ANNUAL REPORT 2018 –PRESERVING THE VALUABLE OPEN TO THE NEW– The pace of digitalisation poses an enormous challenge to us. On the one hand, we have to make the new technologies part of our everyday routines, and on the other, we cannot disregard our fundamental values. The valuable handmade keys of the Schell Collection stand for the centuries-old need of people for privacy and security. A need that is more topical than ever in today’s digital age. In cyber-security, keys turn into encryption. Thus, the antique keys symbolize a treasure that must be preserved to guarantee protection and security for our customers in the future as well. SCHELL COLLECTION The Schell Collection currently has around 13,000 exhibition pieces making it one of the world’s largest collections of locks, keys, lockboxes, coffers, chests and ornamental cast iron objects. The objects on exhibit to the public are presented in a museum building erected for this purpose with 2,500 m2 of space located at Wienerstraße 10 in Graz. Of the numerous objects on exhibit, some are always on tour at other exhibitions and at partner museums. The entire collection was built up with private funds without any public means over a period of more than 50 years and constantly enlarged. Seven special-interest books with thousands of colour photographs of the objects have been published in German and English. We are thankful to the Schell Collection for the permission to use the images of the valuable objects in this Annual Report. www.schell-collection.com Hanns Schell HANNS SCHELL – SUCCESSFUL ENTREPRENEUR AND COLLECTOR Hanns Schell has been collecting locks and keys for over 50 years. He was born in Graz in 1938. At the age of 18, he started working at his parents business, Eisenwarengroßhandel Odörfer. In 1962, he married his wife Liselotte. They have five sons and one daughter. In 1969, Hanns Schell became the managing partner of the business. He worked to expand the company by opening new branches and through acquisitions. The steel trade company Filli in Klagenfurt was acquired in 1988 and with the help of Director A. Kropfitsch, the company was expanded to the size it has today. The company, Filli-Stahl became an important production and trade company on the Austrian market. Hanns Schell developed a passion for old locks early on motivated by his profession and also his mountain-climbing excursions. This passion led to the creation of today’s largest collection of locks, keys, lockboxes, coffers, chests and ornamental cast iron objects in the world. Today, Hanns Schell is active in “pre-retirement” in his own words. However, he has long since transferred the company to his sons. –3– TABLE OF CONTENTS TABLE OF CONTENTS BKS BANK AT A GLANCE –––––––––––––––––––––––––––––––––––––––––––––– 6 – PREFACE BY THE CHAIRWOMAN OF THE MANAGEMENT BOARD ––––––––––––– 7 – CORPORATE GOVERNANCE REPORT ––––––––––––––––––––––––––––––––––– 13 – Corporate Governance at BKS Bank ––––––––––––––––––––––––––––––––––––– 14 – Management Board and Supervisory Board ––––––––––––––––––––––––––––––– 17 – Remuneration Report –––––––––––––––––––––––––––––––––––––––––––––––– 30 – Diversity Concept and Measures to Promote Women ––––––––––––––––––––––– 35 – Compliance Management System ––––––––––––––––––––––––––––––––––––––– 38 – Independent Assessment of the Functionality of Risk Management ––––––––––––– 41 – Accounting and Disclosure –––––––––––––––––––––––––––––––––––––––––––– 42 – Report of the Chairman of the Supervisory Board ––––––––––––––––––––––––––– 43 – INVESTOR RELATIONS ––––––––––––––––––––––––––––––––––––––––––––––– 49 – BKS Bank’s Shares ––––––––––––––––––––––––––––––––––––––––––––––––––– 50 – Investor Relations Communication –––––––––––––––––––––––––––––––––––––– 54 – CORPORATE STRATEGY ––––––––––––––––––––––––––––––––––––––––––––– 57 – Company Profile –––––––––––––––––––––––––––––––––––––––––––––––––––– 58 – Mission Statement –––––––––––––––––––––––––––––––––––––––––––––––––– 59 – Strategy Process –––––––––––––––––––––––––––––––––––––––––––––––––––– 61 – On the Right Path ––––––––––––––––––––––––––––––––––––––––––––––––––– 62 – Strategy 2022 –––––––––––––––––––––––––––––––––––––––––––––––––––––– 64 – GROUP MANAGEMENT REPORT ––––––––––––––––––––––––––––––––––––––– 71 – Economic Environment ––––––––––––––––––––––––––––––––––––––––––––––– 72 – Management and Organisational Structure ––––––––––––––––––––––––––––––– 75 – Shareholders of BKS Bank AG –––––––––––––––––––––––––––––––––––––––––– 78 – Markets of BKS Bank ––––––––––––––––––––––––––––––––––––––––––––––––– 81 – Consolidated Companies and Equity Interests ––––––––––––––––––––––––––––– 85 – Assets, Equity and Liabilities ––––––––––––––––––––––––––––––––––––––––––– 90 – Result of Operations ––––––––––––––––––––––––––––––––––––––––––––––––– 