-- --$ BayernLB agrees new strategy
BayernLB

19-Dec-2019

BayernLB agrees new strategy

  • DKB at the forefront of a technology initiative; current growth rate of 50,000 customers a month to be significantly boosted
  • BayernLB’s real estate business to be increased
  • Corporate finance to focus on five sectors of the future and sustainability
  • Significant winddown in capital market business initiated – provisions established for socially responsible cutting of 400 jobs
  • Major investment in modernising infrastructure and IT
  • CEO Stephan Winkelmeier: “We are carving out our own path and building the BayernLB bank of the future, without abandoning our proven conservative risk guidelines”
  • Despite reorganisation, BayernLB forecasts earnings in the mid-triple-digit millions for 2019

Munich - BayernLB has made good progress in recent years and regularly posted solid earnings in a tough market environment. To continue this success going forward, BayernLB is tackling persistently low interest rates and the other major challenges facing the banking sector in the next few years by focusing on the high-growth sectors of the future, while at the same time reducing its cost base.

With this tighter strategic approach BayernLB aims to achieve sustainable competitive profitability. Under the target vision approved by the Supervisory Board, BayernLB will evolve into a streamlined, specialised bank by 2024. In the lending business it will concentrate in particular on five sectors of the future of the Bavarian and German economies going forward, along with commercial real estate finance in Germany and in selected foreign markets. At the same time the Group will invest an amount in the high-triple-digit millions in infrastructure and IT in Munich and Berlin, so as to significantly increase the efficiency of the platform in Munich and drive growth at the Bank’s subsidiary DKB. The intention is to double DKB’s customer base from some 4 million today to around 8 million in the next five years.

“BayernLB is carving out its own path in a climate of persistently low interest rates resulting in profound and disruptive changes in the competitive environment. We know where we want to be and we know that we have the tools we need to get there. We are building the BayernLB bank of the future, with a clear value proposition to our customers and high standards for ourselves – and without abandoning our proven conservative risk guidelines. We don’t need to completely reinvent ourselves to do this. But we will make a lot of changes to make sure BayernLB is financially healthy in the long term and to ensure it remains one of Germany’s independent and sustainably successful banks in future,” explained CEO Stephan Winkelmeier.

With the realignment of its strategy, BayernLB aims to achieve lasting, profitable growth by building on its strengths. The Bank expects the greater focus on sustainable issues, which as a public-sector bank it traditionally feels a strong obligation to support, to open up new business potential. At the same time, BayernLB will concentrate on those customers for whom it can create sufficient value added. In particular, the product offering in the capital market business is to be pared considerably. Overall, costs at the core Bank are to be cut substantially, which, together with higher earnings, especially at DKB, will substantially boost the Group’s profitability. In concrete terms, BayernLB plans to achieve a return on equity (RoE) before taxes at around 8 percent, with a CET1 ratio of at least 14 percent for 2024; RoE is currently at around 5 percent, although this is buoyed considerably by positive one-off items.

Strong client-serving business areas as pillars of the strategy

As part of its strategic realignment, BayernLB has also developed clear target visions for the individual business segments.

DKB: The top growth driver of the BayernLB Group will still be DKB, which has already recorded dynamic growth in the past few years. DKB is set to consolidate its position as a tech bank and digital companion to its customers. Investments of some EUR 400 million in growth and the future are planned in the next five years. BayernLB expects earnings at its subsidiary to surge with the intended doubling of its customer base to 8 million. In conjunction with disciplined cost management, DKB should achieve RoE of a good 10 percent before taxes by the end of the investment period.

Real Estate, Savings Banks and Financial Institutions: BayernLB will significantly expand its commercial real estate finance business in the next few years. This growth is expected to take place in Germany and in selected foreign markets, especially in western Europe, the UK and the US. BayernLB is relying on its expertise built up over many years and its dense network of customers and investors to achieve this. As a result, the Bank expects to significantly grow its loan portfolio in real estate finance and earnings in the real estate business by 2024.
BayernLB will also continue to be the central bank to the Bavarian savings banks and to act as a partner supporting these institutions with a competitive and focused range of products. The Bank is open to discussions about pooling product expertise to a greater extent within the sector by sharing labour. Moreover, BayernLB will continue in its role as a strong partner to the public sector. In future, support for all financial institutions will be provided by this business area. Overall, the plan is to grow earnings slightly in the business with savings banks and financial institutions through the strategic adjustments, while at the same time aiming to cut costs.

Corporates & Markets: As a specialised bank for the topics of the future and an innovation partner to the Bavarian and German economy, BayernLB will use its structuring expertise in finance (structured asset finance) and selected capital market products to provide advice and support, especially to companies from five innovative sectors of the future – energy, mobility, technology, mechanical and plant engineering, construction and basic materials. To this end, the Group has combined its previous “Financial Markets” and “Corporates & Mittelstand” units to form the new segment “Corporates & Markets”. The parts of the capital market business that no longer meet customers’ needs and are not profitable enough will be gradually wound down. The Bank anticipates that earnings will fall by around one fifth across the entire segment by 2024, while at the same time large amounts of capital will be released. In addition, costs will be cut significantly in this segment.

“We have a lot of strengths, which we will leverage even more effectively in the next few years. We are convinced that, by changing tack from a universal bank towards an efficient, specialised bank and innovative digital bank under one roof, we as the BayernLB Group will be able to continue along the successful path of recent years,” commented CEO Winkelmeier.

DKB is expected to make the biggest contribution to increasing profitability, but the core Bank is also required to become much more profitable. To this end, costs will be cut considerably – in conjunction with a moderate rise in earnings – by 2024. Alongside reducing the complexity of the product offering, the focus will be on optimising the IT infrastructure and internal processes. This will result in considerable savings in all the central areas in addition to streamlining the business areas.

The strategic realignment will mean job cuts in the core Bank in the next few years. In the capital market business, including downstream units in the back office and central areas, around 400 jobs will be shed in a socially responsible manner. The number of further job cuts required will be defined in the coming months as the details of the programme of measures are fleshed out. These cuts will also be carried out in a socially responsible manner, and BayernLB has ruled out redundancies until autumn 2022.

BayernLB’s transformation, which will take several years, will weigh on earnings, particularly in 2020 and 2021, due to the investment and restructuring expenses it entails. It has posted restructuring expenses in the current year for the job cuts necessary in relation to reduction of the capital market business and for modernising its IT systems. Nevertheless, the Bank maintains its forecast of profit before taxes in the mid-triple-digit millions for financial year 2019