,721 19,152,263 (27,542) 14,989,663 15,028,039 (38,376) Loans and advances to customers 22,265,085 22,179,846 85,240 19,862,042 19,785,244 76,798 Financial investments 3,284,072 3,240,436 43,636 2,873,704 2,822,752 50,952 Intangible and tangible fixed assets 700, ,860 39, , ,817 28,184 Liabilities Deposits from banks 27,400,268 27,422,997 (22,729) 23,508,330 23,471,353 36,977 Deposits from customers 16,965,643 16,990,216 (24,573) 12,664,095 12,673,091 (8,996) Liabilities evidenced by paper 3,599,673 3,506,174 93,499 4,573,382 4,410, ,186 Subordinated capital 1,073,288 1,028,402 44,886 1,020, ,179 74,762 Segments Financial Statements Supervisory Board s Report Glossary Contacts 155

146 Financial Statements (47) Material differences between IFRS-compliant consolidated financial statements and consolidated financial statements drawn up in accordance with Austrian accounting standards According to 59a BWG, consolidated financial statements drawn up in accordance with internationally accepted accounting principles establish an exemption from the obligation to draw up consolidated statements of accounts in accordance with BWG if those consolidated financial statements conform to the provisions of the EEC Directive on the Annual Accounts and Consolidated Accounts of Banks and Other Financial Institutions and satisfy the requirements of 245 a Abs. 1 Z 2 bis 5 and Abs. 2 HGB (commercial code). The Auditor must certify that the requirements under 59a BWG have been satisfied so that the IFRS-compliant consolidated financial statements of Raiffeisen Zentralbank satisfy the statutory requirements regarding accounting and reporting in Austria. The purpose of financial statements drawn up in accordance with IFRS is to provide information about the assets, financial and earnings position and cash flows of an enterprise in order to give present and prospective investors relevant data upon which to base investment decisions. Because of the differing goals of IFRS and HGB (or BWG), there are also a number of material differences in accounting and valuation principles and in the extended duties of disclosure. Financial statements drawn up in accordance with IFRS comprise an Income Statement, a Balance Sheet, a Statement of Changes in Equity, a Cash Flow Statement and Notes. IFRS does not lay down any mandatory format for the balance sheet or income statement. A condensed format for the sake of clarity combined with suitable and comprehensive information in the Notes provides better information content for the reader. Measurement policies such as the principle of conservatism, in particular the so-called imparity realization principle and the reversed decisiveness of the tax balance sheet, are specific to Austrian legal standards and are only of limited applicability under IFRS. The Consolidated Group within the meaning of IFRS is more broadly defined than under HGB because non-financial interests must also be included if a controlling interest exists. The number of companies accounted for using the equity method is smaller than under HGB because Austrian commercial law requires that unconsolidated subsidiaries be included using the equity method because of their minor significance, whereas IFRS requires that they be accounted for at cost in conformity with the materiality principle. Loans and advances to banks and customers are recognized on a gross basis under IFRS and remeasurements are shown as a separate item Provision for possible loan losses on the assets side of the balance sheet. Securities shown as accounts receivable pursuant to BWG are capitalized under the pertinent balance-sheet items pursuant to IFRS Preface Survey of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

147 Financial Statements IAS 39 divides securities into the following categories: financial investments held-to-maturity loans and receivables originated by the enterprise available-for-sale financial assets financial assets or liabilities held for trading Financial assets held-to-maturity are recognized at amortized cost and recorded under Financial investments. That is similar to the treatment of Securities classified as fixed assets under HGB. Securities that are taken over directly in the course of an issue ( loans and receivables originated by the enterprise ) are recognized and measured like securities held-to-maturity. Securities that are neither held for trading nor financial investments i.e. that are available-for-sale are recorded under Other available-for-sale financial assets and remeasured to fair value, whereas HGB applies the strenges Niederstwertprinzip (principle of capitalization at the lower of cost and market). Remeasurements are recognized in the income statement. We did not make use of the option of carrying net remeasurements to retained earnings. Instruments held for trading are measured at fair value under IFRS, whereas Austrian commercial law also permits the application of the strenges Niederstwertprinzip. Financial assets and liabilities held for trading are shown under Trading assets or Trading liabilities. Derivative instruments are all measured at fair value under the provisions of IAS 39, whereas HGB requires the capitalization of derivative instruments in the banking book using the accrued-interest method (whereby an entry for accrued interest takes place but the instrument itself is not remeasured). IFRS and HGB do not differ with respect to the measurement of derivative instruments in the trading book. According to IFRS, intangible fixed assets originated by the enterprise must be capitalized if they satisfy certain requirements. HGB prohibits capitalization. IFRS requires the capitalization of goodwill acquired against payment and its straight-line amortization over its expected useful life. Offsetting against retained earnings as allowed by HGB is not allowed by IFRS. Provisions for retirement benefit commitments and similar obligations must be measured using the projected unit credit method under IAS 19, whereas HGB requires the use of a static accumulation method. When calculating provisions for so-called social capital, future increases in salary are taken into account on a career trend basis. The factor used in the calculation of present value is based on the long-term yield on industrial and government bonds. Under IFRS, temporary differences between the IFRS-compliant balance sheet and the tax base and tax loss carryforwards must be shown as deferred tax assets or liabilities. Segments Financial Statements Supervisory Board s Report Glossary Contacts 157

