Annual Report 2016 Preserving the Valuable Creating the New Palace Christalnigg Is a Special Jewel of Baroque Art
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ANNUAL REPORT 2016 Preserving the Valuable Creating the New Palace Christalnigg is a special jewel of Baroque art. For a long time, it was the meeting place and hub of public life in Klagenfurt and has been the property of BKS Bank for the past 70 years. From 2014 to 2016 it was restored with great care. The stucco ceiling covers an area of around 600 square metres. Estimates places its erection at some time from 1730 to 1740. It is said to have been created by the then very famous stucco plasterer Kilian Pittner and his son Marx Josef who also designed the stucco for the Porcia Castle and the Klagenfurt Cathedral. The restoration of the stucco ceiling was done applying very fine artwork in traditional techniques and in close cooperation with the Federal Monuments Office. TABLE OF CONTENTS TABLE OF CONTENTS BKS BANK AT A GLANCE . 6 PREFACE BY THE CHAIRWOMAN OF THE MaNagEMENT BOARD . 7 CORPOraTE GOVERNANCE REPORT . 15 Corporate Governance at BKS Bank . 16 Management Board and Supervisory Board . 19 Remuneration Report . 35 Independent Assessment of the Functionality of the Risk Management . 40 Accounting and Disclosure . 41 Compliance Management System . 42 Measures to Promote Women . 44 Report of the Chairman of the Supervisory Board . 46 INVESTOR RELATIONS . 53 The BKS Bank’s Shares . 54 Investor Relations Communication . 58 CORPOraTE STraTEgy . 61 GROUP MaNagEMENT REPORT . 77 Economic Environment . 78 Management and Organizational Structure . 83 Shareholders . 86 Markets of BKS Bank . 89 Resources and Services . 94 Consolidated Companies and Investments . 100 Assets and Financial Position . 106 Result of Operations . 110 Segment Reports . 115 Consolidated Own Funds . 130 Risk Report . 132 Sustainability and Non-financial Performance Indicators . 176 Outlook . 188 –4– TABLE OF CONTENTS CONSOLIDATED FINANCIAL STATEMENTS PUrsUANT TO IFRS . 193 Table of Contents - Notes . 194 Statement of Comprehensive Income of the BKS Bank Group for the Financial Year 2016 196 Balance Sheet of the BKS Bank Group for the Year Ended on 31 December 2016 . 198 Statement of Changes in Equity . 199 Statement of Cash Flows . 200 Notes to the Consolidated Financial Statements of BKS Bank . 201 Corporate Bodies . 236 Closing Remarks of the Management Board . 237 Profit Distribution Proposal . 238 Auditor’s Report . 239 SUPPLEMENTary INFORMATION . 245 Shareholder Structure of the 3 Banken Group . 246 History of Our Company . 247 Glossary . 248 List of Abbreviations . 256 Forward-looking Statements / Publication Information . 259 Minimal deviations of the values in the tables and charts are due to rounding differences . –5– BKS BANK AT A GLANCE THREE-YEAR PERFORMANCE COMPARISON INCOME STATEMENT in €m 2014 2015 2016 Net interest income 157 .3 166 .4 154 .2 Charges for losses on loans and advances -49 .5 -48 .5 -31 .0 Net fee and commission income 47 .6 53 .0 48 .8 General administrative expenses -105 .8 -105 .1 -106 .4 Profit for the year before tax 54 .1 60 .7 49 .8 Profit for the year after tax 48 .7 53 .6 46 .2 BALANCE SHEET in €m Total assets 6,854 .6 7,063 .4 7,581 1. Receivables from customers after impair- ment charges 4,815 .8 4,920 .1 5,175 .3 Primary deposits 5,013 .0 5,109 .8 5,568 .0 — of which savings deposits 1,705 .5 1,629 .8 1,529 .0 — of which securitized debt incl . subordinat- ed capital 789 .1 758 .1 743 .2 Equity 795 .8 860 .2 958 .8 Customer funds under management 12,972 .0 13,212 1. 13,723 .2 — of which on custody accounts 7,959 .0 8,102 .3 8,155 .1 OWN FUNDS PURS . TO CRR in €m Average risk-weighted assets 4,846 .6 4,883 .4 4,974 .1 Own funds 580 .9 599 .9 670 .0 — of which Common Equity Tier 1 capital (CET 1) 543 .7 575 .6 625 .9 — of which total Tier 1 capital (CET1 and AT1) 543 .7 575 .6 625 .9 Own funds surplus 193 .2 209 .2 241 .0 Common Equity Tier 1 capital ratio (in %) 11 .2 11 .8 12 .6 Total capital ratio, % 12 .0 12 .3 13 .5 PERFORMANCE RATIOS Return on equity before tax 7 .2 7 .3 5 .5 Return on equity after tax 6 .5 6 .5 5 .1 Cost/income ratio (cost/income coefficient) 51 .9 48 .7 56 .2 Risk/earnings ratio (credit risk/net interest in- come) 31 .5 29 .2 20 .1 RESOURCES Average number of staff 915 923 926 Number of branches 57 59 60 THE BKS BANK’S SHARES Number of no-par ordinary shares (ISIN AT0000624705) 34,236,000 34,236,000 37,839,600 Number of no-par preference shares (ISIN AT0000624739) 1,800,000 1,800,000 1,800,000 High (ordinary/preference share) in € 17 .8/15 .6 17 .5/15 .7 17 .3/15 .4 Low (ordinary/preference share) in € 16 .9/14 .9 16 .5/14 .8 15 .8/13 .9 Close (ordinary/preference share) in € 17 .3/15 .3 16 .9/15 .1 16 .8/15 .4 Market capitalization in €m as at 31 Dec . 