CONSOLIDATED ANNUAL REPORT 2018 1 BAWAG GROUP CONSOLIDATED ANNUAL REPORT 2018 2018 HIGHLIGHTS January Agreement on a strategic partnership with Spotcap March BAWAG Group elected “Austria’s Best Bank 2018” by Global Finance for the second consecutive year April Issuance of € 300 million Additional Tier 1 (AT1) capital May Agreement on a strategic partnership with MediaMarktSaturn Austria July BAWAG Group awarded by Euromoney with two awards: “Western Europe’s Best Bank Transformation” and “Austria’s Best Bank” Share buyback program launched for up to 1,285,000 shares Tender offer for the € 300 million 8.125% Tier 2 Notes of BAWAG P.S.K. due 30 October 2023 September Acquisition of Deutscher Ring Bausparkasse successfully closed October Agreement on strategic partnership with METRO Cash & Carry Austria November Share buyback program completed with 1,285,000 shares December Launch of Qlick in Germany, our online German lending platform Agreements signed to acquire BFL Leasing, Health AG and Zahnärztekasse AG easybank again awarded “Best Direct Bank in Austria” by Börsianer; start:bausparkasse honored as “Best Building Society in Austria” for the first time € 573 million full-year 2018 record profit before tax achieved ALL 2018 TARGETS OUTPERFORMED Targets 2018 Performance 2018 Profit before tax >5% annual growth € 573 million / +14% Return on tangible equity (@12% CET1) >15% 17.1% Cost-income ratio <46% 44.2% Common Equity Tier 1 capital ratio (fully loaded) ≥12% 14.5% TARGETS Targets 2019 2020 Profit before tax growth >6% >6% Profit before tax (absolute) >€ 600 million >€ 640 million Cost-income ratio <43% <40% Return on tangible equity 15-20% 15-20% Common Equity Tier 1 capital ratio (fully loaded) 12-13% 12-13% Pre-tax earnings per share1) >€ 6.00 >€ 6.40 After-tax earnings per share1) >€ 4.50 >€ 4.80 1) Before deduction of AT1 coupon; before capital measures. 2 KEY FINANCIAL FIGURES Profit or loss statement 2018 2017 Change (%) 2016 Change (%) (in € million) Net interest income 840.5 793.1 6.0 732.2 14.8 Net fee and commission income 282.8 216.9 30.4 192.9 46.6 Core revenues 1,123.3 1,010.0 11.2 925.1 21.4 Other income1) 47.4 110.4 (57.1) 40.4 17.3 Operating income 1,170.7 1,120.4 4.5 965.5 21.3 Operating expenses (517.9) (528.5) (2.0) (439.4) 17.9 Regulatory charges (40.1) (33.8) 18.6 (46.1) (13.0) Total risk costs (45.1) (61.8) (27.0) (42.7) 5.6 Profit before tax 572.7 500.4 14.4 445.4 28.6 Income taxes (136.2) (51.2) >100 12.9 – Net profit 436.5 449.1 (2.8) 458.1 (4.7) Performance ratios 2018 2017 Change (pts) 2016 Change (pts) (figures annualized) Return on equity2) 12.2% 13.4% (1.2) 15.1% (2.9) Return on equity (@12% CET1) 14.4% 15.1% (0.7) 16.2% (1.8) Return on tangible equity2) 14.2% 15.4% (1.2) 17.1% (2.9) Return on tangible equity (@12% CET1) 17.1% 17.6% (0.5) 18.5% (1.4) Net interest margin 2.21% 2.24% (0.03) 2.32% (0.11) Cost-income ratio 44.2% 47.2% (3.0) 45.5% (1.3) Risk costs / interest-bearing assets 0.12% 0.17% (0.05) 0.14% (0.02) Statement of financial position 2018 2017 Change (%) 2016 Change (%) (in € million) Total assets 44,698 46,056 (2.9) 39,746 12.5 Customer loans 30,482 30,793 (1.0) 28,485 7.0 Customer deposits and own issues 34,620 36,611 (5.4) 32,045 8.0 Common equity 3,706 3,576 3.6 3,108 19.2 Tangible common equity 3,202 3,088 3.7 2,737 17.0 Risk-weighted assets 20,465 21,494 (4.8) 19,047 7.4 Balance sheet ratios 2018 2017 Change (pts) 2016 Change (pts) Common Equity Tier 1 capital ratio (fully loaded) 14.5% 13.5% 1.0 13.6% 0.9 Total capital ratio (fully loaded) 16.3% 15.2% 1.1 16.2% 0.1 Leverage ratio (fully loaded) 7.1% 6.2% 0.9 6.4% 0.7 Liquidity coverage ratio (LCR) 179% 150% 29 138% 41 NPL ratio 1.7% 1.8% (0.1) 1.7% 0.0 1) The term “Other Income” includes gains and losses on financial instruments and other operating income and expenses. 2) Excl. AT1 capital. 3 Note: For details on definitions and calculation methodology, please refer to the section entitled “Definitions” on pages 245-248. Figures of prior years were adjusted. For further details, please refer to Note 1. BAWAG GROUP CONSOLIDATED ANNUAL REPORT 2018 SHARE-RELATED FIGURES Share & stock market data 2018 2017 Change (%) 2016 Change (%) Pre-tax earnings per share (in €)1) 5.75 5.00 14.9 – – After-tax earnings per share (in €)1) 4.38 4.49 (2.4) – – Book value per share (in €) 37.51 35.76 4.9 – – Tangible book value per share (in €) 32.41 30.88 4.9 – – Dividend per share (in €) 2.182) 0.58 >100 – – Share price high (in €) 48.20 48.00 0.4 – – Share price low (in €) 34.16 41.20 (17.1) – – Closing price (in €) 35.84 44.46 (19.4) – – Price/book ratio 0.96 1.24 (23.2) – – Price/tangible book ratio 1.11 1.44 (23.2) – – Shares outstanding at the end of the period 98,794,893 100,000,000 (1.2) – – Weighted average number of shares outstanding 99,597,178 100,000,000 (0.4) – – Market capitalization (in € billion) 3.5 4.4 (20.4) – – 1) Before deduction of AT1 coupon. 