The result was underpinned by encouraging core business with corporates, private clients and savings banks and lower allowances for losses on loans and advances due to the economy than in the previous year. By contrast, the sovereign debt crisis exerted strain, resulting in extremely difficult conditions on the financial markets particularly in the second half of the year. Overall, charges arising in connection with the sovereign debt crisis and totaling around EUR 940 million were absorbed. This figure includes write-downs on Greek sovereign bonds, which were written down to their market value of around 21 percent as of 31 December 2011. At the same time, LBBW was able to increase its Tier 1 capital ratio to 12.9 percent as of the end of 2011 thanks to the systematic reduction of risks.
"All in all, the past year has shown that we are on the right track with our strict focus on sustained client business. We are well on the way, particularly in business with corporate and private clients. The fact that we started our restructuring as early as two years ago is now paying off. The measures are taking effect across the board: We are making good progress with regard to the reduction in staff costs and material costs and in the run-off of the credit investment portfolio together with other non-strategic exposures," said Hans-Jörg Vetter, Chairman of the Board of Managing Directors of LBBW. However, Vetter added that the pronounced market turbulence cast a huge shadow over the successes in core business, especially in the second half of the year. "It is all the more important, therefore, that we were able to reduce risks substantially and to strengthen the capital ratios. We will continue to pursue this course energetically and will very forcefully run down risk weighted assets in non-strategic operations."
Overview of 2011 income statement and balance sheet figures
Net interest income increased by 6.0% y-o-y to EUR 2.298 billion. In addition to solid earnings from the private and corporate clients businesses, this was attributable to nonrecurring income from the restructuring of a major corporate exposure and to higher investment income.
Net fee and commission income came to EUR 536 million after EUR 630 million in the previous year. Among other things, this reflects investor restraint in the securities business. Furthermore, income from lending and trust investment business declined.
The result from financial assets at fair value was a loss of EUR 33 million (2010: EUR -657 million). Positive earnings contributions from the accelerated run-off of credit derivative positions, which had been reduced utilizing tightening spreads in the first half, were offset by charges resulting from valuation adjustments to other financial instruments accounted for at fair value.
Other operating income increased by EUR 54 million y-o-y to EUR 217 million. Here, the result of real estate held as investments recorded a marked improvement.
Allowances for losses on loans and advances were perceptibly reduced y-o-y to EUR 152 million. This reflects the favorable performance of the economy, particularly in the core markets of LBBW.
The net result from investment securities came to EUR - 716 million. The exposures in southern European countries weighed on this result. On the positive side, income from the sale of equity holdings across the Group came to EUR 276 million.
Administrative expenses were down 2.1 percent to EUR 1.727 billion. This reflects, in particular, the decline in staff costs as a result of the job cuts in connection with the Bank's restructuring. As of the end of the year LBBW had 12,231 employees, 830 fewer than in the previous year. The increase in material costs of EUR 27 million to EUR 590 million is due to the first-time introduction of the bank levy, which for LBBW came to EUR 57 million. Excluding the bank levy, total administrative expenses would have been down by more than 5 percent.
Operating result recorded a marked y-o-y increase to EUR 423 million.
The cost of the risk shield provided by the state of Baden- Württemberg totaled EUR 336 million, of which EUR 306 million were recorded as guarantee commission for the state of Baden-Württemberg and the remainder in net interest income. Taking into account goodwill impairments of EUR 15 million and a positive restructuring result as a consequence of the release of provisions not required, which also came to EUR 15 million, consolidated profit before tax totaled EUR 117 million. In the previous year a loss of EUR 341 million had been incurred. The consolidated profit after tax totaled EUR 87 million after a loss figure of EUR 363 million in the previous year.
Total assets of the Group fell slightly to EUR 373.1 billion at the end of the year. Reductions in the balance sheet exposures to clients and banks were offset by increased exposures from derivatives, due to the changes in interest rates.
