The stable earnings position and solid central performance indicators reflect the balanced business model oriented to long-term success and the Bank's risk-conscious strategy. LBBW has been consistently operating profitably for 18 quarters in a row now, achieves low risk costs and possesses a capital basis which still substantially exceeds the regulatory requirements. The Common Equity Tier 1 ratio stood at 15.4 percent as at 30 June 2016 under current regulatory law (CRR/CRD IV with transitional rules) and 14.7 percent in accordance with CRR/CRD IV fully loaded, which does not take effect until 2019. The total capital ratio came to 20.7 percent under the transitional rules and 20.2 percent under CRR/CRD IV on a fully loaded basis.
The capital ratios declined slightly compared with 31 December 2015. This was due, among other things, to the adjustment of the regulatory transitional rules, a slight increase in risk weighted assets from EUR 74 billion to EUR 77 billion following a moderate expansion in business activities and a drop in equity due to actuarial effects in connection with provisions for pensions caused by a reduction in the discount rate. At 4.3 percent, the leverage ratio remained comfortably above the current regulatory 3-percent minimum mark. LBBW's adequate capital base is also confirmed by the results of the EU-wide stress test published in July. "We have a resilient position, providing us with the scope we need to devote all our attention to our customers and the projects for safeguarding our Bank's future," said Hans-Jörg Vetter. "For this reason, we are now deliberately investing in projects aimed at ensuring our Bank's continued viability." One example of this is the intensive preparations that are currently ongoing for the migration to a new core banking system in 2017. In this way, the Bank will be creating the basis for greater digitization, standardization and optimization of its business processes. Restructuring of retail customer business is also progressing as planned. Thus, the Bank has expanded its digital offerings with the "AssetGo" investment app and started the previously announced reorganization of its branch network.
Overview of expense and income items in the first half
In the first six months, net interest income came to EUR 769 million, falling slightly short of the previous year (EUR 819 million). This was particularly due to the further decline in interest rates not least of all as a result of the ECB's interest rate policies, intense competition and the deliberate decision not to accept new business offering a higher return but also exposed to greater risks.
The fruits of this safety-oriented business policy are reflected in allowances for losses on loans and advances. The figure of minus EUR 1 million is an improvement over the previous year's already very low level of minus EUR 12 million thanks to the high quality of the loan portfolio. What is more, the continued stable economic conditions in core markets had a positive effect.
Net fee and commission income came to EUR 252 million at the end of the first half and was thus virtually unchanged over the previous year. Whereas income from the arrangement of structured capital market issues rose, there was a slight decline in net fee and commission income from lending business.
Net gains/losses from financial instruments measured at fair value through profit or loss dropped from EUR 97 million in the previous year to EUR 11 million. Among other things, this was due to valuation discounts for counterparty risks in the trading book and strains in the banking book from the measurement of derivatives which are used as economic hedges but cannot be included in hedge accounting in accordance with IFRS.
On the other hand, net gains/losses from financial investments and net income/expenses from investments accounted for using the equity method rose substantially to EUR 191 million (previous year: EUR 78 million). This increase was particularly underpinned by higher equity investment income from the sale of the subsidiary cellent AG, the shares in VISA Europe Limited and gains from the sale of securities.
At EUR 51 million, other operating income was influenced by numerous individual effects. The decline of EUR 8 million was primarily due to the recognition of provisions, whereas in the previous year provisions had been released.
Administrative expenses rose moderately by 3 percent to EUR 882 million. This is primarily due to spending on the aforementioned projects for the Bank's continued viability as well as pay-scale adjustments.
The guarantee commission payable for the guarantee provided by the state of Baden-Württemberg for loans to the special-purpose vehicle Sealink came to EUR 51 million. Expenses for bank levy and deposit guarantee system stood at EUR 77 million. The item includes the Bank's contributions to the restructuring fund in accordance with European requirements and to the deposit guarantee system of the Savings Banks Finance Group for all of 2016. At minus EUR 5 million, net income/expenses from restructuring include provisions for the reorganization of the Financial Markets segment.
All told, this resulted in consolidated profit before tax of EUR 258 million at the end of the first six months (previous year: EUR 271 million). As income tax was lower, net consolidated profit came to EUR 188 million at the end of the first half of 2016 (previous year: EUR 182 million).
Overview of the operating segments
During the period under review, all operating segments made a positive contribution to the Bank's earnings, with the Corporates segment accounting for the greatest share. However at EUR 344 million, segment profit before tax was EUR 93 million lower than in the previous year, which had benefited from non-recurring effects in equity investment business. In addition, pressure came from the decline in net interest income from deposits due to the further drop in interest rates and from finance business due to the intense competition as well as rising investments in projects for the Bank's future viability. The commercial real estate finance and large corporates units performed encouragingly, accounting for an increased earnings contribution and growing lending volumes. The moderate requirements for allowances for losses on loans and advances relieved the strain across the entire segment.
Profit before tax in the Retail/Savings Banks segment dropped to EUR 24 million, down from EUR 45 million in the previous year, due to the effects of low interest rates and increased spending on modernizing the IT system. The opposite effect arose from increased deposit volumes, equity investment income from the Visa transaction and a positive contribution from allowances for losses on loans and advances due to the solid condition of the loan book.
In the Financial Markets segment, customer restraint in a difficult market environment and strain on net interest income as a result of lower interest rates led to profit before tax of EUR 50 million (previous year: EUR 151 million). By contrast, customer business concerning the arrangement and marketing of capital market issues performed gratifyingly.
Outlook for the current year
The underlying conditions remain characterized by extremely low interest rates and intense competition. In addition, the Bank expects allowances for losses on loans and advances to normalize. Even so, it will continue to benefit from the good quality of its loan books in a stable economic environment. Against this backdrop, LBBW expects, as already announced, to close the year with a clearly positive result before tax, which will fall slightly short of the previous year.