(42e) Net charge for losses on loans and advances

The net charge for losses on loans and advances in 2005 includes a one-off effect in the form of a charge of about € 70 m resulting from an adjustment of the provisioning policy. Almost all of this one-off effect relates to the Private Customers segment. As a result of the new segmentation introduced in mid−2005 as part of the “Fit for Sales” project, segment results are comparable with previous years only to a limited extent. If the one-off effect is excluded, the net charge for losses on loans and advances in the BA-CA Group in 2005 was about € 424 m, just under 2 percentage points higher than the amount of € 417 m (before first-time application effects of amended and new IFRSs) for the previous year published in the Annual Report and thus significantly lower than the growth of BA-CA’s lending volume.

This result was achieved although the economic environment, characterised not least by a further strong increase in bankruptcies of private individuals, again failed to support domestic customer business. In Austria the number of bankruptcies of private individuals rose by 15.7% compared with 2004 to almost 6,500, with estimated insolvency liabilities up by 7% and bankruptcy petitions dismissed for lack of funds up by 24.6%. Business insolvencies rose by 11.1%, with a slight decrease of 4% in estimated insolvency liabilities. In the first half of 2005, Austria was again among the countries leading the European league table of insolvency growth, which was higher only in Romania (up by 68.8%) and Slovakia (up by 32.9%), two countries which are also part of BA-CA’s core market (source: KSV insolvency statistics).

The sharp rise in bankruptcies of private individuals and a more conservative treatment of security for loans – in line with the Basel II methodology – are the reasons for the increase in the provisioning rate for low-volume loans, against which flat-rate specific provisions are made, and thus for the exceptional burden on the Private Customers segment in 2005.

The provisioning charge in the SMEs segment in Austria again benefited from the use and further improvement of procedures for the early recognition of risks, and from the fact that the year under review again saw no major insolvencies.

In the Private Customers segment, the bank introduced a new retail scoring procedure and streamlined processes and lending guidelines. Allowing for the normal delay after which these measures will become fully effective, they should lead to a significant reduction of the provisioning charge in this segment, too.

Risk trends in Central and Eastern Europe continued to be very satisfactory and better than expected. Contributions to the favourable risk trend in CEE came especially from the banking subsidiaries in Croatia, the Czech Republic, Slovakia and Poland, where provisioning charges were in some cases significantly below budget.

Specific provisions and provisions on the liabilities side are generally made in accordance with International Financial Reporting Standards. If concrete factors provide strong indications of a future loss, a loan loss provision is made in the amount of the expected loss and in the respective loan currency. Flat-rate specific provisions are automatically made by the system for unsecured portions of exposures below € 50,000, and of loans to private customers, from the date when the loan is called for repayment or assigned to the loan recovery unit for further steps; the provisioning rate is based on loan loss experience in the past. Moreover, since 1 January 2005, a general provision in accordance with IAS 39 has been maintained for impairment losses incurred but not reported in business with retail customers.