Net interest income was close to the previous years level, totalling € 2,179.8 million (minus 2.3 percent) as of December 31, 2005. This primarily reflected the year-long effects of a flat interest rate curve, a low interest rate environment, and investor restraint.
Net commission income rose appreciably by 15.4 percent or € 67.0 million to € 502.7 million. This was mainly driven by rising income from securities business, and commissions from lending and fiduciary operations.
At € 120.2 million, net income from financial transactions fell short of the positive results achieved in previous years. A marked improvement in the second-half of the year partially offset the moderate performance of the first half. It should be noted in this connection that the net interest elements from trading operations and foreign exchange dealings were included in the figures for net interest income. On the whole, the trading result improved considerably.
Administrative expenses fell by 4.5 percent or € 73.8 million to € 1,581.8 million. Through carefully directed cost management, LBBW was able to reduce administrative expenses despite increasing business investments. The cost-income ratio (CIR) was 47.0 percent, compared with the previous years 48.6 percent.
Marked increase in net income for the year
The balance of other operating income/expenses at € 560.2 million was only 1.7 percent or € 9.4 million below the previous year's level of € 569.6 million. With a stable contribution to the bank's operating results, leasing income remained an important source of income for the LBBW Group at €274.1 million. Landesentwicklungsgesellschaft Baden-Württemberg (LEG) was a further stable earnings component.
In 2005, LBBW generated operating income before risk provisioning/valuation result of € 1,781.1 million. This was 1.7 percent or € 29.5 million above the previous year's level. The continued easing of the risk provisioning/ valuation result reflects a stringent risk policy, the quality of the loan book, and the positive implications of a stable economic situation in LBBWs core market. The easing of provisions amounted to 21.1 percent or € 129.2 million.
As a whole, operating income (income from ordinary activities) grew by 13.9 percent or € 158.7 million over the previous year to € 1,298.4 million. Meanwhile, the extraordinary profit/loss improved by 9.4 percent or € 33.4 million compared with the previous year, amounting to -€ 323.3 million.
With net income after taxes of € 682.5 million, the previous year's result was clearly exceeded again in 2005. The increase was 23.8 percent or € 131.4 million. Return on equity (RoE) totalled 15.1 percent, after 13.3 percent in 2004.
Operating segments contributed to the favourable result
In the Retail Clients segment, the LBBW Group posted stable operating income before risk provisioning. Due to a decline in the risk provisioning/valuation result, operating income (income from ordinary activities) rose from € 70.7 million to € 114.6 million. The RoE improved, from 7.9 percent to 12.8 percent. The cost-income ratio slipped from 75.1 percent in 2004 to 74.3 percent in 2005.
The Corporate Finance segment experienced a similarly positive development with stable gross income, falling administrative expenses and effective risk management. At the end of 2005, this segment had a RoE of 16.6 percent versus 13.1 percent in 2004. The cost-income ratio was stable at 45.6 percent compared with 44.9 percent the previous year.
Due to improved gross income and only a slight increase in administrative expenses, the Financial Markets segment posted higher operating income before risk provisioning/ valuation. A date-related increase in write-downs on securities led to operating income after risk provisioning/ valuation result that matched the previous year's level. Thus, the RoE came to 12.5 percent and the CIR to 41.7 percent. The trading result improved considerably as a whole.
Growth in balance sheet total and business volume
Compared with the previous year, business volume was up by 8.8 percent or € 38.8 billion to € 481.6 billion. Total assets also rose, by 3.7 percent or € 14.3 billion, to € 404.9 billion.
Diversified loan portfolio
The LBBW Group's claims on banks rose 6.7 percent or € 10.4 billion to € 165.3 billion. This stemmed from funding both in the domestic and international financial markets. Claims on customers remained relatively constant, dropping to € 116.2 billion from € 119.4 billion.
The lending portfolio to customers showed healthy diversification. Domestic companies and private individuals made up the most important customer group, accounting for 61.2 percent of the total claims on customers. The volume of bonds and other fixed-income securities owned rose 5.8 percent or € 5.8 billion to € 105.1 billion.
LBBW bonds in strong demand
The basis for the LBBW Group's funding activities includes liabilities to banks and customers as well as securitised liabilities. Liabilities to banks advanced last year by 14.2 percent or € 16.5 billion to € 132.8 billion. Liabilities to customers were also up, rising by 3.2 percent or € 2.7 billion to € 87.6 billion.
Securities again accounted for the largest share of funding activity with € 158.0 billion of issuance, down 2.2 percent or € 3.6 billion from 2004.
Despite the abolition of the maintenance obligation (Anstaltslast) and guarantor's liability (Gewährträgerhaftung) in July 2005, investors' appetite for LBBW bonds was strong. LBBW issued paper in euros and eleven other currencies ranging from the Australian dollar to the South African rand and as plain vanilla and structured products (credit, currency, equity, and interest rate structures).
Tier 1 Capital ratios improved further
The core capital ratio, which is determined in line with the Basel capital standards recommendation (BIS core capital ratio) rose appreciably from 6.5 percent to 7.1 percent. The BIS total capital ratio was unchanged at 10.5 percent while the structure of LBBW's equity improved. With this total capital ratio, the LBBW Group was well above the required minimum of 8 percent.
Private and Corporate Banking business bundled at BW-Bank
The cost structure at LBBW in the years ahead will be influenced by the integration of Baden-Württembergische Bank (BW-Bank). The addition of BW-Bank to the LBBW Group makes it possible to harmonise structures and processes, and combine IT systems, thus boosting efficiency. Synergy benefits from the integration of BW-Bank are expected to become apparent in the current financial year. LBBW will thus be able to continue to limit staff expenses and operating expenditures.
