Significant increase in profit for NORD/LB in 2013
- Earnings before taxes doubled
- Further increase in loan loss provisions
- Core capital ratio up to 11.8 per cent
NORD/LB Norddeutsche Landesbank increased its profit significantly in the financial year 2013. The Group achieved earnings before reorganisation and taxes of EUR 268 million, following EUR 131 million in the previous year, while its earnings before taxes totalled EUR 161 million (previous year: EUR 78 million). Due to tax revenue as a result of one-off effects, earnings after taxes totalled EUR 245 million (EUR 82 million).
“Given the circumstances, we have achieved a good result,” said Dr. Gunter Dunkel, Chairman of the Managing Board of NORD/LB. “We have once again made much higher loan loss provisions for risks in the area of ship financing than in the previous year. Despite this, we have more than doubled our earnings before taxes and even tripled our earnings after taxes. The basis for this success is our proven business model and the very good performance in almost every business segment.”
Net interest income totalled EUR 1,931 million and was therefore, despite the further reduction in total assets, only slightly down on the previous year’s figure (EUR 1,959 million). With interest rates remaining at a low level, interest income and interest expense have fallen compared to the previous year.
Loan loss provisions were increased significantly and rose from EUR 598 million to EUR 846 million. As in the previous year, these were largely made for ship financing business and for the most part comprise net allocations to specific valuation allowances in the amount of EUR 694 million. Net allocations to general loan loss provisions allowances totalled EUR 55 million.
Net commission income was, at EUR 163 million, at around the same level as the previous year (EUR 168 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, totalled EUR 73 million (minus EUR 122 million). The performance of currency derivatives, which were used to hedge exchange rate risks in particular in ship and aircraft finance, had a positive effect.
The profit/loss from financial assets totalled EUR 11 million (minus EUR 5 million). The profit/loss from shares in companies accounted for using the equity method, which was affected by the write-down of an investment in the previous year (minus EUR 14 million), totalled EUR 33 million. Other operating profit/loss totalled EUR 69 million (minus EUR 99 million).
Administrative expenses remained virtually unchanged in the amount of EUR 1,166 million despite increasing regulatory requirements and investment in IT infrastructure (EUR 1,158 million).
Earnings before reorganisation and taxes therefore totalled EUR 268 million (EUR 131 million). The reorganisation expenses in the amount of minus EUR 107 million (minus EUR 53 million) include expenses for measures relating to the capital-boosting programme agreed with the EU Commission as well as expenses for the provision of a possible guarantee by the federal states of Lower Saxony and Saxony-Anhalt that has not been utilised. Earnings before taxes totalled EUR 161 million (EUR 78 million).
Income taxes produced a positive result for 2013 in the amount of EUR 84 million, which was primarily due to one-off effects relating to taxes for previous years and the accounting of deferred taxes required under IFRS. Notwithstanding this, the Group paid current taxes in the amount of EUR 81 million for 2013. This expense is seen alongside the reversal of tax provisions for previous years following the completion of a tax audit as well as deferred non-cash tax revenue.
Earnings after reorganisation and taxes totalled EUR 245 million (EUR 82 million). Comprehensive income, which also includes the income recognised directly in equity, rose to EUR 495 million (EUR 335 million).
Rise in capital ratios
The total assets of the NORD/LB Group were reduced further, by 11 per cent compared to 31 December 2012, to EUR 200.8 billion (EUR 225.6 billion). Since the end of 2008 total assets have been reduced by EUR 43.5 billion by focusing on the bank’s core business segments. Risk-weighted assets (RWA) have been reduced in the same period by EUR 21.3 billion to currently EUR 68.5 billion.
The NORD/LB Group’s capital ratios rose yet again in the past financial year. The core capital ratio (Basel 2.5) rose from 10.9 per cent as at the end of 2012 to 11.8 per cent as at 31 December 2013, while the regulatory capital ratio rose from 13.8 to 14.3 per cent.
“We improved our capital ratios yet again in the past year,” stated Dunkel. “We prepared the bank for Basel III with the successful implementation of the capital-boosting programme in previous years and as a result made it even more crisis-resistant. We have increased our core tier 1 capital in the past three years by a total of EUR 3.5 billion. As we have also provided a high risk cover for our shipping portfolio, we believe that we are well prepared for the upcoming Balance Sheet Assessment by the new European regulatory authorities.”
