OF KOMMUNALKREDIT AUSTRIA

Transcription

1 OF KOMMUNALKREDIT AUSTRIA

2 TABLE OF CONTENTS Letter from the CEO I Boards of the company 3 Management Report for the business year Economic framework 5 Situation of the financial economy 5 Economic framework for local authorities 8 Significant events of the business year 9 Other material disclosures 12 Assets, financial position and income 14 Non-financial performance indicators 19 Branch offices 21 Research and development 22 Significant events after the balance sheet date 22 Risk management 23 Internal control and risk management system 40 Sustainability 42 Compliance and money laundering 43 Outlook 44 Report of the Supervisory Board to the Annual General Meeting 47 Separate financial statements of Kommunalkredit Austria AG for the business year Balance sheet of Kommunalkredit Austria AG (Austrian Banking Act) 49 Income statement of Kommunalkredit Austria AG (Austrian Banking Act) 51 Notes to the financial statements of Kommunalkredit Austria AG for the business year Audit opinion 81 Statement by the legal representatives 83

3 LETTER FROM THE CEO Ladies and Gentlemen: I am pleased to present the 2014 Annual Report of Kommunalkredit Austria AG (KA). KA closed the year 2014 with a sound result, reporting an above-budget IFRS profit for the year of EUR 9.0 million before tax and EUR 8.1 million after tax. The result includes a risk provision of EUR 7.0 million for a bond issued by Heta Asset Resolution AG (formerly: Hypo Alpe Adria) and subscribed to by KA in 2006 in a nominal value of EUR 35 million, which is covered by a surety of the Province of Carinthia pursuant to 5(2) of the Holding Act of the Province of Carinthia. KA has a very stable capital position, with own funds in the amount of EUR million and a core capital according to Basel III of EUR million. The total capital ratio increased from 21.8% to 24.8% and the core capital ratio from 15.3% to 18.4%; thus, in a persistently volatile market environment, both ratios are above the regulatory minimum requirements. PwC Wirtschaftsprüfung GmbH issued an unqualified audit opinion on the annual financial statements. Developments in 2014 were strongly influenced by the partial divestiture process of KA, which based on the decision taken by the European Commission (EC) on 19 July 2013 was launched in the second half of the year through a public tender published on 14 August 2014 and reached an important milestone with the signing of the contract on 13 March 2015, as communicated on the same day in an ad-hoc disclosure. The owner of KA, the Financial Markets Holding Company of the Republic of Austria (FIMBAG), accepted the bid submitted by a consortium of buyers consisting of the English company Interritus Limited and the Irish company Trinity Investments Limited for the purchase of its 99.78% share held in KA. The consortium has stated its intention to carry on and extend the activities of KA in the areas of public infrastructure (structuring, advisory services, financing), as well as support scheme management and consulting through KA s subsidiary Kommunalkredit Public Consulting (KPC) in Austria and Europe. The asset quality of KA s credit portfolio is high; 94.9% of the credit exposure is in the investment-grade range; 61.6% of the exposure is rated AAA/AA. The exposure-weighted average rating of the total exposure is AA- according to the S&P rating scale. The nonperforming-loan (NPL) ratio, taking account of the EUR 35 million HETA bond, currently stands at 0.39%. As at 31 December 2014, the KA Group reported total assets according to IFRS of EUR 12.6 billion (2013: EUR 12.3 billion). The slight increase as compared to the previous year reflects the build-up of liquidity toward the end of 2014 in view of the maturity date of a EUR 1 billion bond at the beginning of February, which was redeemed on schedule. Throughout 2014, KA continued to meet its funding needs in the free market entirely without government support. KA s net interest income in 2014 amounted to EUR 22.3 million. The significant increase of EUR 19.0 million compared with the previous year reflects the absence of the negative oneoff effects that had depressed the result for the first half of Net fee and commission income amounted to EUR 16.7 million, mainly comprising the gross revenues of KPC generated in support scheme management and consultancy services in the amount of EUR 16.6 million. I

