Clarity regarding NORD/LB’s future direction
- Key elements of future business model
- NORD/LB runs down bad debt from ship financing
- Risk provisioning for NPL portfolio responsible for 2018 negative EBT of € 2.1 billion
- Bank to remain financier of SMEs
- 2019 to be year of transition
NORD/LB Norddeutsche Landesbank has, together with its owners and the Savings Banks Finance Group, agreed on the key elements of a capital strengthening and revised business model with its former owners and the Savings Banks Finance Group. NORD/LB will remain a business partner for SMEs, savings banks, private and commercial customers as well as institutional investors. It will also continue in its role as a specialist for financing energy and infrastructure projects, real estate and aircraft.
Owing to the run down of bad loans from ship financing, NORD/LB set aside additional risk provisions of € 1.893 billion in 2018. Although all the Bank’s other business segments remained profitable in 2018, expanding risk provisions for the ship financing portfolio led to a net loss for the year, as previously reported. Earnings before taxes for 2018 amounted to minus € 2.057 billion, while consolidated profit came in at minus € 2.354 billion. In financial year 2017 by contrast, the Bank posted a pre-tax gain of € 195 million.
“Such a heavy loss for 2018 is painful,” says Thomas Bürkle, CEO of NORD/LB. “But ridding ourselves of bad loans from ship financing will give us a new start. We now have clarity regarding the Bank’s future path. We will combine the strengths NORD/LB is known for as a financier of SMEs with particular expertise in structured financing.”
Great strides in downsizing ship financing and transforming the bank
In financial year 2018, NORD/LB made good progress in stripping the bad loans from its ship financing. By the end of 2018, NORD/LB had reduced the entire portfolio to € 10.3 billion. Compared to the end of 2016, when the portfolio stood at € 16.9 billion, this amounts to a decrease of 39 per cent. The amount of non-performing loans (NPL) was equivalent to € 7.5 billion as at 31 December 2018. The NPL portfolio is to be run down as a matter of urgency. As part of a portfolio transaction, the first step will be to transfer a significant part of the portfolio, in the amount of approx. € 2.6 billion to a financial investor.
In this context, NORD/LB set aside an extensive additional risk provision for the entire NPL portfolio, resulting in a total of € 1.8 billion for the ship financing segment for the 2018 financial year. The total existing loan loss provisions set aside for the ship financing portfolio amounted to € 4.9 billion as at 31 December 2018, equivalent to a core risk coverage of 65 per cent for the NPL portfolio. If the market value of the ships is also taken
into consideration, core risk coverage is 123 per cent. Overall, NORD/LB has not only scaled back its ship loan volume to a significant degree; it has also provided a comfortable cushion for the remaining NPL portfolio, so that no more expenses are expected in this regard in future.
In parallel to this, the Bank has made great strides in its One Bank transformation programme launched in 2017. Bremer Landesbank has now been fully incorporated. All Group staff and management functions have been realigned and downsized. In addition, central processes, primarily in the lending business, have been restructured, the IT landscape has been streamlined and a host of digitalisation initiatives have been launched. With these measures, the Bank will fully achieve its staff reduction target of 1,250 personnel announced in 2017. Specific contractual solutions reached voluntarily with staff have already been identified for roughly 850 positions (68 per cent) of the downsizing target, either in the form of early retirement or termination agreements with severance payments. These will be implemented by the end of 2020 at the latest. This means the Bank is perfectly on schedule with the plan it rolled out in 2017.
Income statement for financial year 2018
In financial year 2018, net interest income in the Group amounted to € 1,279 million (previous year’s figure: € 1,417 million). The year-on-year decline is essentially due to the ongoing reduction in total assets over the past few years. In this context, there was a substantial drop in earnings from the ship financing portfolio in particular, which the Bank has scaled back to a significant degree. Tight interest margins due to persistently low interest rates have also had a negative impact. However, the introduction of IFRS 9 led to new classifications and changes in measurement regulations with regard to interest income as well as other components of the income statement, with the result that comparability with figures from the previous year is limited.
Risk provisioning was at minus € 1,893 million (minus € 991 million). This sharp increase in risk provisioning is a result of the extensive elimination of bad debts from the ship financing portfolio. Net commission income stood at € 52 million (€ 112 million). An appreciable year-on-year rise in commission expenses for securitisation transactions for strengthening capital ratios had a negative impact.
