"Customer business has proved to be a solid earnings pillar for the Group even in turbulent times," said Hans-Jörg Vetter, the Chairman of LBBW's Board of Managing Directors. "Although the Bank felt the effects of greater customer restraint in comparison with the previous year in the wake of uncertain markets and extraordinarily low interest rates, the fact that we have been able to report a profit testifies to the viability of our customer-orientated business model."
LBBW continued to make good progress in the systematic realignment of its activities in the first half of 2012. During this period, the Bank reduced its risk weighted assets by a further EUR 4 billion to EUR 104 billion in line with targets. In particular, it continued to systematically run off its credit investment portfolio, which no longer forms part of its core bank activities. The volume of this portfolio was reduced by a further EUR 8 billion compared with 31 December 2011 to EUR 28 billion. Consequently, it has shrunk by over 70 percent since restructuring commenced in 2009. At the same time, the Group's capital ratios improved further, with the core capital ratio (Tier I ratio) rising to 14.2% and the total ratio in accordance with SolvV to 18.4% as of 30 June 2012. In addition, LBBW is in talks with its owners concerning the conversion of the silent partners' contributions into common Tier I equity in order to ensure that it has appropriate equity resources allowing it to satisfy substantially more stringent future requirements. These negotiations are well in progress.
At EUR 373 billion, total assets remained nominally almost unchanged compared with the beginning of the year; however, it should be noted in this connection that market factors beyond LBBW's control are currently working against the planned reduction in assets - in particular, declining interest rates, which have caused the fair value of interest rate derivatives to rise. Adjusted for these effects, total assets would have been substantially lower.
Further progress made in restructuring
The Bank is also progressing well in other restructuring areas. Thus, agreements have already been entered into for the reduction of around 2,300 full-time equivalent positions on the basis of voluntary offers such as early and partial retirement arrangements and natural fluctuation. The restructuring plan provides for total redundancies of around 2,500 jobs. In addition, LBBW further reduced its shareholdings in the first half of the year. Thus, it sold LBBW Immobilien GmbH with its 21,000 appartments as well as a number of smaller interests. "Thanks to the early commencement of repositioning, we have already made great progress in converting LBBW into a purely customer-orientated bank. We will be completing most of the restructuring process this year and in this way will be able to respond flexible to the ever increasing pace of change in the underlying conditions for banks," explained Hans-Jörg Vetter.
Income and expense items of the first half of 2012
Net interest income in the first six months came to EUR 1.248 billion and was thus 3.6 percent higher than in the previous year. The adjustments to the present values of expected interest payments on silent partners' contributions and profit participation certificates in connection with the planned capital measures resulted in a positive effect of around EUR 339 million on the balance sheet. Adjusted for this effect, net interest income would have dropped by EUR 297 million particularly as a result of lower interest rates and targeted deleveraging. Moreover, net interest in the previous year had been inflated by positive one-off effects.
Net fee and commission income stood at EUR 247 million, after EUR 272 million in the previous year. Here, the Bank clearly felt the effects of customer restraint against the backdrop of market uncertainty in the wake of the European sovereign debt crisis.
Valuation adjustments (e. g. for market parameters, counterparty risks and legal risks as well as own credit rating) accounted for a figure of EUR -305 million within net gains/ losses from financial instruments at fair value through profit or loss, which therefore came to EUR -176 million as of the end of the first half. Moreover, the figure of EUR 424 million recorded in the first half of 2011 had been influenced by the favorable trend in spreads on credit derivatives in that period, which was not repeated to the same extent.
At EUR 91 million, provision for credit losses was largely unchanged over the previous year (EUR 84 million) thanks to stable economic conditions in Germany.
Once again, LBBW accepted net losses from financial investments in order to continue reducing its credit investment portfolio. However, at EUR 21 million, these losses were substantially less than those which had been recorded in the same period of the previous year (EUR 324 million) as a result of strain caused by Greek exposure in particular.
Administrative expenses rose by 3.7 percent to EUR 893 million due, among other things, to the increase of EUR 17 million in the bank levy as well as capital spending on growth and future projects.
Operating income came to EUR 352 million. After the deduction of commission expenses of EUR 151 million for the risk shield provided by the state of Baden-Württemberg and restructuring expenses of EUR 7 million, consolidated profit before tax came to EUR 194 million (previous year: EUR 567 million). After tax, the LBBW Group achieved consolidated profit of EUR 165 million as of 30 June 2012 (previous year: EUR 350 million).
Overview of the three operating segments
The Corporates segment, which primarily comprises business with corporate customers, generated profit before tax of EUR 314 million (previous year: EUR 797 million) in a difficult market environment in the first half of 2012. The segment generated growth in the volume of lending business with SME customers. On the other hand, the normalization of provision of credit losses and the aforementioned valuation adjustments, among other things, exerted strain compared with the previous year.
Net profit in the Retail/Savings Banks segment shrank slightly to EUR 289 million, down from EUR 304 million in the previous year. Whereas endowment and pension insurance brokerage business was encouraging, margins on deposits decreased due to low interest levels. Similarly, income from securities business was down from the previous year due to customer restraint. The decline in segment profit from EUR 108 million to EUR 58 million is also attributable to additions to provision of credit losses, whereas in the previous year there had on balance been substantial net reversals.
The Financial Markets segment, whose focus on customer business was further strengthened, achieved an increase in both income and profit despite the valuation adjustments which were also necessary here. Net profit came to EUR 359 million, up from EUR 349 million in the first half of 2011, while profit before tax rose from EUR 178 million to EUR 195 million. Money market and securities lending business made a significant contribution here.
LBBW assumes that conditions in the international financial markets will continue to be influenced by high uncertainty and considerable risks in the second half of the year. Despite the problems facing the Eurozone periphery countries, Germany should remain on its growth path, although it must be assumed that momentum will weaken substantially. With its customer-orientated business model, Landesbank Baden-Württemberg considers itself to be well positioned in this environment. Barring any dramatic new upheavals in the financial markets or an unexpectedly severe slump in the economy, LBBW continues to assume that IFRS profit for 2012 will be higher than in 2011.
Please note: LBBW’s individual financial statements (prepared in accordance with the German Commercial Code (HGB)) as at year-end are the basis for the distribution of the profit participation certificates. It is not possible at this time to issue a robust or reliable forecast for the full-year results prepared in accordance with the German Commercial Code. LBBW does not publish half-yearly financial statements under the German Commercial Code.