4 As in previous years, the result according to the Austrian Banking Act / Austrian Company Code was balanced. Thanks to the positive development of business, an amount of EUR 4.8 million was appropriated to the general risk provision pursuant to 57(1) of the Austrian Banking Act. Moreover, as at 31 December 2014, an amount of EUR 32.0 million was reclassified from the risk provision pursuant to 57(1) to the fund for general banking risks pursuant to 57(3) of the Austrian Banking Act. In total, statutory risk provisions pursuant to 57 of the Austrian Banking Act amounted to EUR 40.4 million as at 31 December 2014 ( : EUR 35.5 million). Under the conditions imposed by the EC s amending decision, KA is subject to a prohibition of profit distribution on profit-dependent equity instruments. The activities of KA s subsidiaries are included in the results. Kommunalkredit Public Consulting (KPC), KA s 90% subsidiary, specialises in the management of support programmes and provides advisory services, above all in the fields of environmental protection, water management and energy. The company successfully carried on its comprehensive activities in At the beginning of 2014, KPC took over the operational management of support programmes in the field of protective water management on behalf of the Federal Ministry of Agriculture, Forestry, Environment and Water Management. Under a new contract awarded by the Federal Ministry of Finance this year, KPC is in charge of implementing and managing the crafts bonus programme, a support scheme for private individuals contracting licensed crafts businesses for home improvement work. Across all support programmes, almost 60,700 projects were approved and a total of EUR million in funding was granted in With an underlying investment volume of EUR 2.5 billion, the projects thus supported play an important role in stimulating economic activity at regional and local level. Besides the management of support programmes, KPC successfully acts as a specialised consultant to renowned international organisations and financial institutions, such as the European Commission, the European Bank for Reconstruction and Development (EBRD), the World Bank and Kreditanstalt für Wiederaufbau (KfW). Kommunalnet E-Government Solutions GmbH (Kommunalnet), a 45% subsidiary of KA, is the leading working and information platform for local authorities in Austria. At the end of December 2014, Kommunalnet had 12,905 registered users from over 2,000 Austrian local authorities and associations of local authorities. Thus, Kommunalnet holds a unique position in the Austrian market with a market penetration rate of 94.2%. The development of business in 2015 will be largely determined by the partial divestiture of Kommunalkredit Austria AG (KA). The transaction, in which the consortium of buyers will take over the 99.78% share in KA held by FIMBAG, is expected to be closed around the middle of the year and is subject to approval by the competent bodies of KA as well as the bank regulators, the European Commission and other authorities. The entire business operations of KA, including all its subsidiaries, will be transferred to a newly established company (KA New) by way of a proportionate demerger for new incorporation pursuant to 1(2.2) of the Demerger Act. This includes loans and securities of KA in its present form in the amount of approximately EUR 3.5 billion out of total assets (calculated pursuant to the Austrian Company Code) in the amount of approximately EUR 4.3 billion. The part of KA remaining after this restructuring step (KA Residual), with total assets of approximately EUR 7.0 billion, will be merged into KA Finanz AG (KF). Upon completion of the transaction, KA New will again be in a position to offer its comprehensive expertise in the structuring and financing of public infrastructure projects, as well as in support programme management, to its many customers in Austria and throughout Europe, concentrating its competencies in the core business segments of social infrastructure, energy & environment, and transport. II

5 KA focuses, in particular, on the arrangement and structuring of projects and the provision of finance for the construction phase; to a growing extent, the financing of the operational phase will be syndicated by institutional investors, such as insurance companies or mutual funds. Given the new regulatory provisions and the low interest environment, institutional investors will have a growing need for long-term assets generating stable cash flows. At the same time, restrictive requirements of the Basel III regime, such as the net stable funding ratio, will limit the possibility for banks to carry long-term assets on their balance sheets. KA acts as a link between its customers, the public sector, project sponsors and project developers, as well as institutional investors. On behalf of the entire staff of KA, I should like to thank our shareholders, our Supervisory Board, our customers and our market partners most cordially for their support and excellent cooperation under the challenging conditions of the past year. The Executive Board also wishes to thank all the employees of the bank for their commitment. The bank will continue to address the challenges of the current business year with the utmost energy and dedication. Alois Steinbichler Chairman of the Executive Board III

6 BOARDS OF THE COMPANY EXECUTIVE BOARD Alois Steinbichler Chairman of the Executive Board since 17 November 2009 Helmut Urban Member of the Executive Board Since 1 September 2013 SUPERVISORY BOARD Klaus Liebscher since 17 November 2009 Chairman of the Supervisory Board Member of the Board of Finanzmarktbeteiligung AG (FIMBAG) and former Governor of the Austrian National Bank (OeNB) Adolf Wala since 17 November 2009 Deputy Chairman of the Supervisory Board Member of the Board of Finanzmarktbeteiligung AG (FIMBAG) and former Director General of the Austrian National Bank (OeNB) Helmut Mödlhammer from 17 November 2009 until 27 October 2014 President of the Association of Austrian Municipalities Werner Muhm since 17 November 2009 Director of the Vienna Chamber of Labour and the Federal Chamber of Labour Herbert Paierl from 17 November 2009 until 31 March 2014 Self-employed entrepreneur Stefan Pichler since 28 May 2013 Professor of Banking and Finance at the Vienna University of Economics and Business 3

7 Marc Schimpel (delegated by the Staff Council) since 19 October 2013 Franz Hofer (delegated by the Staff Council) since 17 November 2009 Patrick Höller (delegated by the Staff Council) since 19 October 2013 STATE COMMISSIONER Edeltraud Lachmayer since 1 July 2010 State Commissioner, Federal Ministry of Finance Bettina Horvath since 1 December 2014 Deputy State Commissioner, Federal Ministry of Finance Klaus Öhler from 1 July 2013 until 30 November 2014 Deputy State Commissioner, Federal Ministry of Finance GOVERNMENT COMMISSIONER FOR THE COVER POOL FOR COVERED BANK BONDS Alexander Gruber since 1 November 2014 Government Commissioner, Federal Ministry of Finance Peter Istjan from 1 July 2010 until 31 October 2014 Government Commissioner, Federal Ministry of Finance Peter Brandner since 1 July 2010 Deputy Government Commissioner, Federal Ministry of Finance 4