The foundation for sustained value-added has been created by bundling the product and advisory expertise of two strong partners at BW-Bank. By integrating consumer and investment banking, the bank can exploit new customer opportunities, and offer a broader range of products and services. Strengths that already exist in the higher-income customer segment - for example, investment business, structured products or investment management - will be exploited even more effectively, and additional income thus generated.
With BW-Bank, the LBBW Group now services one million private customers in Baden-Württemberg. BW-Bank operates as a savings bank in the area surrounding Stuttgart, the state capital. The bank's focus covers the higher-income consumer and investment banking, with emphasis on health professional and freelancers. The aim is to offer these Private Banking customers comprehensive services in asset investment and asset formation, provisioning and financing business as well as accounts and cards, in turn strengthening the bank's market position.
Corporate Banking in Baden-Württemberg also received a noticeable boost from the concentration of approx. 25,000 companies at the new BW-Bank. As the bank for small and medium-sized enterprises (SMEs) in the south-west, it is now positioned to combine the benefits of customer proximity, short decision-making channels and many years of regional expertise with the extensive product range of a large bank.
Distinct growth opportunities also exist in interest rate and foreign exchange management, asset management, and Corporate Finance products given already-existing Investment Banking activities and the highly efficient research department at LBBW. In international business, SMEs need help to develop difficult foreign markets. LBBW and BW-Bank provide them support worldwide. To this end, BW-Bank can now turn to more than 20 foreign offices operated by LBBW and make use of their know-how.
Individual product range for corporate customers
In Corporate Finance, Landesbank Baden-Württemberg expects gross revenue to rise. Besides selective new customer acquisitions, the bank's aim is to more fully exploit the potential offered by existing client relationships. Intensifying joint marketing efforts with the savings banks of Baden-Württemberg is a key element in raising gross revenue. For example, in collaboration with eight Baden-Württemberg savings banks, LBBW has launched "BW-SPARK", a programme for managing portfolio risks. Individual credit risks of the participating banks are bundled centrally and exchanged on a volume-neutral basis for a diversified portfolio to reduce cluster risks at the individual banks. With a volume of € 65 million, this represents one of the biggest credit trading transactions in Germany.
Another product, "SmartMezzanine" is specifically tailored to the needs of SMEs. The standardised mezzanine participatory rights programme helps SMEs to allocate equity to the balance sheet and, if needed, refinancing in the international financial market. As one of the few providers in Germany, the consortium comprising LBBW, HSH Nordbank and Hamburger Sparkasse, makes complete equity recognition in accordance with the German Commercial Code (HGB) possible.
In 2006, LBBW's foreign customers will receive an additional competent point of contact when the new Representative Office in Moscow opens its doors to all export-oriented SMEs.
Expansion of activities in New York planned
LBBW is planning to improve earnings in the Financial Markets segment by expanding various business activities. The bank seeks to do so by expanding structured note issuance, and by selectively stepping up the banks capital market-oriented customer business.
"LBBW will further enhance its business opportunities in the US financial markets in 2006 with the addition of a broker-dealer licence in New York", Jaschinski announced. The formal prerequisites are currently being undertaken. The new company is to be operated by maximizing synergies with the operations of LBBW's New York Branch to the greatest extent possible. The branch and broker-dealer business models will give rise to synergy effects. The focus of LBBW US Securities LLC, which is expected to be launched by the end of 2006, will be on own-account trading and matched book lending. Its balance sheet capabilities and good rating make LBBW competitive and an interesting partner. US Securities LLC will, moreover, operate as a platform for LBBW products and services in the US capital markets.
Cooperation with savings banks gears upward
In the ten business fields of cooperation presently covered by the Contractual Services Partnership between savings banks and LBBW, twelve concrete implementation agreements have so far been concluded. These agreements define concrete details concerning the structure of the products and services, business processes and division of responsibilities. Roughly three-quarters of all implementtation agreements have been signed by the savings banks in Baden-Württemberg. Cooperation within the Contractual Services Partnership is being further strengthened by the addition of new fields of activity such as structured investment products and the RSU/Landesbanken rating service for savings banks.
Since January 2006, LBBW key account managers to the savings banks participating in the Contractual Services Partnership have also been making a contribution in Baden-Württemberg. As central contact partners, they coordinate the individual cooperation efforts. The aim is the personal and holistic servicing of each individual savings bank by the respective key account manager.
Wholly owned Group subsidiary LRP
Further implementation of the parent-subsidiary model between Landesbank Rheinland-Pfalz (LRP) and LBBW is scheduled in 2006. The primary objective - to achieve the greatest possible regional customer proximity while at the same time endeavouring to avoid redundant work within the Group - is being pursued systematically.
Through the integration of LRP into the LBBW Group, it will be possible to achieve synergies that will benefit the Group's earnings. For example, market penetration can be increased by expanding business activities with SMEs in LRP's core market. By approaching the market together, LRP and LBBW can ensure that the Groups resources are used efficiently and intensively. The next steps planned, i.e. process optimisation in the IT, back-office and service areas, will result in further savings. It is expected that by concentrating on successful business segments while pursuing stringent cost management, the mapped-out path to success will be enhanced.
Reliable generators of income: Leasing and real estate
The leasing and real estate activities engaged in by LBBWs subsidiaries offer it portfolio risk diversification, and create expectations for stable contributions to the Group's earnings in the years ahead.
"We are proceeding on the assumption that we can generate a satisfactory result also for the year 2006 and achieve our objective of a return on equity of more than 15 percent", Dr. Siegfried Jaschinski confidently stated. He explained that in this context, expectations for LBBWs performance are based forecasts for a moderate rise in interest rates and a slight recovery in economic activity.