BayernLB closes first quarter of 2012 with pretax profit of EUR 54 million
16 May 2012
- Customer business continues to perform well
- IFRS dictated mark-to-market valuation of cross-currency swaps plus revaluation of own liabilities weigh on earnings by a total of EUR -202 million
- Government intervention in Hungary and weaker forint lead to negative earnings before taxes of EUR -44 million at MKB
- Reduction of non-core activities continued successfully as illustrated by the sale of DKB Immobilien AG and Nextebank in Romania
- BayernLB still expects earnings before taxes to be positive for the full year in its core business
Munich - The BayernLB Group closed the first quarter of 2012 with a pre-tax profit of EUR 54 million in a market environment marked by the ongoing sovereign debt crisis in the eurozone. Once again, business purely for and with customers performed well. In addition, BayernLB made further progress in reducing non-core activities. However, mark-to-market valuations as at 31 March 2012 plus the consequences of government intervention in Hungary weighed on earnings for the three-month period. In the year-before period, earnings before taxes were EUR 149 million.
In the first quarter of this year, BayernLB boosted earnings in business with corporate and real estate customers and the savings banks year on year. The "Corporates, Mittelstand & Retail Customers" segment posted earnings before taxes of EUR 240 million (Q1 2011: EUR 141 million). Group subsidiary DKB, which is consolidated in this segment, performed significantly better than in the year-before period – due in part to the sale of DKB Immobilien AG. It also ramped up the number of retail customers to around 2.4 million. The two divisions Corporates and Mittelstand also saw earnings before taxes grow sharply by 14 percent to EUR 96 million and total revenues performed well thanks among other things to higher new business while margins remained stable. In the Real Estate business, earnings before taxes rose by 17 percent to EUR 41 million, thanks to higher revenues and lower administrative expenses among other factors. Earnings before taxes in the Savings Banks/Association division also jumped to EUR 13 million (Q1 2011: EUR 3 million) due particularly to demand for capital market products and the flourishing trade in notes, coins and precious metals. The savings banks are very important to BayernLB, not only as customers, but also as sales partners, as a source of refinancing and as owners.
Gerd Haeusler, CEO of BayernLB: "The performance of our business in the new BayernLB's core areas - business with savings banks and corporate, real estate and retail customers - shows that we are on the right track. Focusing on our customer business in Bavaria and Germany is bearing fruit. In the first three months of the year, BayernLB made further progress in implementing its new business strategy, even if the progress was partly concealed by the quirks of mark-to-market valuation rules under international accounting standards. We are making the bank slimmer, stronger and focussing it long-term on its core business which includes long-term financing for the shift to new energy forms in Germany.”
The performance in business with customers was above all overshadowed by two negative valuation markdowns as at the reporting date which were posted in the gains or losses on fair value measurement item and were a major factor in the EUR -258 million earnings before taxes of the "Markets" capital market segment:
- Cross currency swaps, conducted by BayernLB to fund foreign currency loans in US dollars and British pounds, dampened earnings to the tune of EUR -146 million. As the past few quarters have shown, the fair value of these instruments, which are recorded on the balance sheet, decreases due to their insurance character whenever the supply of liquidity to the financial markets is loosened - and vice versa. Owing to the extensive and unprecedented efforts of the European Central Bank to inject money into the financial system in recent months and the resulting oversupply of liquidity in the German markets, BayernLB had to significantly markdown the valuation of these instruments as at 31 March 2012, as dictated by IFRS accounting standards.
- In addition, a EUR -56 million markdown on the value of its own liabilities it has issued as required by IFRS standards also weighed on Group earnings. Although BayernLB in principle does not value its own liabilities at fair value and thus avoids having to take account of changes in its own credit spread, under IFRS standards certain types of structured bonds must be marked to market. The sharp reduction in the risk premium on BayernLB's own liabilities thus led to a higher valuation of the liability side.
The valuation of both these items was well in the black as at 31 December 2011. These mark-to-market valuations have no impact on earnings under German GAAP rules (HGB).
