NORD/LB doubles earnings before taxes
- Rise in net interest and commission income
- Increase in customer loans despite reduction in total assets
NORD/LB Norddeutsche Landesbank achieved earnings before taxes of € 276 million in the financial year 2014 and thereby significantly increased its pre-tax profit. In 2013 its earnings before taxes had totalled € 140 million. Its consolidated profit after taxes totalled € 205 million in 2014. The previous year’s figure (€ 224 million) was boosted by a special tax effect. There was no change in the preliminary figures for the financial year 2014 published at the end of March.
“We had set ourselves the target for 2014 of improving on the previous year’s earnings. We have clearly achieved this target. Our earnings before taxes has almost doubled, despite the additional difficulties that could not be foreseen one year ago,” stated Dr. Gunter Dunkel, Chairman of the Managing Board of NORD/LB, referring to the securities of Hypo Alpe Adria Bank, for which the Austrian Financial Market Authority imposed a payment standstill until the 31 May 2016. “While the current level of low interest rates represents a challenge for us, too, as a special financer with proven industry know-how and a high level of structuring expertise, we are less dependent on interest rates. This pays off in times like these.” The continuing negative impact of the global crisis in the shipping sector has once again been more than compensated for by the other business segments.
Net interest income rose despite the further reduction in total assets to € 1.985 billion and was therefore € 54 million up on the previous year’s figure (€ 1.931 billion). Following a further drop in interest rates in the money and capital markets, both interest income and interest expenses have fallen. Net allocations to loan loss provisions were reduced compared to the previous year by € 111 million to € 735 million (€ 846 million). The ship finance portfolio accounts for most of these, while the risk situation remains unstressed in the NORD/LB Group’s other business segments.
Net commission income rose significantly to € 185 million (€ 163 million). The profit/loss from financial instruments at fair value including hedge accounting, which also includes much of the capital market business with institutional customers, rose by € 57 million to € 130 million (€ 70 million). This development was prompted by the fall in general market interest rates in the eurozone. The performance of currency derivatives, which were used to hedge currency risks in lending, had a positive effect.
The profit/loss from financial assets totalled minus € 3 million (€ 11 million) and was affected in particular by the necessary valuation allowances for securities of Heta Asset Resolution AG (Heta), which is responsible for the winding-down of Hypo Alpe Adria Bank’s assets. The profit/loss from investments accounted for using the equity method totalled minus € 37 million (€ 33 million) and was affected by the unscheduled write-down of an investment. Other operating profit/loss totalled minus € 75 million (€ 49 million).
In the course of an efficiency improvement programme, the aim of which is to achieve faster and leaner processes in all areas of the bank’s operations, administrative expenses were reduced noticeably despite increasing regulatory requirements and investment in IT to € 1.125 billion (€ 1.167 billion).
Earnings before taxes and reorganisation expenses therefore totalled € 325 million (€ 247 million). The reorganisation expenses in the amount of minus € 49 million (minus € 107 million) included expenses for measures relating to NORD/LB’s capital-boosting programme agreed with the EU Commission. Earnings before taxes and after reorganisation expenses totalled € 276 million (€ 140 million).
The income taxes reported in the IFRS consolidated financial statements for 2014 totalled € 71 million. In the previous year, due to a special effect in IFRS (including the reversal of tax provisions), a profit-boosting effect in the amount of € 84 million was reported here, even though the bank had also paid income taxes of around € 81 million in this year. Earnings after taxes and reorganisation expenses totalled € 205 million (€ 224 million).
Total assets reduced further
The total assets of the NORD/LB Group were reduced further, from € 200.8 billion at the end of 2013 to € 197.6 billion as at 31 December 2014. This reduction has had no effect on the issuing of loans to customers, the volume of which has even risen slightly to € 108.3 billion. The total risk exposure (previously risk-weighted assets) totalled € 69.2 billion (€ 68.5 billion).
The NORD/LB Group’s capital ratios stabilised in the past financial year. The Common Equity Tier 1 capital ratio was 10.7 per cent (simulated comparative value as at 31 December 2013: 10.3 per cent), while the total regulatory capital ratio was 13.2 per cent (13.2 per cent). Both ratios have been reported since 1 January 2014 in accordance with the new rules of the Capital Requirements Regulation (CRR) based on IFRS.
“We have implemented our capital-boosting programme vigorously in recent years. With NORD/LB’s successful performance in the stress tests, we are reaping the benefits of these measures,” stated Dunkel. “The stress test has shown that NORD/LB has adequate capital even in a crisis scenario.” In the results of the comprehensive assessment of European banks, which were published at the end of October 2014, NORD/LB had achieved a Common Equity Tier 1 capital ratio of 8.8 per cent in the most severe scenario and therefore exceeded the required minimum ratio of 5.5 per cent by a significant margin.