2) Dividend proposal for the AGM. BAWAG GROUP AT A GLANCE BAWAG Group AG is the listed holding company of corporate customers offering comprehensive savings, BAWAG P.S.K., which is headquartered in Vienna, Austria, payment, lending, leasing, investment, building society and with the main banking subsidiaries easybank and insurance products and services through various online start:bausparkasse in Austria and Südwestbank and and offline channels. Deutscher Ring Bausparkasse (since January 2019 start:bausparkasse) in Germany. With more than 2.5 Our business segments are BAWAG P.S.K. Retail, million customers, BAWAG P.S.K. is one of Austria’s largest easygroup, Südwestbank, DACH Corporates & Public banks operating under a well-recognized national brand. Sector, International Business and Treasury Services & Markets. Delivering simple, transparent and best-in-class We apply a low-risk, efficient, simple and transparent products and services that meet our customers’ needs is business model focused on Austria, Germany and our consistent strategy across all business units. developed markets. We serve retail, small business and 4 STRATEGY SUMMARY Growing in our core markets – Our aim is to grow our Driving efficiency and operational excellence– Cost customer base and business in our core markets, efficiency across all businesses and functions is critical namely Austria, Germany and developed markets to succeed in a more complex world with increased with a focus on the DACH region. competition, higher regulatory requirements and new market entrants from outside the financial services Making our customers’ lives easier – We offer our industry. customers the best experience and convenience when banking through our various digital and physical Maintaining a safe and secure risk profile– A strong channels to build and maintain successful long-term capital position, stable deposits and a low risk profile are customer relationships. fundamental cornerstones for the execution of our strategy. Disclaimer: Neither BAWAG Group nor any of its affiliates, advisors or representatives Certain statements contained in this report may be statements of future shall have any liability whatsoever (in negligence or otherwise) for any loss expectations and other forward-looking statements that are based on howsoever arising from any use of this report or its content or otherwise management’s current view and assumptions and involve known and unknown arising in connection with this document. risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. This report does not constitute an offer or invitation to purchase or subscribe for any securities and neither it nor any part of it shall form the basis of or be Actual results may differ materially from the results predicted, and reported relied upon in connection with any contract or commitment whatsoever. results should not be considered as an indication of future performance. The tables in this report may contain rounding differences. 5 BAWAG GROUP CONSOLIDATED ANNUAL REPORT 2018 CONTENTS 7 LETTER FROM THE CEO 11 STRATEGY 14 BAWAG GROUP ON THE STOCK MARKET 16 GOVERNANCE 16 Managing Board of BAWAG Group AG 17 Corporate Governance 19 Report from the Chairman of the Supervisory Board 21 GROUP MANAGEMENT REPORT 22 Economic and Regulatory Developments 24 Financial Review 29 Business Segments 43 Risk Management 43 Internal Control and Risk Management System 45 Capital, Share, Voting and Control Rights 50 Human Resources Development 53 Corporate Social Responsibility 53 Research and Development 54 Outlook and Targets 56 CONSOLIDATED FINANCIAL REPORT 57 Consolidated Accounts 69 Notes 191 Risk Report 234 Statement of All Legal Representatives 235 Boards and Officers of BAWAG Group AG 238 AUDITOR’S OPINION 245 DEFINITIONS 249 GLOSSARY 6 LETTER FROM THE CEO LETTER FROM THE CEO Capital distribution Dear Shareholders, At year-end 2018, our fully loaded CET1 capital ratio was 14.5%, while generating 260 basis points of gross capital. We just wrapped up our first full year as a listed company.