On the other hand, operating business was good. Income from the three operating segments of the LBBW Group – Corporates, Retail Clients, Financial Markets – improved by 17.5 percent to approximately EUR 3 billion. "Particularly the corporate customer business and our customer-driven capital market activities developed pleasantly last year”, stated Dr. Siegfried Jaschinski, Chairman of the LBBW Board of Managing Directors.
"In the first months of the current year, the positive trend in the operating business continued. This shows that LBBW has a profitable business model on a sustained basis”, added Jaschinski. However, since the beginning of the year, there were again charges in the wake of the financial market crisis as a result of bank and sovereign credit default swaps widening.
"We remain of the opinion that most of the valuation losses from our entire non-customer related credit substitute business will be reversed. This applies especially to our investments in banks and sovereigns”, commented Jaschinski. Since the start of the financial market crisis, LBBW had posted a total of approximately EUR 4 billion charges to income. As of today, the Board of Managing Directors anticipates that approximately one third of this amount will actually default, while two thirds can be reversed over the next few years.
Details of the 2008 annual financial statements
In the last year, the financial market crisis negatively impacted the result by a total of EUR 3.27 billion. The charges impacted various positions in the income statement. The total amount contains charges from large individual exposures together totaling approximately EUR 900 million; in this context, Icelandic banks and Lehman Brothers have to be mentioned in particular. As a result of the intensification of the financial market crisis triggered by Lehman and Iceland there were additional value adjustments for structured products, CDS and bonds.
Of the different income statement positions, net interest income rose by 9.5 percent to EUR 2.348 billion in the last year, despite increased expenses for liquidity, funding and increased CDS hedging costs. The key factor driving growth was successful business with corporate customers. The allowance for losses on loans and advances increased to EUR 903 million after EUR 186 million in the previous year, of which EUR 520 million related to the traditional lending business. This reflects the way in which the financial market crisis spread to the real economy, particularly in the last quarter of 2008. Furthermore, the allowance for losses on loans and advances includes some of the charges from exposures in Iceland and at Lehman.
Net fee and commission income declined by 6.0 percent to EUR 549 million. The price declines on equity markets reduced revenues in the securities and custody business.
The net trading result was minus EUR 2.057 billion. This was driven primarily by charges as a consequence of the financial market crisis due to revaluations, primarily for CDS and structured securities. Other operating income increased to EUR 361 million.
The rise in administrative expenses to EUR 1.789 billion is primarily due to the initial consolidation of the former Sachsen LB. Furthermore, employing new staff in growth areas of the Group resulted in higher personnel costs.
As with the net trading result, net income/loss from investment securities was also driven by the financial market crisis. It totaled minus EUR 982 million, with the loss coming almost exclusively from the non-customer related credit substitute business.
The operating result of the LBBW Group was minus EUR 2.460 billion. Expenses in connection with integrating the former Sachsen LB and Landesbank Rheinland-Pfalz resulted in one-time charges of EUR 109 million. There was a pre-tax loss of EUR 2.569 billion. After taking into account tax income from a loss carried forward to be capitalized in line with IAS 12, LBBW posted a consolidated net loss after taxes of EUR 2.055 billion. The individual bank statement which was prepared in accordance with the regulations of the HGB report (HGB = German Commercial Code) net income for the year after tax of EUR 94 million.
Operating segments develop pleasantly
The positive development in the core business is reflected in the three segments – Corporates, Retail Clients and Financial Markets. In the Corporates segment, which bundles the corporate business in the Group, operating income moved up by approximately 18 percent to EUR 1.549 billion. This trend was driven by higher lending to small and mediumsized companies (Mittelstand), as well as increased commission income from special and capital market financing. The business with borrower’s note loans (Schuldscheindarlehen) developed very well, in which LBBW as lead arranger is the market leader in Germany with a volume of approximately EUR 10 billion. However, an increasing allowance for losses on loans and advances owing to the weak economy resulted in a downturn of the profit before tax to EUR 387 million after EUR 703 million in the previous year.
