Methods and models.

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LBBW Research uses models in its work. Worth noting are some model approaches from the different areas of macroeconomics, in addition to stocks and credit analyses; here in brief:

Capital market interest rate forecasts

LBBW Research uses several econometric models to derive the forecasts for the euro swap curve. One of the models that we regularly update, calculates a fair value for the steepness of the swap curve measured against the difference between 10 and 2-year swaps. It estimates a fair curve steepness based on real 3-months EURIBOR, the HICP for the eurozone, its standard deviation and the eurozone's economic sentiment.

Exchange rate forecasts

LBBW Research also uses fundamental data as orientation for exchange rate forecasts. An important factor for the medium to long-term rate development is the purchasing power parity of the exchange rates. They constitute a type of gravitational centre to which the exchange rates tend to return to. However, in the short to medium term the deviations from the purchasing power parity can be significant. The following, as well as other factors, play a role here: (anticipated) interest rate differences, risk appetite and current market positioning.

Stock exchange forecasts


Discounted cash flow model

DCF methods are based on future cash flow surpluses determined within the context of corporate planning and discounted to the valuation date with the aid of capital costs. In doing so, taxes payable (e.g. commercial tax or income tax) are incorporated into the evaluation. The net present value or the capitalized value calculated in this way is the discounted cash flow.

Credit analysis


LBBW Financials Scorecard

The main influencing factors of Financials Senior Unsecured are assessed both qualitatively and quantitatively and given a score. Key factors include the market environment, strategy, available capital, profitability and market evaluation. The results of the scoring model are transferred into a recommendation for action for the investment (Basic, Additional, Not Recommended) as well as the LBBW traffic light to show the default probability. Green thus stands for a very low probability of default under market-typical fluctuations. Yellow implies a low default probability, although at above-average fluctuations. Red signals urgent action required, as it cannot be out ruled that the issuer will default during the term. The LBBW Financials Scorecard also serves as a basis for the analysis of covered bonds within the scope of the LBBW Covered Bonds Scorecard, where the examination of the covered bonds is differentiated in a three-phase model with regard to the likelihood of support (by the owner), the quality of the cover pool and the type of legal framework.

 
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