8 MANAGEMENT REPORT FOR THE BUSINESS YEAR 2014 ECONOMIC FRAMEWORK The recovery of the global economy, which set in around mid-2013, continued during the first months of 2014, but was then followed by a phase of highly divergent developments. While the USA took the lead with its dynamic economic performance, the euro area lagged behind, the main issue being low or even declining rates of inflation. The persistent military conflict in eastern Ukraine, the impact of economic sanctions against Russia and the slowdown of growth in the countries in transition (diminished growth in China, recession in Brazil) resulted in a downward revision of economic forecasts. The latest projections of the Statistical Office of the European Union (Eurostat) were for GDP growth of 1.3% in the European Union (EU), 0.8% in the euro area and 0.4% in Austria in the year 2014, and thus, as a whole, lower than originally expected. For the United States, however, economic growth of 2.2% has been forecast. A positive change of trend in unemployment has been reported both for Europe and the USA: In the American labour market, the rate of unemployment dropped from 7.4% to 6.2% in 2014; similarly, unemployment in Europe fell from 10.8% to 10.2%. In the euro area, the unemployment rate was 11.6% in 2014, down from 11.9% in 2013, mainly as a result of an improving employment situation in the peripheral countries of the EU. Unemployment in Austria, currently at 5.0%, remains low in comparison with the EU average, but has been trending upward since 2013 (4.9%). In line with the European trend, price inflation in Austria slowed down, but remained above the European level. At the end of December 2014, based on the European harmonised consumer price index (HCPI), the Austrian rate of inflation was 0.8%, whereas prices at EU level and in the euro area were decreasing at the rates of -0.1% and -0.2%, respectively. For the time being, there are no immediate signs of an economic recovery in the euro area, even though the weakness of the euro and the low raw material prices ought to stimulate economic activity in the course of the year. For 2015 Eurostat currently forecasts growth rates of 1.4% in the European Union (0.9% in the euro area) and 0.5% in Austria. Thus, hopes for a speedy economic recovery in the EU will take longer to materialise than expected. The US economy, however, is forecast to grow at a rate of 3.1%. SITUATION OF THE FINANCIAL SECTOR In 2014 the global financial markets continued to be influenced mainly by the monetary-policy measures taken by the central banks, above all the European Central Bank (ECB) and the US Federal Reserve System (Fed), as well as the Bank of Japan (BoJ). Reacting to the low level of inflation and sluggish economic growth in the euro area, the ECB further reduced its key lending rate from 0.25% to 0.15% at the beginning of June. Moreover, the ECB launched a new EUR 400 billion credit package for banks ( Targeted Long-Term Refinancing Operations TLRFOs) to stimulate the economy. Through the provision of longterm funding, that is conditional upon the banks lending practice, loan origination in the euro area is to be encouraged. 5

9 At the beginning of September, the ECB reacted to unfavourable economic data with yet another interest rate cut in order to counteract the growing danger of potential deflationary factors. The key lending rate was reduced to a new all-time low of 0.05% per year. Since 11 June 2014, for the first time ever, commercial banks depositing short-term liquidity with the ECB have been confronted with negative interest rates on their deposits. At the end of 2014, the deposit rate was minus 0.20%. As another monetary-policy measure, at the beginning of January 2015 the ECB decided to implement a large-scale government bond buying programme (quantitative easing), which is intended to pump additional liquidity into the market and counteract the risk of deflation in the euro area. The programme, comprising a total volume of EUR 1,140 billion, was launched in March 2015; the ECB plans to purchase government bonds and other securities in the amount of up to EUR 60 billion per month over a period of eighteen months. The Fed confirmed its intention of maintaining the key lending rate within a range of 0% and 0.25% for a longer period of time, but announced a gradual tightening of its monetary policy and completely discontinued its bond buying programme under the policy of quantitative easing in the autumn of While the low level of short-term interest remained relatively stable in Europe and the USA throughout 2014, long-term rates were characterised by falling base rates. The ten-year euro swap rate dropped substantially from 2.17% at the beginning of the year to 0.81% at the end of Over the same period, the thirty-year euro swap rate fell from 2.78% to 1.46%. Long-term yields in the USA declined from 3.03% at the beginning of 2014 to 2.12% at the end of the year (on ten-year US treasury bonds) and from 3.96% to 2.75% (on thirty-year US treasury bonds). The exchange rate of the euro against the US dollar remained relatively high at more than 1.35 throughout the first half of 2014, but declined continuously over the rest of the year, driven by poor economic forecasts for the euro area and the persistent crisis in eastern Ukraine. After a 2014 year-end parity of 1.21, the EUR/USD rate reached its twelve-year low at 1.06 in mid- March The main beneficiaries of the monetary-policy measures of the ECB are the peripheral countries of the EU: After Ireland, Spain was the next country to decide in January 2014 that it no longer needed financial support from the European Stability Mechanism (ESM). In June, Portugal followed suit. This positive development is also reflected in the risk premiums on the government bonds of these countries. In conjunction with the supportive monetary policy of the ECB, it allowed the peripheral countries, except Cyprus, to return to the capital market with new bond issues, which were significantly oversubscribed, at lower yields. For the first time in several years, Greece returned to the capital market, placing several bond issues from April 2014 onwards. However, after the victory of the Syriza party in the Greek parliamentary elections in January 2015, discussions regarding a potential Greek refusal to continue under the European bail-out programme have again taken centre stage. In February 2015, after intensive negotiations, the Greek government and the Euro Group agreed on a temporary extension of the programme until June