The decision to bulk up the liquidity reserve last year resulted in an additional expense of EUR 30 million which was also posted in the gains or losses on fair value measurement item. This higher expense is a direct result of the ECB's expansive policies, which have provided the markets with excess liquidity in the past few months. Despite the surplus liquidity at the moment, the new BayernLB will continue to not partake in credit substitute business, but rather stick to its business model as a customer-serving bank.
The situation in eastern Europe, which is no longer one of BayernLB's core markets, remained difficult. The pre-tax loss at Group subsidiary MKB rose by EUR -11 million from the year-before period to EUR -44 million. The decline in total revenues there was primarily driven by the major depreciation in the forint compared to the year-before period and the ongoing loss in earnings from the Foreign Currency Loan Repayment Law of September 2011, which triggered early repayment of over one third of foreign currency loans in the retail customer segment. Furthermore, the Hungarian bank levy, expected to be EUR 46 million for full-year 2012, weighed on earnings. These moves re-quire a major restructuring at MKB with significant cost reductions in addition to the steps already taken in 2011. In March 2012, Dr Pál Simák was appointed new CEO of MKB. BayernLB's Board of Management continues to work intensively with the new management on restructuring the bank. However, BayernLB has no influence on potential further government interventions in the banking system such as the current proposed legislation concerning a transaction tax in Hungary.
BayernLB continued to reduce those activities defined as non-core business in the reporting period. The loans and securities portfolio pooled in the “Restructuring Unit” was trimmed further in the first quarter, as risk assets in the internal restructuring unit shrank by EUR 1.2 billion to EUR 10.3 billion. For example, in January, the remaining Greek government bonds held by Group subsidiaries DKB and LBLux were sold, as had already been reported in the 2011 Annual Report. However, this had no significant negative impact on first quarter results. The IFRS carrying amount of all the BayernLB Group's exposures to central governments in the European Economic and Monetary Union particularly affected by the debt crisis was EUR 472 million as per reference date. Moreover, BayernLB continued to streamline its investment portfolio. In March, DKB sold DKB Immobilien AG which contained its residential property portfolio and in April MKB sold its Romanian subsidiary Nextebank.
In Q1 2012, BayernLB achieved net interest income of EUR 428 million. However, at Group level, it remained below the year-before figure of EUR 479 million, partly due to the major drop in net interest income at MKB.
Credit risk provisions as at 31 March 2012 were EUR -53 million, largely unchanged on last year's low EUR -49 million. Overall it must be taken into account that due to the value adjustment period, credit risk provisions in the first quarter are usually below the pro rata value of the full year.
Net commission income climbed 10.4 percent on the previous-year period to EUR 64 million. This resulted particularly from maturity of a bond issued by BayernLB in 2009, originally for EUR 5 billion, which was guaranteed by the German Financial Market Stabilisation Fund (SoFFin). This resulted in a permanent reduction in commission expenses.
Gains or losses on fair value measurement – including gains or losses on hedge accounting – amounted to EUR 11 million in the first quarter (Q1 2011: EUR 96 million). This includes valuation markdowns totalling EUR -202 million from cross currency swaps and the revaluation of BayernLB's own liabilities. This was offset partly by positive customer margins of EUR 53 million (Q1 2011: EUR 35 million).
Gains or losses on financial investments were nearly flat at EUR 4 million (Q1 2011: EUR -45 million).
Administrative expenses amounted to EUR -354 million, which was 2.4 percent less than the previous year period.
Other income and expenses includes, for example, the earnings from the BayernLB Group's real estate activities. In Q1 2012 this totalled EUR 12 million (Q1 2011: EUR 37 million).
The expenses for bank levies item was EUR -54 million (Q1 2011: EUR -70 million).
Balance sheet and key figures
Total assets fell by 1.5 percent to EUR 304.6 billion in the first three months of 2012. A significant contribution to this came from the EUR 6.1 billion decline in assets held for trading to EUR 42.5 billion. Loans to domestic customers, on the other hand, rose slightly by 0.2 percent to EUR 115.9 billion.