At the same time NORD/LB is finding new ways to reduce its capital requirement and release its available equity. With the Northvest transaction in March 2014, for example, a EUR 450 million tranche of securitised credit risks was issued from a EUR 11.4 billion reference portfolio of high-quality loans comprising four asset classes to international institutional investors. This transaction alone reduces the bank’s risk assets in the current year by around EUR 4 billion and releases equity in the amount of EUR 350 to 400 million.
Crisis in the shipping sector enters its sixth year – risk cover increased further
Despite the continuing difficult situation in the international shipping markets, NORD/LB’s financing portfolio has remained very stable. Most of the portfolio can be classified as “performing loans”, while only a small number of ships are unemployed. Due to their low average age, the financed ships have a long remaining useful life with a corresponding earnings potential.
Despite the crisis, NORD/LB continues to take on new ship financing business, although it is only doing so on a very selective basis and with a heavy focus on RWA-friendly business. Ship financing is being provided in particular for business not related to traditional commercial shipping segments such as offshore platforms, cruise ships and liquefied petroleum gas tankers.
“Our shipping portfolio is the subject of constant close assessment and analysis,” explained Dunkel. “We also monitor market developments closely. The market has not yet started to recover. However, we expect to see signs of recovery in some segments from 2015 on. The recovery will initially be seen in the market for container ships, product tankers and multi-purpose ships, and later for bulkers and crude oil tankers. However, a differentiated view of the developments in the segments is necessary. Overall it remains highly uncertain how the shipping markets will develop.”
NORD/LB has made significant loan loss provisions for risks in the area of ship financing in recent years. As at 31 December 2013, EUR 1.21 billion was put aside for specific valuation allowances. These provided risk cover for specific shipping exposures. NORD/LB has also put aside general loan loss provisions in the amount of EUR 370 million to act as a risk buffer. The bank’s risk cover therefore totals EUR 1.58 billion.
Successful performance in main business segments
While ship financing still faces major challenges as a result of the crisis, all of NORD/LB’s other business segments performed very successfully in 2013 and more than compensated for the negative impact of the crisis in the shipping sector.
In the energy and infrastructure segment, in which business focuses on the structuring and arranging of project finance, NORD/LB expanded its market position as one of the leading financers of renewable energies in Europe. Successful projects in the wind and solar energy segment were completed in particular in Germany, France, Great Britain and Ireland. With this finance 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.
The NORD/LB Group’s commercial real estate business, which is concentrated in its wholly-owned subsidiary Deutsche Hypothekenbank, was very positive in 2013. Deutsche Hypothekenbank benefited with new business in the amount of EUR 2.7 billion from the sustained growth in its target markets in Germany, Great Britain, France, Benelux and Poland. With innovative transactions such as the strategic cooperation agreed with Bayerische Versorgungkammer in 2013, Deutsche Hypo has also played a large part in institutional investors showing increased interest in the NORD/LB Group’s asset classes.
As one of the longstanding market leaders in the area of aircraft finance, NORD/LB won and successfully processed a total of 38 arranger mandates to finance 67 aircraft with an investment volume of over EUR 2.2 billion (converted) in 2013. The aircraft were mainly financed for leasing companies which lease the aircraft onto airlines, particularly in the growth market of Asia. With its focus on operating leases, NORD/LB has moved early and backed a development which, according to forecasts, will become increasingly important for the aircraft market in the next few years.
In its corporate customers business, NORD/LB was able, despite increasingly intense competition and noticeable pressure on margins, to expand its position in and beyond its core region of northern Germany. Here the focus is on financing solutions that are tailored to the customer. New customer acquisition was successful particularly in the second half of the year. NORD/LB also issued promissory notes for its corporate customers very successfully in 2013. With this product the customer is given the opportunity to gain first experience in the capital market and to make themselves known to external investors.
In its capital market business NORD/LB acted as the syndicated leader or co-lead manager for 115 issues and in so doing increased its activity in this area yet again. NORD/LB’s second US-Dollar public-sector Pfandbrief, which was issued to the market in October 2013 with a volume of USD 1 billion, received particular attention. NORD/LB underlined its continued good standing with the successful issue of its second Flugzeugpfandbrief in February 2014, one and a half years after having issued the world’s first Pfandbrief of this type.
The private and commercial customers segment is mainly defined by Braunschweigische Landessparkasse. The strategic goal of quality leadership in consulting and service was pursued systematically in 2013 with the integrated advisory approach being implemented extensively in all segments with the S-finance concept. The real estate agency and financing business performed well, while there was an increase in income from securities and insurance business.
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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