10 European Banking Union As one of the core measures of the EU intended to stabilise the financial markets, the negotiators of the European Council and the European Parliament agreed in March 2014 on the foundation of the European Banking Union, which will be based on three pillars: The Single Supervisory Mechanism (SSM) Since 4 November 2014, the Single Supervisory Mechanism (SSM), set up within the organisational structure of the ECB, has been acting as the new supervisory body for the 128 major banks previously supervised by the ECB as well as all banks with cross-border operations. All other banks continue to be subject to regulation by the national supervisory authorities. The Single Resolution Fund (SRF) The Single Resolution Fund (SFR), to be endowed with a total capital of EUR 55 billion within a period of eight years, is to cover the costs of bank resolution, if the contributions by shareholders and lenders are not sufficient. The fund is to be established in 2016 and contributions are to be paid in by banks in the form of a bank levy over a period of eight years. The Single Resolution Mechanism (SRM) Within the framework of the establishment of the Banking Union, a resolution mechanism for banks in financial distress was introduced. The purpose of the Single Resolution Mechanism (SRM) is to ensure the orderly liquidation and closure of banks without placing an undue burden on public budgets. Besides the Single Resolution Mechanism, the Bank Recovery and Resolution Directive (BRRD) was adopted in May 2014, which regulates the reorganisation and resolution of Banks. The Directive was transposed into Austrian law through the Federal Act on the Reorganisation and Resolution of Banks (effective as of 1 January 2015). The Austrian Stability Programme On 23 May 2014 the Austrian Parliament adopted the Federal Budget Framework Act 2015 to The first and foremost priority thereof is budget consolidation. The 2014 budget provides for a federal deficit, defined in accordance with the Maastricht criteria, of 2.8% of GDP, which is to be reduced to 1.5% in By 2016 the target of a structurally nearly balanced budget (structural deficit of 0.4% of GDP) is to be achieved. Currently, a budget deficit of 3.0% in 2014 is being forecast by Statistics Austria and the Austrian Institute of Economic Research (WIFO). The Federal Budget Framework Act provides for an increase of the government debt ratio to 79.2% of GDP by the end of 2014, to be followed by consolidation and a subsequent reduction to 71.5% by the end of On account of the transition from the European System of Accounts (ESA) 1995 to ESA 2010, the Statistical Office of the European Union retroactively re-allocated 1,400 budget items to the government sector. According to forecasts by Statistics Austria and WIFO, this will result in an increase of the debt ratio to 86.9% of GDP in 2014 (2013: 81.2%); a reduction to 82.7% has been projected for

11 ECONOMIC FRAMEWORK FOR LOCAL AUTHORITIES In line with a trend established in recent years, municipal finance in Austria has shown a stable development. Thanks to a policy of strict budgetary discipline, the key figures of municipal finance available for 2013 show a healthy surplus (total revenues minus total expenditure, result according to Maastricht criteria and free funding portion), the level of debt has been further reduced and reserves are on the increase. At the same time, local authorities tended to invest more than in the previous year, thus fulfilling the important role of stimulating the local economy. This is the essential message of the 2014 Municipal Finance Report 1, a publication produced by Kommunalkredit Austria AG (KA) in cooperation with the Association of Austrian Municipalities and the Association of Austrian Cities and Towns. The most important municipal indicators developed as follows: Table: Municipal indicators in EUR million Change Total revenues minus total expenditure 1,550 1, Free funding portion Net lending/borrowing (VRV 2 ) Result according to Maastricht criteria (ESA 3 ) Debt level 11,351 11,358-7 Reserves 1,678 1, Capital expenditure 1,823 1, The local authorities closed the year 2013 with substantial surpluses. The balance of revenues and expenses was the third highest since The free funding portion was just under EUR 500 million. At the same time, the local authorities further reduced their total debt level by EUR -7.4 million and built additional reserves in the amount of EUR +110 million. Municipal investments increased by EUR million. This positive budgetary situation results primarily from an increase in revenues. In 2013 the municipal share in federal tax revenues increased by 4.3% or EUR 237 million. Revenues from municipal sources also increased significantly. These include local rates (+3.3% or EUR 100 million), local charges (+3.1% or EUR 54 million) and income from own services (+2.7% or EUR 40 million). Generating substantial surpluses in their key financials, further reducing their debt levels and building reserves, the local authorities continued their successful course of budget consolidation throughout In view of the moderate macro-economic development forecast for 2015, municipalities may still be expected to close 2014 with positive results, whereas 2015 will be a more challenging year. In this strategic environment, which is characterised by the imperative of budgetary discipline, on the one hand, and the need for municipal infrastructure investments, on the other hand, broadening the basis for public infrastructure financing is of particular importance. As a competence centre for municipal affairs, KA offers its customers a broad range of services and solutions in each of its business segments, i.e. Social Infrastructure, Energy and Environment, and Transport. 1 Available online at 2 Budgeting and Accounting Regulation 3 European System of Accounts ESA 8

12 SIGNIFICANT EVENTS OF THE BUSINESS YEAR During the first full business year after the Amendment Decision of the European Commission (EC) of 19 July 2013 and the resulting discontinuation of new asset-side business, Kommunalkredit Austria AG (KA) showed a satisfactory performance. With an IRFS profit for the year of EUR 9.0 million before tax and EUR 8.1 million after tax, KA outperformed its 2014 budget. The Group s comprehensive income according to IFRS totalled EUR 8.8 million in KA holds a bond issued by HETA Asset Resolution AG (HETA) in a nominal amount of EUR 35 million, which is secured by a surety of the Province of Carinthia pursuant to 5(2) of the Carinthian Provincial Holding Act (Kärntner Landesholdinggesetz). KA assumes a high level of recoverability under the surety, but nevertheless, for prudential reasons, a provision of approximately EUR 6.8 million was booked in the 2014 annual accounts. KA achieved its result thanks to its continued focus on managing its EUR 9.5 billion loan portfolio and on providing financial and advisory services for a broad customer base, as well as its activities in the field of support scheme management. Moreover, active measures were taken to improve the bank s balance-sheet structure. As in previous years, the after-tax result reported pursuant to the Austrian Company Code/Austrian Banking Act was balanced after the appropriation of EUR 4.8 million to risk provisions set up pursuant to 57 of the Austrian Banking Act. In accordance with the conditions imposed through the EC s Amendment Decision of 19 July 2013, the Financial Markets Holding Company of the Republic of Austria (FIMBAG) launched a public tender, inviting bids for KA, on 14 August After completion of a comprehensive due diligence process, an agreement for the sale of KA with total assets according to the Austrian Commercial Code of EUR 4.3 billion was concluded with a buyer consortium (consortium) consisting of Interritus Limited, based in the United Kingdom, and Trinity Investments Limited, based in Ireland, on 13 March The transaction is to be closed by mid An ad-hoc disclosure to that effect was announced on 13 March Amendment Decision of the European Commission (EC) The restructuring plan of the former Kommunalkredit, as approved by the EC on 31 March 2011, provided for the bank to be privatised by 30 June 2013 (closing). As market conditions at that time did not permit the sale of KA in a manner that would have preserved shareholder value, the European Commission in its Amendment Decision of 19 July 2013 accepted the proposal of the Republic of Austria that KA no longer engage in any new lending business. Thus, KA remained in the ownership of the Republic of Austria, managing its assets until their contractual maturity dates and continuing its advisory activities. Since the date of the Amendment Decision, KA has not conducted any new financing business; however, KA is authorised to carry on with the following activities: Continuous full servicing of current financing transactions as well as financing transactions in the bidding phase Market-based funding of the bank (money market, capital market and customer deposit business) Advisory services for the municipal and infrastructure sectors Support scheme management programmes of Kommunalkredit Public Consulting (KPC) The Amendment Decision also allows KA to obtain liquidity or capital support, if need arises, from the Republic of Austria. However, there has been no need for KA to avail itself of this possibility. 9