The Bank reduced its risk positions by 2.0 percent to EUR 116.0 billion as at 31 March 2012. The core capital ratio edged up to 11.7 percent (31 December 2011: 11.4 percent). The core tier I ratio as defined by the European Banking Authority (EBA) amounted to 10.1 percent. BayernLB's capital base thus remains solid.
Outlook for full year 2012
For the full year, BayernLB still expects earnings before taxes in its core business areas to be positive.
The BayernLB Group Financial Report as at 31 March 2012 can be downloaded from www.bayernlb.de as a PDF file in German and English.
Q1 2012 and Q1 2011
| ||1 Jan-31 Mar 2012 |
|1 Jan-31 Mar 2012 |
|Net interest income ||428 ||479 ||-10.7 |
|Risk provisions |
in the credit business
| -53 || -49 || 8.2 |
|Net commission income ||64 ||58 ||10.4 |
|Gains or losses on |
fair value measurement
|6 ||60 ||-89.9 |
|Gains or losses on hedge accounting ||5 ||36 ||-87.3 |
|Gains or losses on financial investments ||4 ||-45 ||- |
|Income from interests in |
companies valued at equity
|-1 ||8 ||- |
|Administrative expenses ||-354 ||-363 ||-2.4 |
|Expenses for bank levies ||-54 ||-70 ||-23.0 |
|Other income and expenses ||12 ||37 ||-68.3 |
|Gains or losses on restructuring ||-3 ||-2 ||6.3 |
|Earnings before taxes ||54 ||149 ||-63.7 |
|EUR million ||Corp., Mittelst. & Retail Customers ||Real Estate & Savings Banks/ Association ||Markets ||Eastern Europe ||Restruct. Unit ||Central Areas & Others ||Consolidation ||Group |
|Net interest income ||207 ||125 ||17 ||56 ||30 ||48 ||-55 ||428 |
|Risk provisions in the credit business ||-37 ||5 ||-3 ||-23 ||6 ||0 ||0 ||-53 |
|Net commission income ||41 ||8 ||5 ||13 ||3 ||-6 ||0 ||64 |
|Gains or losses on fair value measurement ||130 ||33 ||-194 ||14 ||44 ||10 ||-31 ||6 |
|Gains or losses on hedge accounting ||-1 ||1 ||4 ||0 ||3 ||1 ||-3 ||5 |
|Gains or losses on financial investments ||41 ||3 ||0 ||2 ||-42 ||0 ||0 ||4 |
|Income from interests in companies measured at equity ||0 ||0 ||0 ||-1 ||0 ||0 ||0 ||-1 |
|Administrative expenses ||-147 ||-72 ||-54 ||-57 ||-15 ||-11 ||1 ||-354 |
|Expenses for bank levies ||-5 ||0 ||0 ||-46 ||0 ||-3 ||0 ||-54 |
|Other income and expenses ||11 ||7 ||-32 ||-1 ||-2 ||24 ||5 ||12 |
|Gains or losses on restructuring ||-2 ||0 ||0 ||0 ||0 ||0 ||0 ||-3 |
|Earnings before taxes ||240 ||108 ||-258 ||-44 ||27 ||64 ||-84 ||54 |
Selected balance sheet figures (IFRS)
| ||31 Mar 2012 |
|31 Mar 2011 |
|Total assets ||304.6 ||309.1 ||-1.5 |
|Credit volume ||224.4 ||220.7 ||1.7 |
|Equity and subordinated capital ||21.4 ||21.2 ||1.1 |
| ||31 Mar 2012 ||31 Mar 2011 ||Change |
|Core capital (EUR billion) ||13.5 ||13.5 ||0.3 |
|Core capital ratio (%) ||11.7 ||11.4 ||0.3 pp |
|Core tier I capital ||10.1 ||9.8 ||0.3 pp |
|Risk positions (EUR billion) ||116.0 ||118.4 ||-2.0 |
| ||31 Mar 2012 ||31 Mar 2011 ||Change |
|Number of employees ||10,760 ||10,893 ||-1.2 |