"The result underscores LBBW’s solid performance on the basis of its customer-orientated business model,” said Hans-Jörg Vetter, the Chairman of LBBW's Board of Managing Directors. The Bank is concentrating particularly on business with private and corporate customers and is forcefully running off non-customer-related activities. "This makes us less vulnerable to fluctuations in the capital markets,” Vetter explained.
This year LBBW has resolutely continued the measures commenced in 2009 to become a solely customer-oriented bank. Since the beginning of the year, the Bank has reduced its credit investment business, which now no longer forms part of its core activities, by around 12 billion to EUR 24 billion. LBBW has additionally improved its risk profile by reducing its total risk assets from 108 billion to EUR 99 billion. The Tier 1 capital ratio increased substantially to 14.9 percent as of 30 September, up from 12.9 percent at the end of 2011. In order to ensure adequate capitalization in accordance with the more stringent future requirements, LBBW plans to convert the silent partners’ contributions held by its owners into Common Equity Tier 1 capital in addition to a further targeted runoff of its risk assets. The savings banks in Baden-Württemberg are the first of the three owners to have agreed to this conversion. LBBW is currently in good and constructive negotiations, which have already reached an advanced stage, with the other owners, the State of Baden-Württemberg and the City of Stuttgart.
In the first nine months of this year, total assets contracted from EUR 373 billion to EUR 369 billion. At the moment, interest effects in particular are standing in the way of the planned substantial reduction. Without these effects, total assets would be substantially lower.
LBBW has also made substantial progress in consolidating its shareholdings. In the course of this year, the Bank has disposed of its shares in SV SparkassenVersicherung, Wüstenrot & Württembergische AG, Universal-Investment-Gesellschaft mbH and Nationale Suisse among others. Moreover, LBBW Immobilien GmbH with its 21,500 appartments was sold. The Bank has additionally been making progress in reducing staff numbers in accordance with the EU restructuring plan. It had agreed to lay off more than 2,300 employees by the end of the third quarter. This figure has been achieved by means of voluntary offers, termination contracts and partial retirement arrangements as well as natural fluctuation. LBBW will have largely completed its restructuring by the end of the year.
Income and expense items after the first nine months of 2012
Net interest income came to EUR 1.593 billion as of 30 September 2012, down from EUR 1.774 billion in the previous year. This was particularly due to low interest rates and a targeted reduction in interest-bearing assets in connection with restructuring activities. In addition, the previous year’s figure had been inflated by one-off effects. Moreover, the positive effect on the balance sheet recorded at the end of the first half of the year as a result of adjustments to the present values of expected interest payments on silent partners’ contributions and profit-participation certificates contracted from EUR 339 million to EUR 207 million. This is due to the plans for converting the silent partners’ contributions, under which a partial amount of EUR 2.2 billion is initially to be converted as of 1 January 2013. The balance of EUR 1 billion will be converted if and when required. This has resulted in a correction of minus EUR 132 million compared with the half-yearly figures.
Net fee and commission income came to EUR 379 million (previous year: EUR 404 million). This reflects customers’ continued cautiousness in securities business in particular as a result of uncertainty in the capital markets.
Net losses from financial instruments measured at fair value through profit or loss came to EUR 27 million at the end of the first nine months (previous year: net gains of EUR 157 million). Among other things, the increased fair value of the Bank’s own liabilities ("own credit spread”), which came to minus EUR 121 million as of 30 September 2012, exerted pressure.
Following the release of provision for credit losses of a net EUR 7 million in the same period of the previous year, expense attributable to this item came to EUR 153 million in the first nine months of the year. This normalization in provision for credit losses reflects the economic slowdown as well as the conservative risk policy pursued by LBBW.
Net gains from financial investments, investments accounted for using the equity method and profit/loss transfer agreements came to EUR 74 million, reversing the previous year’s net loss of EUR 529 million. LBBW had included the expense arising from exposure to Southern European countries in this item in the previous year. The income from the sale of investments has also exerted a positive effect this year.
Administrative expenses rose marginally from EUR 1.289 billion to EUR 1.337 billion. Although the Bank was able to achieve savings through voluntary staff layoffs as well as a reduction in the cost of materials, this effect was offset by the substantial additional expense caused by the bank levy, which increased to EUR 69 million, as well as spending on growth projects and measures to ensure compliance with regulatory requirements such as Basel III.
Operating result came to EUR 542 million, thus falling short of the previous year by EUR 102 million. Net of the commission income for the risk shield provided by the state of Baden-Württemberg (EUR 228 million) and restructuring expense (EUR 8 million), LBBW achieved consolidated profit before tax of EUR 307 million. After tax, the Bank recorded consolidated profit of EUR 281 million (previous year: EUR 245 million) at the end of the first nine months.
Overview of the three operating segments
The Corporates segment, which primarily comprises business with corporate customers, generated profit before tax of EUR 565 million as of 30 September (previous year: EUR 1.116 billion). Whereas the financing volume in the SME customer business was expanded further in comparison with the previous year, the segment's earnings came under pressure from the reduction in large-scale exposures, the normalization of provision for credit losses, valuation adjustments and declining income on deposit business as a result of the low interest rates as well as from other factors.
In the Financial Markets segment, profit before tax rose to EUR 255 million (previous year: EUR 205 million) particularly as a result of brisk customer demand for money-market products and repo business.
Consolidated profit in the Retail/Savings Bank segment came to EUR 89 million at the end of the third quarter, down from EUR 143 million in the previous year. Life and pension insurance brokerage business performed well. However, customers exhibited restraint in deposit and securities business due to the low interest rates and sustained market uncertainty. Moreover, additions to provision for credit losses increased whereas net reversals were, on balance, recorded in the previous year.
The market environment was characterized by guarded optimism as a result of efforts to overcome the sovereign debt crisis on the one hand and by the economic slowdown on the other. LBBW sees a chance of conditions in the capital markets gradually stabilizing and assumes that the real economy in Germany will grow moderately this year. Barring any dramatic new upheavals in the financial markets or an unexpectedly severe slump in the economy, LBBW continues to assume that its IFRS profit for the year will be higher than in 2011.
Given these general conditions and considering current interests on hybrid capital, LBBW expects that, for fiscal year 2012, it will be able to make up for part of the interest payments on silent partners’ contributions and profit participation rights that had been cancelled in previous years in line with the respective contract terms.