148 Financial Statements Under HGB, temporary differences between the commercial balance sheet and the tax base must be recognized on the balance sheet if a deferred tax liability results but can be recognized on the balance sheet, voluntarily, if a deferred tax asset results. (48) Listed securities within the meaning of 64 BWG Listed Unlisted Listed Unlisted Debt securities and other fixed-interest securities 4,085, ,703 3,347, ,186 Shares and other variable-yield securities 294,240 11, ,831 12,718 Equity participations 132,356 52,358 (49) Volume of the trading book within the meaning of 22 BWG Securities 2,275,068 2,385,486 Other financial instruments 76,220,024 26,263,527 Total 78,495,092 28,649, Preface Survey of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

149 Financial Statements (50) Regulatory own funds The own funds of the RZB-Kreditinstitutsgruppe within the meaning of Bankwesengesetz (Austrian banking act) broke down as follows: Tier 1 capital (core capital) 2,108,598 1,967,611 Tier 2 capital (additional own funds) 923, ,718 Less interests in banks and financial institutions (66,934) (68,884) Eligible own funds 2,964,788 2,755,445 Tier 3 capital (short-term subordinated own funds) 131, ,096 Total own funds 3,096,731 2,868,541 Own funds requirement 2,431,093 2,237,828 Excess own funds 665, ,730 Excess cover ratio in per cent Core capital ratio in per cent Own funds ratio in per cent The core capital ratio is based on the risk-weighted basis of assessment pursuant to 22 BWG. The own funds requirement was made up as follows: Risk-weighted basis of assessment pursuant to 22 BWG 27,971,115 26,446,803 Thereof 8 per cent minimum own funds requirement 2,237,689 2,115,744 Own funds requirement for the trading book under 22b Abs. 1 BWG 160,588 99,791 Own funds requirement for open currency positions under 26 BWG 32,816 22,293 Total own funds requirement 2,431,093 2,237,828 Segments Financial Statements Supervisory Board s Report Glossary Contacts 159

150 Financial Statements (51) Average number of staff The average number of staff during the financial year broke down as follows: White collar 19,896 15,056 Blue collar Total 20,042 15,235 When calculating those averages, we took into account newly integrated companies weighted on a prorated basis according to the time of their first-time consolidation. (52) Expenditure on severance payments and retirement benefits Expenditure on severance payments and retirement benefits broke down as follows: Members of the Managing Board and senior staff 5,829 6,834 Other employees 4,260 7,388 (53) Remuneration of board members The members of the Managing Board and the Supervisory Board were remunerated as follows: Managing Board 2,803 2,912 Supervisory Board Former Managing Board members and their surviving dependents 907 1, Preface Survey of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

151 Financial Statements (54) Boards and officers The company s Managing Board was made up as follows: Walter Rothensteiner, Chairman and CEO Herbert Stepic, Vice-Chairman and Deputy CEO Karl Sevelda Karl Stoss Manfred Url The elected Supervisory Board was made up as follows in 2003: Presiding Committee Christian Konrad, President,, Generalanwalt of Österreichischer Raiffeisenverband and Chairman of the Supervisory Board of Raiffeisenlandesbank Niederösterreich-Wien Georg Doppelhofer, Vice-President, CEO of Raiffeisenlandesbank Steiermark Fritz Hakl, Vice-President, CEO of Raiffeisen-Landesbank Tirol Ludwig Scharinger, Vice-President, CEO of Raiffeisenlandesbank Oberösterreich Ordinary Members Klaus Buchleitner (from 26 June 2003), Chairman of the Managing Board of RWA Raiffeisen Ware Austria Manfred Holztrattner, CEO of Raiffeisenverband Salzburg Julius Marhold, CEO of Raiffeisenlandesbank Burgenland Klaus Pekarek, CEO of Raiffeisenlandesbank Kärnten Peter Püspök, CEO of Raiffeisenlandesbank Niederösterreich-Wien Klaus Thalhammer (to 22 September 2003 ), CEO of Österreichische Volksbanken-AG Karl Waltle, Chairman of the Managing Board of Raiffeisenlandesbank Vorarlberg Gottfried Wanitschek, Member of the Managing Board of UNIQA Versicherungen AG Staff Council delegates Franz Hummel, Chairman of the Staff Council Martin Prater, Deputy to the Chairman of the Staff Council Hildegard Svejda, Deputy to the Chairman of the Staff Council Günther Gall (to 31 December 2003) Anton Patek (to 31 December 2003) Helge Rechberger Segments Financial Statements Supervisory Board s Report Glossary Contacts 161