619 .8 605 .8 662 .7 Dividend per share in € 0 .23 0 .23 0 .231) P/E ratio, ordinary/preference share 11 .6/10 .3 11 .3/10 .1 13 .3/12 .2 1) Proposal made to the 78th annual general meeting of BKS Bank AG on 9 May 2017 –6– BKS BANK AT A GLANCE PREFACE BY THE CHAIRWOMAN OF THE MANAGEMENT BOARD –7– –8– Creating Space for New Ideas Herta Stockbauer Chairwomen of the Management Board –9– PREFACE BY THE CHAIRWOMAN OF THE MANAGEMENT BOARD DEAR SHAREHOLDERS, “It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is most adaptable to change." This quote by Charles Darwin applies to the banking indus- try today more than ever. Our industry is one of the sectors the most severely affected by digital change. On the one hand, customer behaviour is changing dramatically . It is especially younger customers who are demanding new and innovative banking services, and are shifting their banking activities to the internet . On the other hand, it is also necessary to adapt systems to provide smooth and continuous end-to-end processes . We are confronted with new forms of payment services that run on new technologies such as the distributed-ledger technology, better known as 'blockchain' technology . BKS Bank does not view the advance of digitization as a threat, but rather as an opportunity . We are progressing very well in our work to transform our organisation for the digital age . Moreover, we believe that digital will not mean anonymous in the future either . Complex banking transactions will always require personal advice . By offering personal advisory services, we have long since set ourselves apart from most of our peers . EXCELLENT ADVISORY SERVICES: OUR COMPETITIVE ADVANTAGE TODAY AND TOMORROW Therefore, we are optimistic about the future . With our branch network we are well prepared and do not have any widespread plans to close branches like other banks are doing . On the contrary, we plan to open new ones in our growth markets . In 2016, we served 152,000 individuals and businesses, which is 2,000 more than in the year before . The expansion is taking place primarily in our growth markets of Slovenia and Vienna . BKS Bank is now well-established in both markets . Our customers appreciate us as a reliable customer-oriented partner . Just as we are expanding our branch network, we also plan to continue the further education and training programme for our employees . In 2016, our employees spent more than 39,000 hours in training . The success of all of these measures is reflected in the high degree of satisfaction with our advisory services and the quality of our company . — Our customers gave us very good ratings in the customer satisfaction survey we conducted in the reporting year . — The Recommender Award 2016 confirmed our outstanding customer orientation . — We are also very pleased about the two awards we received from Österreichische Gesellschaft für Verbraucherstudien and 'trend' magazine . We were designated the best branch bank in Austria and the best bank in advisory services for real estate financing . — We again won the designation "EFQM Recognised for Excellence 5*" in the competition that honours company quality and are included the "List of Excellent Companies in Austria" . –10– PREFACE BY THE CHAIRWOMAN OF THE MANAGEMENT BOARD Our numerous activities in the area of sustainability also distinguishes us from others . Our customers and business partners appreciate our accountability in business dealings, and in social and ecological aspects . Our corporate social responsibility (CSR) policy strengthens our innovation capacity . Thus, at the beginning of 2017, we were the first bank in Austria to issue a social bond1) . The BKS Bank ordinary share has been included in the VÖNIX sustainability index of the Vienna Stock Exchange since June 2016 . This ranks us among the top CSR companies in Austria . 746 NEW SHAREHOLDERS We are pleased that our shares continue to be an attractive investment for our shareholders . In 2016, the BKS Bank ordinary and preference shares celebrated their 30- year anniversary of listing on the stock exchange . We also successfully completed a capital increase in the same year . We acquired 746 new shareholders and placed the entire volume of new shares on the market . I would like to thank you for helping us achieve this success . The capital increase contributed enormously to further strengthening our own funds, which has always stood on solid ground . Own funds amounted to EUR 670 million at the end of the year .