Profit/loss at fair value (including hedge accounting) stood at minus € 273 million (€ 354 million). With the introduction of IFRS 9, the initial effects from the fair value measurement of ship loans are included here for the first time at minus € 162 million and are recognised as an additional risk provision. Several other earnings components which were still reported here in 2017 will now be recorded under other comprehensive income (OCI). The new item, disposal profit/loss from financial assets that are not measured at fair value through profit or loss, amounted to € 31 million. The corresponding figure of € 459 million from the previous year benefited considerably from special effects in securities transactions.
Administrative expenses fell by 13 per cent to € 1,011 million (€ 1,156 million) compared to the previous year. This is a further success of the One Bank Group-wide transformation programme launched in 2017. Staff expenses, IT costs and consulting expenses all fell significantly.
Other operating profit/loss came to minus € 45 million (€ 29 million) and includes expenses for the bank levy of € 56 million. Due to the ongoing realignment of the Bank and as planned, restructuring or reorganisation expenses nearly doubled by comparison with the previous year, totalling € 219 million (minus € 114 million). Income taxes calculated in accordance with IFRS amount to € 297 million (€ 60 million).
Total assets of the NORD/LB Group were scaled back again in financial year 2018 as scheduled. As as at 31 December 2018, it totalled € 154.0 billion (2017 year-end: € 163.8 billion). Since 2010, NORD/LB has consistently reduced its total assets by one third. The total risk exposure that is crucial for calculating capital ratios has seen an even greater drop, totalling € 45.5 billion at the end of 2018, which is 48 per cent below the figure from 2010.
As a result of the consistent reduction of the NPL portfolio, NORD/LB’s common equity tier 1 capital ratio at 31 December 2018 was 6.82 per cent, down from 12.40 per cent at the end of 2017. The total regulatory capital ratio also declined significantly to 12.78 per cent (previous year: 18.07 per cent). NORD/LB informed the supervisory authority in advance about the temporary drop in the capital ratios. All figures quoted are final values. Given that discussions concerning capital measures are still ongoing until the end of the week, certification of the 2018 financial statement is not yet complete.
Capital plan presented
In the meantime, NORD/LB has presented the banking supervisory authority with a capital plan with a target capital ratio of 14 per cent, which should be attained by end-2019 at the latest. This will exceed by far the new Supervisory Review and Evaluation Process (SREP) requirements of 10.57 per cent applicable from 1 March 2019.
NORD/LB will reinforce its capital ratio via a cash capital injection of € 2,835 million, in which two German federal states will participate, Lower Saxony with roughly €1.5 billion and Saxony-Anhalt with roughly € 200 million. The Savings Banks Financial Group will provide € 1.135 million. Lower Saxony will also be contributing € 800 million in capital-relief measures, bringing the total capital to around € 3.5 billion.
These capital measures remain subject to the approval of the Bank’s relevant bodies, its owners and the DSGV. The Bank and its owners remain in close contact with the EU Commission, which has yet to conduct a state-aid assessment of the capital measures. It is intended to implement the capital measures in the third quarter of 2019.
Segment performance in financial year 2018
All business segments of NORD/LB apart from ship financing continue to be profitable. NORD/LB’s Corporate Customer business stabilised its earnings at a high level despite a difficult market environment characterised by tougher competition and increased pressure on margins. This was also helped by the implementation of an expanded industry approach. Profit before taxes stood at € 182 million. The Corporate Customer segment also includes the housing and agricultural banking divisions.
In the Energy and Infrastructure Customers segment, NORD/LB arranged a total volume of € 3.5 billion in domestic and international project financing. This segment generated earnings before taxes of € 84 million. NORD/LB is among the top 3 banks worldwide financing wind and solar farm projects. Despite growing competition, the Bank maintained its market position as one of the leading financiers of renewable energy in its core European markets of Germany, France, the UK and Ireland. Although the German market for renewable energies was particularly strained in 2018 due to the new legal framework, NORD/LB was involved in more than 20 projects with over € 500 million in total financing volume.