The restructuring of the joint guarantee system of savings banks, Landesbanken and Landesbausparkassen means that NORD/LB will remain part of a strong joint liability scheme in the future as well. NORD/LB's owners have already given their approval to the recently renegotiated statutes of the German Savings Bank Association.
Significant developments in the business segments
Despite intense competition, NORD/LB improved its result in the Corporate Customers segment in part due to an increase in net interest income. In particular the very positive result in Acquisition Finance, in which 19 transactions were successfully completed in the German Middle-Market with financial investors, should be noted. Agricultural Banking, which is reported in the Corporate Customers segment, continued to successfully build on its leading nationwide market position.
The performance in the Energy and Infrastructure segment, in which the focus is on structuring and arranging project finance, was affected in the financial year 2014 by an increase in interest and commission income. Despite increasing competition, NORD/LB was able to build on its market position as one of the leading financers of renewable energies in the key markets of Germany, France, Ireland and UK. It also financed its first wind park project in Italy. In financing these projects, NORD/LB is not only helping to export German project development expertise, but also to export German turbine technology to those locations in Europe which, due to their natural conditions, are particularly predestined to produce power from wind energy.
Business results in the Ship Finance segment continue to be affected by the global crisis in this sector. The bank has again managed to return many exposures at risk of default to a solid economic footing thanks to its active remarketing. At the same time NORD/LB significantly increased its new business activity in this segment in 2014. “We have been managing a transformation of our ship finance portfolio for some time,” explained Dunkel. “Outgoing old business is being replaced by new, attractive business. We will of course stick to our proven conservative financing principles.”
The Aircraft Finance segment developed its product range further with its established asset approach, with commission-based advisory services playing an increasing role. One transaction highlight was the launch of a Junior Loan Fund with established industry partners around the manufacturer EADS (Airbus).
NORD/LB Group’s commercial real estate business, which is concentrated in its wholly-owned subsidiary Deutsche Hypothekenbank, was very successful in 2014. Due to the favourable conditions in the commercial real estate market, Deutsche Hypothekenbank increased its new business volume by 36 per cent to € 3.6 billion, with activities in the European target markets accounting for much of this growth. Deutsche Hypo’s income performance also improved.
Significant drivers of the positive earnings performance in capital market business were transactions with institutional customers and savings banks in traditional capital market products and the issuing of bonds. NORD/LB’s second Flugzeugpfandbrief, which was issued to the market in February 2014 with a volume of USD 500 million, and the Northvest transaction in March 2014, with which a tranche of securitised credit risks in the amount of € 450 million was issued from a portfolio of high-quality loans to international investors, received particular attention. NORD/LB also entered into a cooperation with the Talanx Group at the start of the year in the promising alternative investments sector.
The Private and Commercial Customers segment is mainly defined by Braunschweigische Landessparkasse, in which a change of strategy has taken place in the past year. The focus will be on the one hand on increasing income by exploiting customer potential and improving efficiency by further standardising processes on the other. Staff will be concentrated in the branch network in the bank’s bigger locations in order to increase their availability to provide one-to-one advice. With around 100 locations, Braunschweigische Landessparkasse will continue to have an extensive presence in its business region. These locations include branches offering comprehensive advice, finance centres that also deal with insurance matters and are operated jointly with Öffentliche Versicherung Braunschweig, and self-service centres.
Low interest rates an opportunity
Dunkel was cautiously optimistic about the bank’s development in the ongoing financial year: “We have made a good start to the year. Despite the increase in valuation allowances for the Heta securities in the NORD/LB Group to around 50 per cent of their nominal value, we will report a good result for the first quarter. The environment will of course remain challenging, due in particular to the continuing phase of low interest rates. However, we also consider the environment of low interest rates to be an opportunity to extend our position as a provider of alternative investments.”
Regarding future development in the Ship Finance segment, Dunkel commented: “It is still too early to sound the all-clear in this segment. The crisis in the shipping sector will continue to have a significant negative impact in 2015. However, due to our successful performance in our other main business segments, we will again be able to more than compensate for this. We have therefore again set ourselves the target for 2015 of improving on the previous year’s earnings before taxes.”
Environment remains challenging
The conditions for the NORD/LB Group’s business will remain challenging in 2014. “We are again expecting to make above-average loan loss provisions for risks in the area of ship financing in the current year,” said Dunkel. “However, thanks to stable income and our proven, customer-oriented business model with its highly diversified sources of income, NORD/LB will continue to be profitable. Our goal is to achieve a higher profit in the current financial year than in the previous year.”
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