95 – Segment Report ––––––––––––––––––––––––––––––––––––––––––––––––––– 102 – Consolidated Own Funds –––––––––––––––––––––––––––––––––––––––––––– 114 – Risk Management –––––––––––––––––––––––––––––––––––––––––––––––––– 116 – Sustainability and Non-financial Performance Indicators ––––––––––––––––––––– 132 – Outlook –––––––––––––––––––––––––––––––––––––––––––––––––––––––––– 141 – –4– TABLE OF CONTENTS TABLE OF CONTENTS CONSOLIDATED FINANCIAL STATEMENTS PURSUANT TO IFRS ––––––––––––– 145 – Table of Contents - Notes –––––––––––––––––––––––––––––––––––––––––––– 146 – Consolidated Statement of Comprehensive Income for the Financial Year 2018 ––– 148 – Consolidated Balance Sheet as of 31 December 2018 ––––––––––––––––––––––– 152 – Consolidated Statement of Changes in Equity ––––––––––––––––––––––––––––– 153 – Consolidated Statement of Cash Flows –––––––––––––––––––––––––––––––––– 154 – Notes to the Consolidated Financial Statements of BKS Bank ––––––––––––––––– 155 – Company’s Boards and Officers –––––––––––––––––––––––––––––––––––––––– 224 – Closing Remarks of the Management Board –––––––––––––––––––––––––––––– 225 – Profit Distribution Proposal ––––––––––––––––––––––––––––––––––––––––––– 226 – Auditor’s Report ––––––––––––––––––––––––––––––––––––––––––––––––––– 227 – ADDITIONAL NOTES ––––––––––––––––––––––––––––––––––––––––––––––– 233 – Shareholder Structure of the 3 Banken Group ––––––––––––––––––––––––––––– 234 – History of Our Company ––––––––––––––––––––––––––––––––––––––––––––– 235 – Glossary ––––––––––––––––––––––––––––––––––––––––––––––––––––––––– 236 – List of Abbreviations –––––––––––––––––––––––––––––––––––––––––––––––– 243 – Forward-looking Statements –––––––––––––––––––––––––––––––––––––––––– 246 – Publication Details –––––––––––––––––––––––––––––––––––––––––––––––––– 246 – Minimal deviations of the values in the tables and charts are due to rounding differences. This Annual Report is an unaudited translation from the German into English. In the event of any discrepancies, the German version shall prevail. –4– –5– BKS BANK AT A GLANCE THREE-YEAR PERFORMANCE COMPARISON INCOME STATEMENT in €m 2016 2017 2018 Net interest income 120.5 120.7 129.7 Impairment charges -31.0 -26.7 -18.3 Net fee and commission income 48.8 49.9 55.5 General administrative expenses -106.4 -107.8 -114.6 Profit for the year before tax 49.8 77.2 87.0 Profit for the year after tax 46.2 68.0 77.4 BALANCE SHEET in €m Total assets 7,581.1 7,579.5 8,434.9 Receivables from customers after impairment charges 5,175.3 5,313.2 5,918.0 Primary deposits 5,568.0 5,669.1 6,218.2 – thereof savings deposits 1,529.0 1,475.1 1,429.4 – thereof liabilities evidenced by paper incl. subordinated debt capital 743.2 712.6 750.7 Equity 958.8 1,046.5 1,210.7 Customer funds under management 13,723.2 14,150.7 14,518.4 – thereof on custody accounts 8,155.1 8,481.6 8,300.2 OWN FUNDS UNDER CRR in € m Total risk exposure amount 4,974.1 5,016.7 5,283.1 Own funds 670.0 701.6 779.2 – thereof common equity tier 1 (CET1) capital 625.9 614.5 593.7 – thereof total tier 1 capital (CET1+AT1) 625.9 627.8 645.2 Common equity tier 1 capital ratio (in %) 12.6 12.5 12.2 Total capital ratio (in %) 13.5 14.0 14.8 PERFORMANCE RATIOS Return on equity after tax 5.1 6.8 6.8 Return on assets after tax 0.6 0.9 1.0 Cost/income ratio (cost/income coefficient) 56.2 51.9 50.3 Risk/earnings ratio (credit risk/net interest income) 20.1 16.7 10.5 Non-performing loan ratio (NPL ratio) 4.8 3.5 2.5 Net stable funding ratio (NSFR) 99.1 105.0 110.2 Liquidity coverage ratio (LCR): 155.6 145.2 137.7 Leverage ratio 8.5 8.0 8.0 RESOURCES Average number of staff 926 928 932 Number of branches 60 63 63 THE BKS BANK’S SHARE Number of no-par ordinary shares (ISIN AT0000624705) 37,839,600 37,839,600 41,142,900 Number of no-par preference shares (ISIN AT0000624739) 1,800,000 1,800,000 1,800,000 High (ordinary/preference share) in € 17.3/15.4 18.5/17.8 19.8/18.2 Low (ordinary/preference share) in € 15.8/13.9 16.8/15.4 16.5/16.9 Close (ordinary/preference share) in € 16.8/15.4 17.8/17.7 16.8/17.0 Market capitalisation in €m as at 31 Dec. 662.7 705.3 721.8 Dividend per share in € 0.23 0.23 0.231) Price/earnings ratio, ordinary/preference share 13.7/12.5 10.4/10.3 9.2/9.3 1) Proposal made to the 80th Annual General Meeting of BKS Bank AG on 8 May 2019 –6– BKS BANK AT A GLANCE PREFACE BY THE CHAIRWOMAN OF THE MANAGEMENT BOARD –6– –7– –CONTINUITY AND INNOVATION THE KEY TO SUCCESS– Herta Stockbauer Chairwomen of the Management Board Steel cut key, 18th century –8– –8– –9– PREFACE BY THE CHAIRWOMAN OF THE MANAGEMENT BOARD DEAR SHAREHOLDERS, I am very proud to report excellent earnings for the year 2018. Net profit for the year after tax was EUR 77.4 million and 13.8% higher year on year. Our total assets