The performance of the Real Estate Banking Customers segment was largely influenced by Deutsche Hypo, the competence centre for commercial real estate financing within the NORD/LB Group. Among the highlights for the 2018 financial year were the financing of a logistics centre in Garbsen near Hanover, “The Oval” office building in Düsseldorf and the development of an urban district in Düsseldorf. Deutsche Hypo issued its second green Pfandbrief with a volume of € 500 million and a term of 6.25 years in the reporting year. It also placed a benchmark mortgage Pfandbrief in British pounds for the first time. In total, the Real Estate Banking Customers segment generated € 142 million in pre-tax earnings.
In the Markets segment, which includes the capital market business with institutional customers, NORD/LB can also look back on a successful 2018. Noteworthy domestic transactions include the first cross-federal state municipal bond, which was issued by five cities, the first green and socially responsible promissory note from the city of Hanover as well as a benchmark bond issued by the federal state of North Rhine-Westphalia worth € 1 billion. In international business, NORD/LB was able to put its skills to the test in several successful transactions in the covered bond segment in particular. This 2018 segment figure was € 54 million.
The Aircraft Customers segment, which includes the asset-based financing of commercial aircraft from reputable manufacturers for aircraft and leasing companies, posted a result which was only slightly lower than the solid result from the previous year. During this time, NORD/LB was able to further develop its expertise as a responsible arranger of large-volume credit facilities and tailored financing structures. One of the highlights of financial year 2018 was the structuring of tailored financing for a European leasing company.
Pre-tax earnings in the Private and Commercial Customers segment was exactly the same as the previous year at € 50 million. The segment includes products and services for all private and commercial customers in the Braunschweigische Landessparkasse (BLSK) region in Hanover, Hamburg, Bremen and Oldenburg. The existing digital service offering was enhanced in 2018 through the addition of product consulting and sales of selected products.
The Savings Banks Network business bundles business activities with savings banks in Lower Saxony, Saxony-Anhalt and Mecklenburg-Western Pomerania as well as parts of Schleswig-Holstein, Hamburg, Bremen and Brandenburg. The collaboration with the savings banks in the lending business as well as municipal financing are also reported here. In 2018, operating earnings for the segment rose significantly. At € 23 million, pre-tax earnings remained unchanged year-on-year.
New business model
The Managing Board and the owners of NORD/LB have agreed together with the Savings Banks Finance Group on the key elements of the future business model of the Bank. Accordingly, in the Corporate Customer business, NORD/LB will remain a strong and reliable partner for SMEs and continue to offer a complete range of services to its large customers as well as to SMEs. Agricultural banking, in which NORD/LB is one of the leaders nationwide, will also remain part of the Corporate Customer business. As a central bank for savings banks, NORD/LB will continue to serve in the Savings Banks Network business as a partner for savings banks in their business region.
In the Renewable Energies and Infrastructure segment, NORD/LB will leverage its strong market position to continue to finance projects in Germany and abroad. The Bank will also continue to operate the Capital Markets business for institutional customers. Deutsche Hypo, which finances commercial real estate for the NORD/LB Group, and Braunschweigische Landessparkasse (BLSK) will remain within the NORD/LB Group. The aircraft financing portfolio is to be reduced, while NORD/LB will fully withdraw from ship financing. The retail banking segment will also see some rescaling. As well as the capital measures presented above, the decisions on the future business model of the bank are subject to the approval of the competent committees. The EU Commission must also give its approval.
Thomas Bürkle said: “The new NORD/LB will not only have less risk and become more regionally focussed, it will also be much smaller. The target size for the medium term is set at total assets of some € 95 billion. We will thus proceed to reduce total assets as we have done over the past ten years. NORD/LB will nevertheless remain a strong and capable bank. We will assist our clients with their international business in the future as well. And we will continue to offer our customers the expertise, reliability and quality they are accustomed to from us.”
Outlook for 2019
Referring to the result for the current financial year, Bürkle had this to say: “Business in the new year is progressing well, even though the competitive environment and regulatory requirements remain challenging. In 2019, we will concentrate in particular on the repositioning and further transformation of the Group. Consequently, it will be a year of transition combined with high restructuring costs. We intend to report a profit before restructuring and taxes in 2019. However, given the amount of expenses planned for restructuring, we currently expect net earnings to be negative again. The repositioning of the Bank takes priority over the quality of results. Nevertheless, we intend to become profitable again by 2020 at the latest.”
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Dr. Thomas Klodt
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NORD/LB Corporate Communication