152 Financial Statements State Commissioners: Alfred Lejsek, State Commissioner, Head-of-Department Christian Riemer, Deputy State Commissioner, Ministerialrat The following were members of the Länderkuratorium (federal advisory board): Jakob Auer, Chairman (to 25 June 2003), Chairman of Raiffeisenlandesbank Oberösterreich Wilfried Thoma, Chairman (from 26 June 2003), President of Raiffeisenlandesbank Steiermark Gerhard Ortner, Vice-Chairman (to 25 June 2003), Chairman of the Supervisory Board of Österreichische Volksbanken-AG Josef Riegler, Vice-Chairman (to 25 June 2003), Chairman of Raiffeisenlandesbank Steiermark Franz Pinkl, Vice-Chairman (from 26 June 2003), Chairman of the Supervisory Board of Österreichische Volksbanken AG Jürgen Wagensonner, Vice-Chairman (from 26 June 2003), Chairman of the Supervisory Board of Raiffeisen-Landesbank Tirol Kurt Amann, Chairman of the Supervisory Board of Raiffeisenlandesbank Vorarlberg Hans Malliga (from 4 September 2003), Chairman of the Supervisory Board of Raiffeisenlandesbank Kärnten Franz Romeder, Vice-Chairman of Raiffeisen-Holding Niederösterreich-Wien Sebastian Schönbuchner, Chairman of Raiffeisenverband Salzburg Helmut Thrackl, Chairman of Raiffeisenlandesbank Burgenland Vinzenz Thurn-Valsassina (to 3 September 2003), Chairman of the Supervisory Board of Raiffeisenlandesbank Kärnten (55) Organizational structure of Raiffeisen Zentralbank Product Divisions Customer Divisions Service Divisions Raiffeisen Zentralbank s customer and product divisions intertwine within a matrix. That enhances the customer-orientated transaction of business and cooperation between divisions. In addition, there are service divisions that serve all other divisions. The divisions report to the Managing Board members as follows: 1 Walter Rothensteiner 2 Herbert Stepic 3 Karl Sevelda 4 Karl Stoss 5 Manfred Url Preface Survey of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

153 Financial Statements Customer Divisions Austrian Corporate Customers, 3, Joseph Eberle Multinational Corporate Customers, 3, Peter Bazil Global Financial Institutions & Sovereigns, 2, Martin Czurda Network Banks, Branches, Representative Offices, 2, Verbund (Raiffeisen Banking Group), 5 Product Divisions Corporate Finance, 3, Helmut Breit Customer Services, 3, Günter Kreuzhuber Trade and Export Finance, 2, Peter Lennkh Retail Banking, 2, Christopher Davis Transaction Services, 4, Günther Gall (since 1/1/2004, previously Heinz Wiedner) Treasury, 4, Gerhard Bösch (since 1/3/2004, previously Armin Steppan) Investment Banking/Fixed Income*, 4, Christian Säckl Service Divisions Audit, 1, Robert Tinauer Human Resources, 1, Josef Dellinger Legal and Compliance, 1, Friedrich Sommer Management Services, 1, Gerhard Tanew Participations, 1, Christian Teufl Public Relations, 1, Andreas Ecker-Nakamura, Michael Palzer Tax, 1, Horst Bergmann Group Head Office/Executive Secretariat, 1, 5, Johannes Schuster International Business Units, 2, Heinz Hödl Economics and Financial Market Research, 4, Peter Brezinschek Office and Facility Management, 4, Heinz Essl, Jürgen Scheicher Credit Management, 5, Hubert Figl Marketing, 5, Leodegar Pruschak Organization/IT, 5, Jens Wirsching * Equity business is the domain of Raiffeisen Centrobank. Vienna 12 March 2004 The Managing Board: Walter Rothensteiner Herbert Stepic Karl Sevelda Karl Stoss Manfred Url Segments Financial Statements Supervisory Board s Report Glossary Contacts 163

