Operating result recorded a marked increase - from EUR 32 million in the previous year to EUR 423 million. High charges totaling EUR 944 million as a result of the sovereign debt crisis exerted a negative impact on profit for the year. This includes impairments on Greek sovereign debt, which was written down to their market value of around 21 percent of the nominal value as of 31 December 2011. Nevertheless, LBBW (in accordance with IFRS) generated a consolidated profit before tax of EUR 117 million following a loss before tax of EUR 341 million in the previous year. After tax, LBBW closed out the year with consolidated profit of EUR 87 million (previous year: EUR -363 million). The Tier 1 capital ratio rose to 12.9 percent as of 31 December 2011 thanks to the systematic reduction of risk weighted assets.
"The good profit for the year shows that we are successful on a sustained basis with our business model that is consistently geared to operations with private clients, corporates and savings banks and institutional clients. At the same time, we will continue to push ahead resolutely with our restructuring and to reduce the credit substitute business, our risk-weighted assets and non-strategic exposures as planned", is how Hans-Jörg Vetter, Chairman of the Board of Managing Directors of LBBW, confirmed the strategy that the Group has been pursuing for the past two years.
Operating segments remain strong and solid
In the three operating segments Corporates, Retail/Savings Banks and Financial Markets LBBW generated a consolidated profit of more than EUR 1.5 billion overall in the past year.
The biggest earnings contributions were provided by the Corporates segment, which includes corporate clients and the commercial real estate financing business. The segment's profit before tax reported a marked increase. It grew by almost 50 percent and at EUR 1.259 billion reached its highest level since LBBW began (previous year: EUR 850 million). This shows the strength of LBBW and its roots as a principal bank of the SME sector, particularly on its traditional core markets. The significant reduction in allowances for losses on loans and advances thanks to favorable economic conditions and a decline in administrative expenses also boosted the segment's profit in 2011.
The Retail/Savings Banks segment increased its profit before tax from EUR 137 million to EUR 149 million. Growth in the deposit-taking business as well as extensions in the wealth management business, in particular, exerted a favorable effect. In addition, it was possible to reduce administrative expenses in this segment also by means of stringent cost management.
At EUR 155 million, profit before tax of the Financial Markets segment was down on the previous year's figure (EUR 261 million). This decline was chiefly due to generally difficult market conditions in the wake of the sovereign debt crisis and the active reduction of risk positions, especially in the interbanking business. LBBW will continue this conscious reduction, thereby focusing its financial market activities strictly on the client-oriented business. Pressure on the segment result was eased by the reduction in administrative expenses, despite the strain caused by the new bank levy.
Overview of LBBW's 2011 income and balance sheet figures
Net interest income increased by 6.0 percent y-o-y to EUR 2.298 billion. The basis for this increase was the persistently solid earnings from the private and corporate clients businesses. Moreover, non-recurring income from the restructuring of a major corporate exposure and higher investment income boosted the result.
At EUR 536 million, net fee and commission income fell short of the previous year's figure of EUR 630 million. Among other things, this reflects investor restraint in the securities business. Furthermore, income from the lending business and trust investment income were down.
Although the result from financial assets at fair value was a loss of EUR 33 million it recorded a substantial improvement in comparison with the previous year (EUR -657 million). Here, income was generated from the run-down of credit derivative positions, especially through the utilization of spread tightenings in the first half of 2011.
Other operating income increased from EUR 163 million y-o-y to EUR 217 million. Here, the result of real estate held as investments recorded a marked improvement.
Thanks to the favorable performance of the economy, particularly in its core markets, LBBW reported low allowances for losses on loans and advances. At EUR 152 million, they were substantially below the previous year's figure of EUR 471 million.
The net result from investment securities came to EUR -716 million. This was mainly due to the high charges resulting from exposures in southern European countries in the wake of the sovereign debt crisis. On the positive side, income from the sale of equity holdings totaled EUR 276 million.
In 2011, LBBW was able to reduce its administrative expenses further. At EUR 1.727 billion, they were a good 2 percent below the previous year's figure. This reflects, among others, the decline in staff costs as a result of the scheduled job cuts connected with the restructuring. As of 31 December 2011 LBBW had 12,231 employees, 830 fewer than at the end of 2010. LBBW recorded a slight increase in other administrative expenses. This increase is due to the first-time introduction of the bank levy, which cost LBBW EUR 57 million. The bank levy excluded, total administrative expenses would have been down by a good 5 percent.
All told, the operating result came to EUR 423 million and thus substantially exceeded the previous year's figure of EUR 32 million.
The cost of the risk shield provided by the state of Baden- Württemberg once again weighed on LBBW's net profit for the year. Out of the total of EUR 336 million, EUR 306 million were recorded as guarantee commission for the state of Baden-Württemberg and the remainder in net interest income. After deducting goodwill impairments of EUR 15 million and taking into account 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 (previous year: EUR -341 million). The consolidated profit after tax totaled EUR 87 million following 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 despite the interest-driven increase in market values from derivatives. This decline reflects the further run-down of the non-core business areas, particularly the credit investment portfolio.
Reduction in risk weighted assets, appropriate capital resources
The Bank was able to improve its capital ratios further thanks to the continuing reduction in risk positions. At the end of 2011 the Tier 1 capital ratio stood at 12.9 percent (previous year: 11.4 percent), the total ratio came to 17.2 percent (previous year: 15.3 percent). "LBBW thus has appropriate capital resources", summarized Vetter. This is also proven by the result of the EBA capital survey in the fall, in which LBBW met the requirements of the European Banking Authority without any additional capital being required. Nevertheless, LBBW is continuing talks with its owners concerning the conversion or strengthening of the silent participations, which under Basel III can no longer be counted as Tier 1 capital. Through such measures the Bank would be in an even better position for any further tightening of capital requirements by the regulatory authorities.
Last year LBBW once again reduced its risk-weighted assets drastically. The credit investment portfolio, which had a volume of EUR 95 billion at the end of 2008, had been trimmed from EUR 54 billion to EUR 36 billion by the end of 2011. In the past year, total risk weighted assets were reduced from EUR 121 billion to EUR 108 billion despite the more stringent "Basel 2.5" capital backing rules already implemented by LBBW as of end 2011.
Restructuring remains well on schedule
LBBW's restructuring remains right on schedule. Further investments were sold in 2011, for example shares in Dekabank, the EEX energy exchange and LBS Baden- Württemberg. Furthermore, in February of this year LBBW sold LBBW Immobilien GmbH with its roughly 21,000 apartments.
The Bank is also on schedule in its efforts to reduce material costs as set out in the restructuring plan, as well as in the cutting of around 2,500 jobs. In the meantime, the cutting of around 2,000 full time equivalent positions has been agreed through voluntary measures (settlement, earlyretirement or partial-retirement reduced working hour agreements) as well as natural fluctuation.
Start to 2012
LBBW has had a satisfactory start to this year. The positive performance of the operating business segments continued in the first few months. However, the result of the first quarter of 2011, which was influenced by a large number of non-recurring factors, will not be reached. Based on the current assessment, a profit before tax in the range of around EUR 150 million is expected for the first quarter of 2012.
The Bank expects continuing growth in the client business in the further course of the year. For the year as a whole LBBW is thus still anticipating an improved result under IFRS compared with 2011, provided that there are no new dramatic upheavals on the financial markets.