Systematic reduction in risks, appropriate capital resources
The Bank was able to substantially improve its capital ratios thanks to the systematic reduction in risk positions. The Tier 1 capital ratio stood at 12.9 percent as of 31 December 2011 (31 December 2010: 11.4 percent). The total ratio came to 17.2 percent as of the balance sheet date, up from 15.3 percent in the previous year. At the same time, the risks to the Bank have declined substantially. The credit investment portfolio, which had been valued at EUR 95 billion at the end of 2008, was reduced last year from EUR 54 to 36 billion (as of 31 December 2011) by making use of maturities and also active reduction.
Total risk weigthed assets were reduced from EUR 121 billion in the previous year to EUR 108 billion. This also includes the effects of the more stringent capital backing rules ("Basel 2.5"), which took effect at the end of the year and which, for example, increase the risk assets for market prices risks. All in all, LBBW has appropriate capital resources. This was additionally reinforced by the results of the capital survey conducted by the EBA in the fall, which showed that LBBW fulfilled the European banking regulator's requirements without the need for any additional capital. Despite this, the Bank is continuing to hold negotiations with its owners concerning the conversion or reinforcement of the silent partners' contributions, which in their present form are no longer counted for Tier 1 capital under Basel III. In this way, a reserve is also to be created in the event that the regulatory authorities impose more stringent equity requirements.
In the separate financial statements prepared in accordance with the German Commercial Code (HGB), the Bank expects a profit after tax of around EUR 400 million on the basis of the preliminary figures. Due to of the profit reported under HGB, the Bank assumes that it will be able to fully replenish the profit-participation certificates and silent partners' contributions.
Overview of the three operating segments
In the Corporates segment, which comprises corporate client business as well as commercial real estate finance, profit before tax improved substantially to EUR 1.259 billion (2010: EUR 850 million). As a result, 2011 was the best year in LBBW's corporate client business since its establishment. This reflects the strong position which the Bank holds with corporate clients particularly in its core markets as well as a substantial reduction in allowances for losses on loans and advances thanks to favorable economic conditions. In addition, administrative expenses were lowered slightly.
The Retail/Savings Banks segment recorded an increase in profit before tax to EUR 149 million, up from EUR 137 million in the previous year. Growth in deposit-taking business as well as extensions to wealth management activities particularly exerted a favorable effect. In addition, it was possible to reduce administrative expenses by means of stringent cost management.
The Financial Markets segment recorded a decline in profit before tax to EUR 155 million, down from EUR 261 million in the previous year. This was chiefly due to difficult market conditions against the backdrop of the sovereign debt crisis and along with this an active reduction of risk positions especially in the interbanking business. Despite the strain caused by the bank levy, administrative expenses were slightly lower due to systematic cost management. At the same time, steps to align financial market activities towards client business were continued.
Restructuring progressing well
LBBW made good progress in realigning itself last year. Thus, further investments, including shares in Dekabank, the EEX energy exchange and LBS Baden-Württemberg, were sold. In addition, LBBW Immobilien GmbH with its 21,000 apartments was sold in February of this year. The Bank is also on schedule in its efforts to reduce material costs and jobs. Since the commencement of the restructuring, around 2,000 full time equivalent positions have been cut on the basis of voluntary measures such as settlement, earlyretirement or partial-retirement reduced working hour agreements as well as natural fluctuation accompanied by limited new recruiting, particularly through the retention of trainees. All told, roughly 2,500 full time equivalent positions are to be abolished across the Group as a part of the restructuring.
Outlook for the current year
LBBW expects muted growth in the real economy this year. Despite the recent advances in connection with Greece, the situation in the financial markets is still characterized by considerable risks. With respect to the current year, Hans- Jörg Vetter, Chairman of the Board of Managing Directors, said: "We will very largely complete our restructuring this year and will then be able to systematically continue concentrating on supporting the real economy. In the absence of any dramatic new turmoil in the financial markets, LBBW expects to be able to report an improved profit in 2012 compared with 2011 in accordance with IFRS."
The consolidated financial statements will be presented at the annual press conference on 25 April.