154 Auditors Certificate Auditors Report We audited the attached Consolidated Financial Statements of Raiffeisen Zentralbank Österreich AG, Vienna, comprising the Balance Sheets as of 31 December 2003 and 31 December 2002, the Income Statement, the Cash Flow Statement and the Statement of Changes in Equity for the financial years from 1 January through 31 December 2003 and from 1 January through 31 December 2002, and the Notes to the Consolidated Financial Statements for the 2003 financial year. Those Consolidated Financial Statements were the responsibility of the enterprise s management. Our responsibility was to give an auditors opinion of those Consolidated Financial Statements on the basis of our audit of the annual accounts. We performed our audit observing the principles governing the proper execution of audits of annual accounts that apply in Austria and the International Standards on Auditing (ISA). Those standards require that the audit be planned and executed in such a way that a sufficiently sound opinion can be reached as to whether the Consolidated Financial Statements are free from material misstatements. The audit included a random-sample based examination of the evidence supporting the amounts and other disclosures in the Consolidated Financial Statements. It also included an evaluation of the accounting principles applied and material estimates undertaken by the enterprise s management as well as an appraisal of the overall testimony contained in the Consolidated Financial Statements. We believe that our audit constituted an adequate basis for our audit opinion. It is our conclusion that the Consolidated Financial Statements do in all material respects provide a true and fair view of the assets and financial condition of Raiffeisen Zentralbank Österreich AG, Vienna, and its subsidiaries as of 31 December 2003 and 31 December 2002, and of its profit position and cash flows in the financial years from 1 January through 31 December 2003 and 1 January through 31 December 2002 in compliance with the International Financial Reporting Standards (IFRS). Under Austrian commercial law, it is also necessary to examine the consistency of Management s Report on the Group with the Consolidated Financial Statements and to ascertain whether the statutory prerequisites for exemption from the obligation to draw up consolidated financial statements in accordance with Austrian law have been satisfied. We certify that Management s Report on the Group is consistent with the Consolidated Financial Statements and that the statutory prerequisites for exemption from the obligation to draw up consolidated financial statements in accordance with Austrian law have been satisfied. Vienna 15 March 2004 KPMG Austria GmbH Wirtschaftsprüfungs- und Steuerberatungsgesellschaft Walter Knirsch Johann Mühlehner Certified Public Accountants and Tax Consultants Preface Survey of RZB Raiffeisen Banking Group Interviews Human Resources Management s Report

155 Supervisory Board s Report Supervisory Board s Report The Supervisory Board of Raiffeisen Zentralbank Österreich AG (Raiffeisen Zentralbank) was in regular meetings kept abreast by the Managing Board of business transactions of note and the development of the bank and its group during the 2003 financial year and performed all the tasks that are incumbent upon it by law and the Articles of Association. KPMG Alpen-Treuhand Wirtschaftsprüfungs- und Steuerberatungs-GmbH, Vienna, examined the Consolidated Financial Statements (Balance Sheet, Income Statement, Notes), Management s Report on the Group and the Annual Financial Statements and Management s Report on Raiffeisen Zentralbank. That examination revealed no grounds for objection and the statutory requirements were satisfied in full, so an unconditional Auditors Certificate could be issued. The Supervisory Board concurs with the Managing Board s reports on the results of the audit for the 2003 financial year and concurs with the proposal regarding the appropriation of Raiffeisen Zentralbank s profit. The Annual Financial Statements of Raiffeisen Zentralbank for 2003 are thus final in accordance with 125 Abs. 2 AktG (companies act). There were numerous changes in the make-up of Raiffeisen Zentralbank s boards during the 2003 financial year. They are described in detail in the Notes to the Consolidated Financial Statements (pages 161 et seq). At this point, we would like in particular to remember our Supervisory Board colleague Klaus Thalhammer, CEO of Österreichische Volksbanken AG, who suddenly and completely unexpectedly passed away on 22 September Raiffeisen Zentralbank, its functionaries and its staff will remember Klaus Thalhammer with fondness. The Supervisory Board thanks and acknowledges the staff of Raiffeisen Zentralbank for their work and constant dedication during Management s excellent performance contributed to the bank s outstanding development and has created a solid foundation for its prosperous orientation in years to come. 31 March 2004 The Supervisory Board Christian Konrad Chairman Segments Financial Statements Supervisory Board s Report Glossary Contacts 165