As a further area of focus for this year, Dr. Jaschinski cited the integration of Sachsen Bank and LRP Landesbank Rheinland-Pfalz. He said that, following the acquisition of the former Sachsen LB, LBBW had massively expanded its presence in a high-growth market. Besides eastern Germany, he said there was also potential in the eastern neighbouring states Poland and the Czech Republic. Like Sachsen Bank, LRP is to concentrate on the regional market as a bank with a pure customer focus once it has been completely integrated. As in the LBBW Group's business model, the overall focus is on business with small and medium-sized companies.
Market turmoil burdens earnings in 2007
As announced in March on the presentation of the preliminary figures, LBBW last year reported net income of EUR 311 million in 2007. LBBW is publishing its annual report for the first time on the basis of IFRS. The main reason for the 66.6 year-on-year percentage drop in profits was the financial market crisis. The result was affected by value impairments of EUR 456 million relating to structured products. Of this amount, EUR 258 million related to falls in market values in the trading portfolio and EUR 198 million to assumed permanent impairments on “available for sale” (AFS) securities. Valuation losses of EUR 631 million for structured products were recorded in the revaluation reserve. In addition, there were valuation adjustments of EUR 387 million on credit default swaps (CDS) that were recognised in the income statement.
Dr. Jaschinski expressed satisfaction with the operating performance of the last year. Despite margin pressure in the banking sector due to fierce competition, net interest income fell only slightly by 2.7 percent to EUR 2.13 billion. Allowances for losses on loans and advances increased by EUR 23 million to EUR 186 million and remained at a gratifyingly low level. Net fee and commission income developed very well rising nearly 17 percent to EUR 584 million. The lending and guarantee business and international business in particular contributed to this increase. The turmoil in the financial markets was reflected above all in the trading loss of EUR 615 million.
The other operating income increased by 61.6 percent to EUR 202 million; the real estate business contributed significantly to this growth. Despite start-up costs for strategic and growth projects as well as for regulatory requirements such as the introduction of Basel II and the changeover to IFRS reporting, administrative expenses rose moderately by 7.0 percent to EUR 1.65 billion. The net loss from investment securities was EUR 124 million, which was mainly attributable to impairments on AFS securities.
Aggregate group lending increased by 7.2 percent to EUR 324 billion. Business volume rose by 6.7 percent to EUR 477 billion. Total assets in the consolidated balance sheet grew by 6.3 percent to EUR 443 billion.
Mid-market business performs well
With regard to the individual business lines, Dr. Jaschinski said he was particularly satisfied with the performance of the Corporates business division. Operating income rose by 5.5 percent to EUR 1.31 billion. This reflected not only the robust economy, but also the ongoing focus on the market, especially for small and medium-sized businesses, and a strong real estate business. In a demanding competitive environment, the Retail Clients division managed to report virtually unchanged operating income of EUR 686 million. By contrast, in the Financial Markets division, the market dislocations led to a decline in income to EUR 221 million. However, the areas of the Financial Markets division not affected by the financial market crisis reported an increase in operating income.
The Owners' Meeting has decided, as in previous years, to distribute six percent on the nominal capital of LBBW of EUR 1.42 billion.
Last year, LRP suffered a loss of EUR 91 million as a result of the financial market crisis. Net interest income improved by 2.1 percent to EUR 250.5 million, while net fee and commission income increased by 12.8 percent to EUR 89.7 million. However, the bank reported a net trading loss of EUR 220 million because of the current market situation. Administrative expenses dropped by 2.8 percent to EUR 197.5 million.
Dr. Jaschinski: Most of the writedowns will be reversed
In Q1 2008, the credit markets performed worse than in H2 2007. As a result, LBBW has suffered writedowns of some EUR 450 million since the start of the year. The valuation losses on structured products affecting net income that relate to the financial market crisis amount to some EUR 250 million as of mid-April. As of the same date the values of credit default swaps (CDS) were written down by some EUR 200 million affecting net income. As a result of these effects, LBBW will probably face an overall net loss in a low triple-digit million amount in the first quarter. In addition, writedowns of about EUR 650 million from temporary market value losses relating to structured products will be reported in the revaluation reserve on a neutral basis.
Dr. Jaschinski said he was convinced that most of the valuation losses were only temporary in nature. “We will write back most of the value adjustments over time – at the latest when the products mature. We are convinced of the quality of our portfolio, as we have always carried out our own analyses in addition to considering the credit ratings of the rating agencies.” He added that the fact that LBBW had suffered actual losses of only EUR 50 million since the start of the financial market crisis last summer testified to the quality of the assets. LBBW's structured product portfolio totalled EUR 21.4 billion at the end of February. Of this, subprime accounted for just EUR 556 million.
With regard to the financial markets, Dr. Jaschinski said that nobody could predict with any certainty when the crisis would be over. However, the developments in recent weeks indicated that the worst at least could be behind us.