13 As required by the EC s Amendment Decision, KA is subject to a prohibition of profit distribution on profit-dependent equity instruments. Ad-hoc disclosures to that effect were announced on 31 March 2011 and 19 July Moreover, in return for state aid received, KA is obliged to pay a compensatory own contribution to the Republic of Austria in the amount of its annual surplus otherwise reported. The text of the EC decision, with all confidential data removed, was announced by the EC on 12 January 2014 and can be accessed at details.cfm?proc_code=3_sa_ To date, all requirements of the restructuring programme specified by the EC have been fully met by KA, as was confirmed by the independent Monitoring Trustee in his regular reports to the EC. Partial sale process The EC s Amendment Decision of 19 July 2013 authorises the Republic of Austria to continue efforts to divest the bank, but only in the extent of up to 50% of its total assets of EUR 11.7 billion, according to the Austrian Company Code, as at 19 July 2013, i.e. up to EUR 5.8 billion. As announced through an ad-hoc disclosure on 11 August 2014, FIMBAG, holding 99.78% of the shares of KA in trust for the Republic of Austria, launched a public sale process on 14 August 2014, inviting bids for KA. After a comprehensive due diligence process, a purchase agreement with a buyer consortium (consortium), consisting of Interritus Limited, based the United Kingdom and initiated by Patrick Bettscheider, and Trinity Investments Limited, based in Ireland and managed by the London-based asset management firm of Attestor Capital LLP, on 13 March 2015, providing inter alia for the following: The entire business operations of KA, including all its subsidiaries, will be transferred to a newly incorporated company (KA New) by way of a proportionate demerger for new incorporation pursuant to 1(2.2) of the Austrian Demerger Act (Spaltungsgesetz). This includes loans and securities of the existing KA in the amount of approximately EUR 3.5 billion out of total assets, according to the Austrian Company Code, of approximately EUR 4.3 billion. The part of KA remaining after this restructuring step (KA Residual) with total assets of approximately EUR 7.0 billion will be merged into KA Finanz AG (KF). The entry into effect of the purchase agreement and the execution of the demerger of KA for new incorporation are subject to a number of suspensive conditions and approvals to be granted by the competent bodies of KA, i.e. the Supervisory Board and the Annual General Meeting, as well as the competent bank supervisory authorities, the European Commission and other authorities. The transaction, in which the consortium will take over the 99.78% share in KA New held by FIMBAG, is intended to be closed by the end of the second quarter. Development of business in 2014 KA performed above target in 2014, closing the year with a consolidated IFRS result of EUR 9.0 million (2013: EUR 20.4 million) before tax and EUR 8.1 million (2013: EUR 5.1 million) after tax, after a provision of EUR 6.8 million set up for prudential reasons for an EUR 35 million HETA bond, which is covered by a surety of the Province of Carinthia pursuant to 5(2) of the Carinthian Provincial Holding Act (Kärntner Landesholdinggesetz). 10

14 As in previous years, the bank reported a balanced result pursuant to the Austrian Company Code/Austrian Banking Act. Owing to the positive development of business, EUR 4.8 million were appropriated to the general risk provision pursuant to 57 of the Austrian Banking Act. At the same time, an amount of EUR 32.0 million from the provision set up under 57(1) of the Austrian Banking Act was reclassified into the fund for general banking risks under 57(3) of the Austrian Banking Act. Altogether, general risk provisions pursuant to 57 of the Austrian Banking Act amounted to a total of EUR 40.4 million as at 31 December 2014 ( : EUR 35.5 million). Disbursements of loans based on transactions already committed totalled EUR 99.1 million in 2014 (2013: EUR million). Another EUR 68.4 million has already been committed for disbursement in 2015 and following years. At the same time, low-margin assets in the amount of EUR million and EUR million, respectively, were sold in the secondary market or redeemed prematurely. These proactive measures served to improve the balance sheet structure of the bank. Among the market initiatives launched in 2014, projects under the heading of Infrastructure.Project.Consulting constituted a special priority. Consultancy projects were offered in the fields of wind power, biomass heating plants, street lighting, small-scale hydro power plants, care homes, education, and life-cycle models. Examples worth mentioning include the arrangement and structuring of an Austrian wind farm project generating approximately 30 MW, as well as the design and monitoring of small-scale hydro power projects. In its social infrastructure segment, KA was contracted by a Polish network operator to structure a broadband infrastructure project for Polish municipalities. Within the framework of the GemMIS research project (a municipal management information system), a reporting system to ensure regular monitoring and supervision of municipal projects/investments at intervals of less than one year was designed in cooperation with project partners and implemented for pilot applications. KPC s comprehensive activities in the field of support scheme management were successfully continued and expanded in At the beginning of 2014, KPC took over the operational management of support programmes in the field of protective water management on behalf of the Federal Ministry of Agriculture, Forestry, Environment and Water Management. Under a new contract awarded by the Federal Ministry of Finance this year, KPC is in charge of implementing and managing the crafts bonus programme, a support scheme for private individuals contracting licensed crafts businesses for home improvement work. Across all support programmes, almost 60,700 projects were approved in 2014; 65,000 projects were settled and funding in the amount of EUR million was granted to projects representing a total investment volume of EUR 2.5 billion. A high volume of capital expenditure is particularly important, as it stimulates economic activity at regional and local level. Within the framework of the Austrian JI/CDM programme, KPC s activities in 2014 focused primarily on portfolio management, as the purchasing of CO 2 emission certificates was largely completed. Business in the fields of carbon management and international climate action has shown a highly satisfactory development: KPC was mandated by the Environment Ministry to manage Climate Finance, a programme intended to attract Austrian contributions to the financing of international climate action. Climate Austria, the voluntary carbon compensation platform, achieved good results in

