Solid result for NORD/LB despite shipping crisis
- NORD/LB achieves consolidated profit before taxes and reorganisation expenses of EUR 129 million
- Equity strengthened, core capital ratio up to 10.9 per cent
NORD/LB Norddeutsche Landesbank closed the financial year 2012 with a consolidated profit before taxes and reorganisation expenses of EUR 129 million, while its consolidated profit after taxes totalled EUR 80 million. While net interest income, the most important source of income in the bank’s operational business, increased significantly, the profit was reduced in particular by an increase in loan loss provisions in ship financing and currency-related valuation effects. In the previous year the bank achieved a consolidated profit before taxes of EUR 536 million, although this was boosted by special effects.
“In view of the difficult conditions, we had expected profits to fall by much more and also stated this last year,” explained Chairman of the Managing Board of NORD/LB, Dr. Gunter Dunkel. “The result for 2012 certainly does not reflect NORD/LB’s full earnings potential. It is though a solid result which demonstrates the bank’s ability to absorb risk. We have once again achieved a respectable profit despite the difficult ongoing crisis in the shipping markets and continuing volatility in the financial markets. This underlines the robustness and resilience of our business model. We are able to absorb the considerable losses in the shipping segment with the contributions to earnings from other business segments. Our proven and solid business model is not dependent on the state of individual sectors of the economy, but is based on very diversified sources of income.”
Dunkel stated that the bank has achieved a sound operating profit with income above expectations. The financial year 2012 was also affected by extensive and successful capital-boosting measures, which resulted in significant increases in capital ratios. “We have not only improved the bank’s competitive position on the income side, but also in terms of its capital resources,” explained Dunkel. The strong level of comprehensive income shows that the bank is in good shape. “Of course, at the end of the day it is always the level of profit that counts. But we have made greater progress in many areas in 2012 than is expressed in the income statement.”
Operational business flourishing, increase in net interest income
Net interest income, the most important income item in the NORD/LB Group’s income statement, increased by 11 per cent in the financial year 2012 to EUR 1,957 million (previous year: EUR 1,762 million), while net commission income rose slightly to EUR 168 million (EUR 166 million).
Loan loss provisions were increased significantly to EUR 598 million (EUR 197 million). These are primarily specific valuation allowances in ship financing in the amount of around EUR 500 million. Dunkel explained that the large increase in loan loss provisions was due to the severe and extraordinarily long crisis in the shipping markets: “We have in recent years benefited in ship financing from always ensuring that the assets we have financed were of a high quality and that our customers had a good credit rating. We have not pursued an aggressive growth policy and have avoided risky financing. Now that the crisis in the shipping markets is entering into its fifth year, it has also started to have an impact on us. We have accordingly increased our loan loss provisions in this segment substantially.”
The profit/loss from financial instruments at fair value including hedge accounting totalled EUR - 122 million (EUR 69 million). In particular changes in exchange rates had a negative impact here, resulting in a loss in value for currency derivatives. These financial instruments are held by NORD/LB in connection with the refinancing of lending business in US dollars. “We intend to become more independent of these reporting-date-related valuation effects which are the result of the market valuation of cross currency swaps under IFRS,” explained Dunkel. “We therefore feel that our strategy of refinancing ourselves more directly in US dollars has been proven to be right, and we will continue to pursue it.” In addition, an improved market valuation of our own credit spread had a negative impact on the fair value result.
The profit/loss from financial assets improved to EUR - 5 million (EUR - 48 million). The profit/loss from investments accounted for using the equity method, which was in balance in the previous year, was EUR - 14 million. Administrative expenses totalled EUR 1,158 million (EUR 1,091 million). The slight increase compared to the previous year is primarily explained by negotiated wage increases, with other cost structures remaining stable. Other operating profit/loss, which includes expenses for the bank levy in the amount of EUR 37 million, totalled EUR - 99 million (EUR 69 million). The consolidated profit before taxes and reorganisation expenses therefore totalled EUR 129 million (EUR 730 million).
The reorganisation expenses in the amount of EUR -53 million include one-time expenses for measures relating to the capital-boosting programme agreed with the EU Commission and in particular provisions for voluntary separation agreements. Earnings before taxes after reorganisation expenses total EUR 76 million (EUR 730 million), while the consolidated profit after taxes and reorganisation expenses totals EUR 80 million (EUR 536 million). Comprehensive income, which also includes the income recognised directly in equity, is very positive at EUR 333 million (EUR - 81 million).
Widely diversified sources of income pay off
In the financial year 2012 in particular the Corporate Customers/Markets, Real Estate Banking Customers and Energy and Infrastructure Customers divisions performed successfully. “Things are going well especially in middle-market finance at the moment,” according to Dunkel. “Our customers value NORD/LB’s reliability and many years of experience in its Corporate Customers business. We intend to continue to build on our very strong market position in this segment in the next few years. But we have also arranged a number of groundbreaking financing packages in the Renewable Energies segment.”
Despite the strong development in our operational business, total assets were reduced compared to the previous year by EUR 2.08 billion to EUR 225.55 billion. Risk-weighted assets were reduced from EUR 84.8 billion to EUR 77.9 billion. However, the volume of customer lending business remained constant at EUR 114.6 billion (EUR 114.7 billion). “Even though we are reducing our total assets and risk-weighted assets in a controlled manner, we are with total conviction, and will remain, a customer bank,” explained Dunkel.
Increased EU capital requirements met in full
The core capital ratio of the NORD/LB Group increased as at 31 December 2012 to 10.9 per cent (31 December 2011: 9.4 per cent). The regulatory total capital ratio rose from 12.6 to 13.8 per cent.
“Our capital ratios have improved continually in recent years,” said Dunkel. “With the capital-boosting programme implemented last year, we have, together with our owners and as predicted, met the increased EU capital requirements in full and on time. In so doing we have strengthened the financial backbone of the bank and made ourselves even more robust.”
NORD/LB continues to have an excellent standing in the capital markets,” Dunkel explained further. This is also reflected by the strong demand from investors for securities issued by NORD/LB in 2012. In the summer of 2012 NORD/LB had successfully launched onto the market the first issue worldwide of an aircraft Pfandbrief with a volume of EUR 500 million and in so doing created a new asset class. In October 2012 followed the issue of the first public sector US dollar Pfandbrief by NORD/LB, which revived this market segment. “With these two successful issues we have placed our refinancing on an even broader base,” explained Dunkel. “They are also proof of NORD/LB’s innovative capacity.”
Improved results expected for 2013
“In the first few months of the new year the operational business has performed well. However, the early months have shown that 2013 will also present us with challenges. These include in particular the crisis in ship financing,” explained Dunkel. “There are signs that we already have the cyclical low point behind us in the shipping markets. However, it is not expected that the crisis will end in the short term and we can therefore again expect above-average loan loss provisions in the current year. This segment will though remain a key pillar of our business model in future.” According to Dunkel, if the national debt crisis in Europe worsens again, this might result in fresh volatility in the financial markets. “What makes us confident, though, are the operational successes in virtually every business segment and our business model’s robustness and resistance to crises. We therefore expect that we will achieve improved results in 2013.”
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