In the Retail Clients segment, which covers the retail banking business as well as activities connected with the Bank’s function as the central bank for savings banks, operating income declined by 5 percent to EUR 631 million. This reflects the strong competitive pressure and strong private investor restraint in the securities business. Higher administrative costs due to legal requirements (e.g. definitive flat-rate withholding tax, Abgeltungsteuer) and the development of the Wealth Management unit resulted in profits moving back to EUR 73 million. The new Wealth Management unit for high net worth individuals posted a promising start, despite the difficult market situation.
In the Financial Markets segment, operating income increased by 42.5 percent to EUR 817 million as a result of successful customer-driven capital market business. There was a particularly good development for money market transactions and foreign exchange transactions as well as interest rate derivatives and bond issues. Despite a higher allowance for losses on loans and advances, profit before tax was up 27.4 percent to EUR 274 million.
In the wake of the financial market crisis, the Credit Investment Portfolio/Treasury segment, which primarily covers the Group’s non-customer related capital markets business, posted a loss of EUR 3.153 billion.
As of the December 31, 2008 reporting date, total assets of the LBBW Group amounted to EUR 448 billion. On June 30, 2008, the equivalent figure was still at EUR 500 billion. The considerable reduction reflects efforts at LBBW to limit the balance sheet in view of the financial market environment, without adversely impacting customer business.
Taking into account the 2008 financial statements, the core capital ratio was 6.1 percent. However, as a result of the planned capital increase it will rise to approximately 9 percent.
The number of Group employees increased by 1,066 yearon- year to 13,369 as of December 31, 2008. This was primarily due to the acquisition of BAWAG Bank CZ and Sachsen LB.
Expansion of business with small and medium-sized customers
With the purchase of BAWAG Bank CZ and the integration of the former Landesbank Rheinland-Pfalz and Sachsen LB, key moves were made in the alignment for the future last year. Under the new names of Rheinland-Pfalz Bank and Sachsen Bank, the two former Landesbanken today focus on the upper-tier SMEs in line with the model of BW Bank in Baden-Württemberg. In their core markets, both banks have considerable potential which can be leveraged. In addition, LBBW aims to expand the corporate customer business in Bavaria, where the Group already has three offices via BW Bank. "Due to the retreat of foreign banks and the bank mergers in Germany, the number of service providers for small and medium-sized customers is declining. With our acknowledged expertise, we want to fill this gap, providing SMEs with excellent bank products”, said Jaschinski.
In addition, cooperation with the savings banks was further intensified, e.g. in international business with relationship managers for trade and export finance trained specifically for the needs of savings banks. With the acquisition of Sachsen LB, LBBW also assumed the role of the central bank for the local savings banks. "The traditionally close alliance between savings banks and LBBW in Baden-Württemberg has proved itself on a long-term basis. We would like to strengthen this cooperation even further, providing savings banks in Saxony and the Rhineland-Palatinate increasingly with high quality financing services”, underlined Jaschinski.
On the other hand, non-customer driven capital market business will be successively reduced. Of the total volume of EUR 93 billion, securitizations account for EUR 27 billion. The rest are credit default swaps and bonds, mainly from banks and sovereigns. Within three years, it is intended to scale back the non-customer driven capital market business by approximately half on the basis of the redemptions of current investments. No new investments are planned.
LBBW will adjust its costs to the changed general conditions. A cost reduction program is currently being prepared, which targets cost cuts of EUR 150 million per year. The Board of Managing Directors sees savings potential in building and property costs, in the IT business, in purchasing as well as in the non-customer related capital markets business in the wake of the scheduled portfolio reduction. Precise decisions have yet to be taken.
For the current year, LBBW expects the difficult business environment to continue. According to Jaschinski, an end to turbulence on the financial markets is not yet evident. This was compounded by the severe recession in the real economy. "Currently it is not possible to make a serious earnings forecast. Not least due to the capital increase, LBBW is well prepared to face the ongoing headwind and will take up market opportunities, particularly in business with SMEs”, said Jaschinski.