15 In the field of consulting, KPC continued to implement projects at the interface of environmental engineering and economic know-how for renowned clients, such as the European Bank for Reconstruction and Development (EBRD), the World Bank, Kreditanstalt für Wiederaufbau (KfW) and others. The SUDEP project (sustainable urban demonstration projects) is the biggest consultancy project ever won by KPC. Operating on behalf of the European Commission (EC), KPC will develop and implement municipal demonstration projects aimed at reducing energy consumption in Armenia, Georgia, Moldova, Ukraine and Belarus over a period of four years. Risk position KA s risk position remains stable. 94.9% of its credit exposure is in the investment-grade range; 61.6% of the exposure is rated AAA/AA. The exposure-weighted average rating of the total exposure is AA- (according to the S&P rating scale). A risk provision of EUR 1.0 million was set up in 2014 for an exposure of EUR 2.0 million. Moreover, as stated above, KA holds a bond issued by HETA in a nominal amount of EUR 35 million, which is covered by a surety of the Province of Carinthia pursuant to 5(2) of the Carinthian Provincial Holding Act (Kärntner Landesholdinggesetz). KA assumes a high level of recoverability under the surety, but nevertheless, for prudential reasons, a provision of EUR 6.8 million was booked in the 2014 annual accounts. The NPL (non-performing loan) ratio continues to be low at 0.39%. For details on KA s risk management, see page 23ff. OTHER MATERIAL DISCLOSURES Service level agreement between KA and KF Since the demerger in 2009, Kommunalkredit Austria AG (KA) has acted as a service provider for KA Finanz AG (KF). As at 31 December 2014, fourteen staff members of KA have been working for KF on the basis of a staff leasing agreement. They are responsible for portfolio management, risk management and the operational organisation of the company, reporting to the Executive Board of KF. Moreover, KF obtains operational services from KA under a service level agreement SLA). Expenses are charged to KF on the basis of detailed time records and a clearly specified cost base. Clear rules have been set up to avoid conflicts of interest. Reports on compliance are submitted to the Supervisory Board on a regular basis; transactions susceptible to generating a conflict of interest are governed by a special guideline and are subject to approval by the Supervisory Board. Corporate governance and risk management KA has established a clear corporate governance and risk management structure, which is strictly observed. Supervisory Board Four regular Supervisory Board meetings, one extraordinary Supervisory Board meeting, two Audit Committee meetings and one meeting of the Remuneration Committee were held in Pursuant to 29 and 39 of the amendment to the Austrian Banking Act of 5 July 2013, which transposed the provisions of the Capital Requirements Directive (CRD IV) regarding Basel III 12

16 into Austrian law, a Nomination Committee and a Credit Risk Committee were set up as of 1 January 2014, which met once each in Executive Board / Internal audit / Compliance The agenda of the weekly Executive Board meetings comprises decision-making and reporting items, which are recorded in the minutes. Follow-up items are agreed and monitored. The internal audit unit submits monthly reports to the Executive Board and quarterly reports to the Supervisory Board. The compliance unit reports once each quarter to the Executive Board and once a year to the Supervisory Board. ICAAP The bank s risk and ICAAP strategies are reviewed regularly once a year. Issues relating to credit risk, liquidity risk, market risk, operational and other types of risk are dealt with on a structured basis at the monthly Risk Management Committee meetings. Additional committees in charge of issues relating to credit, capital and liquidity meet at least once a week (see also Risk Report page 23ff). European Commission Monitoring Trustee Within the framework of the Amendment Decision taken by the European Commission on 19 July 2013, the commitments which Austria had assumed vis-à-vis the EC on the basis of the EC s first decision of 31 March 2011 KA were partially modified. Prior to the closing of the partial sale (see page 10), KA is still obliged to fulfil the conditions agreed upon between the EC and the Republic of Austria within the framework of the restructuring plan. Compliance is verified by a monitoring trustee, who reports semi-annually to the EC. The reports submitted since 2009 have not given rise to any complaints. Sale of shares in Kommunalnet E-Government Solutions GmbH In December 2014, 5% of the participation in Kommunalnet E-Government Solutions GmbH (Kommunalnet) was sold to Gemeindebund Service GmbH. Thus, the share held by Kommunalkredit Beteiligungs- und Immobilien GmbH (KBI) was reduced to 45%. Following the increase of its share to 45%, Gemeindebund Service GmbH, together with its provincial entities, now holds a total of 55% of Kommunalnet. Legal proceedings KA does not expect any negative impact from current legal proceedings. For details on legal proceedings, see Note

17 ASSETS, FINANCIAL POSITION AND INCOME Financial performance indicators of Kommunalkredit Austria AG according to the Austrian Company Code Table: Selected key financials according to the Austrian Company Code Financial performance indicators of Kommunalkredit Austria AG according to the Austrian Company Code in EUR million Total assets 10, ,794.6 Debt instruments of public bodies and bonds ,229.8 Loans and advances to banks 1, Loans and advances to customers 7, ,363.0 Amounts owed to banks 3, ,942.7 Amounts owed to customers 1, Securitised liabilities 5, ,259.6 Fund for general banking risk pursuant to 57(3), Austrian Banking Act General risk provision pursuant to 57(1), Austrian Banking Act Net interest income General administrative expenses after amounts charged to KF under the SLA Operating result Loan impairment, net valuation and trading result Appropriation to (-) / release of (+) provision pursuant to 57(1), Austrian Banking Act Profit on ordinary activities before tax Appropriation to fund for general banking risks pursuant to 57(3), Austrian Banking Act (reclassified from 57(1), Austrian Banking Act) 1) Profit for the year after tax Key indicators in EUR million or % ) Risk-weighted assets relative to credit risk, according to Basel III 1, ,426.4 Minimum capital requirement Own funds Total capital ratio 24.8% 21.8% CET 1 core capital after deduction of non-eligible components (Tier 1) CET 1 ratio 18.4% 15.3% Number of shares 31,007,059 31,007,059 Data as at (i.e. Basel III / CRR) The separate financial statements prepared in accordance with the Austrian Company Code provide the basis for establishing compliance with the parameters and conditions agreed upon with the European Commission, as well as for coupon payments on profit-dependent equity instruments, i.e. supplementary capital and participation capital. Balance sheet structure As at 31 December 2014, KA reported total assets pursuant to the Austrian Company Code in the amount of EUR 10.5 billion, down by EUR 0.3 billion or 3.1%. The bank s total assets 14

18 dropped in the wake of the EC s Amendment Decision of 19 July 2013 (no new lending business) and as a result of asset sales to improve the balance sheet structure. Loans and advances to customers decreased by EUR 0.4 billion to EUR 8.0 billion as at 31 December This corresponds to a reduction of 4.9% from EUR 8.4 billion as at 31 December Scheduled redemptions of EUR million were booked against new disbursements committed in the amount of EUR 99.1 million. The volume of debt instruments of public bodies and bonds amounted to EUR 0.9 billion as at 31 December 2014, down by EUR 0.3 billion or 26.7% from EUR 1.2 billion as at 31 December Improvement of the balance sheet structure Opportunities arising through market volatilities were used for the buy-back or early redemption of own issues in a total amount of EUR 29.7 million, generating a gain for KA. At the same time, low-margin asset positions worth EUR million were sold and the early redemption of EUR million was agreed upon, which led to an improvement of the income and capital structure. Risk-weighted assets and equity As at 31 December 2014, KA had own funds in the amount of EUR million ( : EUR million); its CET 1 capital amounted to EUR million ( : EUR million). With risk-weighted assets of EUR 1,323.8 million ( : EUR 1,426.4 million), the bank reported a total capital ratio of 24.8% ( : 21.8%) and a CET 1 ratio of 18.4% ( : 15.3%). Thus, KA continues to have a sound capital base. Based on the provisions of CRR (applicable since 1 January 2014), KA is under no regulatory obligation to consolidate its results. Therefore, with the approval of the Financial Markets Authority (FMA), since 1 January 2014 the capital ratios have been calculated in accordance with the provisions of Basel III (CRR I / CRD IV) exclusively on the basis of the separate financial statements prepared pursuant to the Austrian Company Code/Austrian Banking Act. The bank uses the standard approach for the calculation of its risk-weighted assets and its operational risk. Funding structure / Liquidity The situation was stable in 2014, with KA continuing to meet its funding needs entirely without government support. KA s main sources of funding are covered bonds, senior unsecured issues and customer deposits. Additionally, short-term liquidity is raised through ECB tenders, repo transactions and interbank deposits. Total amounts outstanding: in EUR billion Securitised liabilities Amounts owed to customers Amounts owed to banks* * Value as at incl. EUR 1.9 billion utilisation of ECB tenders ( : EUR 1.6 billion) 15

19 KA s funding requirements in 2014 amounted to EUR 2.5 billion and were met primarily through the following funding instruments: Covered bond benchmark issue In February 2014, after completion of a European road show, KA successfully placed a public-sector covered bond in a volume of EUR 500 million with a seven-year tenor and a coupon of 1.625%. There was high demand from international investors and the issue was significantly oversubscribed, with more than eighty orders for a volume of about EUR 1.1 billion. Covered bond private placements In the short-term segment, covered bonds with maturities of between one and three years were placed. In 2014 KA issued four private placements in a total volume of EUR 173 million. Senior unsecured Long-term senior unsecured funding was raised in the capital market through private placements under KA s debt issuance programme and through loans against borrower s notes. In 2014 a nominal amount of EUR 376 million was generated through senior unsecured funding. Amounts owed to customers As at 31 December 2014, the volume of customer deposits, mostly from institutional customers (insurance companies, pension funds, quasi-public enterprises, investment companies), totalled EUR 1.2 billion ( : EUR 1.0 billion). A volume of EUR 733 million was accounted for by deposits with maturities of less than one year, and EUR 495 million by deposits with maturities of more than one year. The bank has no retail business. Customers using the KA Direct Internet platform are mostly municipalities and local authorities as well as municipal and quasi-public enterprises. ECB tender Having utilised the Three-Year Long-Term Refinancing Operations (LTROs) of the ECB in 2012 to a total amount of EUR 1.5 billion, KA gradually reduced the volume in 2013 and 2014 to EUR 1.1 billion and redeemed the full amount at the beginning of The 2014 year-end value of KA s total drawings from the ECB amounted to EUR 1.9 billion ( : EUR 1.6 billion). KA did not participate in the Targeted Long-Term Refinancing Operation ( TLTRO ), the ECB s second long-term tender programme. Cover pool As at 31 December 2014, KA s cover pool had a nominal value of EUR 4.9 billion, with public-sector covered bonds in a nominal value of about EUR 3.8 billion outstanding. The cover pool mainly comprises assets from Austria (81%), Switzerland (8%) and Germany (7%). 75% of the cover pool is rated AAA/AA; a mere 4% of the assets in the cover pool has a rating below A. 16

20 The following diagram shows the maturity profile of the cover pool assets available as collateral for covered bond issues, as well as the development of the portfolio of covered bond issues outstanding. Diagram: Maturity profile of covered bond issues and cover pool EUR billion Cover Pool Within the framework of Moody s covered bond rating, KA undertook to maintain a nominal minimum rate of over-collateralisation of 28%. As at 31 December 2014, the nominal rate of over-collateralisation was 30.3%. The terms of the over-collateralisation arrangement can be downloaded at /DE/Investor%20Relations/Funding/Covered%20Bonds/%c3%9cberdeckungsvereinbaru ng.aspx. Rating KA has Fitch ratings of A in the long-term segment and F1 in the short-term segment. Fitch last confirmed these ratings on 20 February The long-term rating was put on negative outlook on 26 March The reason given for the change was the forthcoming transposition of the Bank Recovery and Resolution Directive (BRRD). The Directive was transposed into national law through the Federal Act on the Reorganisation and Resolution of Banks, which entered into force on 1 January Moody s Investors Service downgraded KA s long-term rating by one notch from Baa3 to Ba1 on 20 June The short-term rating was downgraded from P-3 to NP. As the same time, another eleven Austrian issuers were downgraded in the wake of a bill introduced by the Austrian federal government, and subsequently adopted, regarding the subordinated liabilities of an Austrian credit institution. The rating agreement with Moody s for unsecured funding instruments was terminated by KA prior to the downgrade, effective as of 20 June Therefore, the ratings which continue to be published by Moody s are no longer mandated by KA. The rating for covered bonds was kept and downgraded from Aa2 to Aa3 with review for downgrade on 23 June

21 Income position The 2014 after-tax result for the year pursuant to the Austrian Company Code came to EUR 0.0 million (2013: EUR 0.0 million). As required by the EC s Amendment Decision, KA is subject to a prohibition of profit distribution on profit-dependent equity instruments. Ad-hoc disclosures to that effect were announced on 31 March 2011 and 19 July Moreover, in return for state aid received, KA is obliged to pay a compensatory own contribution to the Republic of Austria in the amount of the profit for the year that would otherwise be reported. The 2014 operating result was negative at EUR -2.4 million, which reflects an improvement of EUR 25.6 million over 2013, when the operating result was depressed by negative one-off effects in the amount of EUR 20.6 million. The income position, presented in accordance with the Austrian Company Code, was influenced by the following material factors: Net interest income KA s net interest income pursuant to the Austrian Company Code amounted to EUR 19.0 million in 2014 (2013: EUR -1.4 million). The significant increase compared with the previous year is primarily due to the absence of the negative one-off effects reported in Net fee and commission income KA s net fee and commission income amounted to EUR -1.1 million in 2014 (2013: EUR -1.0 million), including EUR 1.0 million (2013: EUR 0.9 million) in fee and commission income from the lending business, EUR 0.5 million (2013: EUR 0.1 million) in fee and commission income from other services (mostly advisory services), and EUR -2.6 million (2013: EUR -2.0 million ) in fee and commission expenses, the latter due, above all, to KA s issuing activities on the capital market. Unlike the figure shown in the consolidated IFRS financial statements, fee and commission income pursuant to the Austrian Company Code does not include KPC s gross revenues. Dividend income Dividend income amounted to EUR 1.6 million (2013: EUR 1.0 million), including the dividend paid out by Kommunalkredit Beteiligungs- und Immobilien GmbH (KBI) and by KPC. General administrative expenses Before charges to KF and KPC for services under the SLA, KA s general administrative expenses totalled EUR million (2013: EUR million), down by EUR 0.3 million or 0.8% from the previous year s level. This total comprises personnel expenses of EUR million (2013: EUR million) and other administrative expenses of EUR million (2013: EUR million). Personnel expenses included an increase in personnel provisions in the amount of EUR 2.1 million resulting from the reduction of the actuarial discount rate from 3.25% as at 31 December 2013 to 1.5% as at 31 December 2014 on account of the significantly lower interest rate level. Other administrative expenses decreased by EUR 1.9 million or 15.3% in Income from personnel and other administrative services charged to KF and KPC, recognised as other operating income, amounted to EUR 11.5 million (2013: EUR 12.3 million). Thus, the resulting net amount of general administrative expenses after charges for services to KF and KPC was EUR million (2013: EUR million), up by EUR 0.6 million or 2.6% from the previous year. 18