- CEO Stephan Winkelmeier: “BayernLB is still the stable, reliable partner its customers have come to expect, even in tough times”
- Profit before taxes in 2019 of EUR 653 million, consolidated profit after taxes of EUR 453 million
- Earnings once again driven partly by one-off income, although this was much lower than the previous year
- Net interest and net commission income on par with FY 2018 at some EUR 2 billion
- DKB and real estate business are key earnings drivers
- Capital base remains sound, risk profile improved further
- Distribution to owners postponed for now in line with the recommendation by the European Central Bank
- Strategic realignment launched successfully
Munich - BayernLB closed the past financial year with solid earnings once again. It has therefore further bolstered the basis for its strategic realignment announced at the end of 2019 and once more proven its resilience in a challenging climate. “BayernLB is still the stable, reliable partner its customers have come to expect, even in tough times. Our operational profitability coupled with our still very solid capital base and liquidity means we are ready and able to support our customers flexibly and cooperatively in this very tense situation caused by the corona pandemic,” explained CEO Stephan Winkelmeier as the Bank published its results for financial year 2019.
In the last financial year BayernLB posted profit before taxes of EUR 653 million (FY 2018: EUR 869 million). This figure, which was at the upper end of the forecasts, was buoyed once again by one-off income, although this was lower than the previous year. The Group held its combined net interest and net commission income stable at around EUR 2 billion. Consolidated profit (after taxes) was EUR 463 million (FY 2018: EUR 822 million).
“Despite persistently adverse conditions on the market, our performance last year was satisfactory. It is further proof that we can forge ahead with our new strategy announced in December on our own terms and from a good position. We are building the BayernLB bank of the future – on firm foundations,” continued Winkelmeier.
The goal in the next few years is to reshape BayernLB, shedding its universal bank-like business model to create a streamlined, efficient, specialised bank, with DKB as an innovative online bank under its Group umbrella. To achieve this, in December 2019 BayernLB set up an extensive transformation programme for the core Bank spanning several years and launched growth initiatives in the real estate business and in structured asset finance. In addition, the Bank has set in motion the realignment of its Financial Markets and streamlining of its corporate banking business. Simultaneously, DKB has begun a EUR 400 million investment programme, which will include upgrading its IT systems. With its growth strategy, DKB aims to double its customer base to 8 million in the next five years.
“As we transform our Bank we are focusing on the areas where our strengths lie and where we can offer our customers the greatest added value. We will continue to build on these strengths. Reflecting this, DKB and the commercial real estate business, which will play an even larger role in the Group in future, were again the key earnings drivers in 2019. At the same time, the new structure of our corporates and capital markets business will allow us to leverage growth opportunities in selected sectors and with a product offering tailored to our customers even if competition becomes fiercer,” stated Winkelmeier.
The Group can also build on a successful foundation when it comes to sustainability, an area on which BayernLB will focus even more closely in future. BayernLB subsidiaries DKB and BayernInvest are already pioneers in developing sustainable products and BayernLB itself was once again rated one of the top 10 banks in the world in ISS's sustainability rating at the start of 2020. The Bank has a strong portfolio in renewable energy, and is also a pioneer and one of the leading arrangers of green Schuldschein note loans. Back in 2016 BayernLB placed the first green Schuldschein in the world and has helped arrange nearly half of all sustainable Schuldscheins since then. Last year the Bank co-arranged a green Schuldschein for Porsche AG. With a volume of EUR 1 billion, it was the largest green Schuldschein ever placed in the market.
Financial data 2019: solid performance in line with expectations.
BayernLB’s net interest income remained stable in financial year 2019, despite the persistently unfavourable interest rate environment. It came in at EUR 1,733 million (FY 2018: EUR 1,742 million). Net commission income rose to EUR 287 million (FY 2018: EUR 270 million). The total of net interest and net commission income therefore stayed above EUR 2 billion in 2019.
Risk provisions in the credit business at BayernLB was a positive EUR 251 million (FY 2018: a positive EUR 135 million). The recoveries on written down receivables included in this amount once again comprised a significant gain resulting from a settlement to end all legal disputes with HETA Asset Resolution AG, Vienna. The net positive risk provisions also reflect the BayernLB Group’s overall high portfolio quality.
Because its core markets enjoyed stable economic growth, BayernLB’s risk profile improved again compared with the previous year, pushing down the NPL ratio, which reflects the share of non-performing loans in relation to the overall lending volume, to 0.7 percent.
Gains or losses on fair value measurement came in at EUR -2 million (FY 2018: EUR 151 million). The decline was mainly due to interest rates falling further and the negative impact of cross-currency swaps. Gains or losses on hedge accounting amounted to EUR -19 million (FY 2018 EUR -50 million). This includes the mark-to-market value of underlying transactions and their hedges, the differences in value of which balance out over the terms of the instruments. As in the previous year, gains or losses on financial investments (EUR 40 million) was mainly impacted by proceeds from the sale of bonds, notes and fixed-income securities (FY 2018: EUR 10 million).
Administrative expenses rose to EUR 1,446 million in 2019 (FY 2018: EUR 1,356 million). This increase was partly due to the BayernLB Group employing additional staff to work on the strategic growth areas, especially at DKB, and to meet the steadily growing regulatory requirements.
Expenses for the bank levy and deposit guarantee scheme stood at EUR 134 million (FY 2018: EUR 103 million). The charge included EUR 56 million for the bank levy (FY 2018: EUR 52 million) and EUR 79 million for the contribution to the Savings Bank Finance Group deposit guarantee scheme (FY 2018: EUR 51 million).
BayernLB’s total assets increased slightly to EUR 226.0 billion (FY 2018: EUR 220.2 billion). Risk-weighted assets (RWAs), by contrast, contracted further to EUR 64.6 billion (FY 2018: EUR 65.6 billion).
Rigorous management of risk positions coupled with stable ratings in BayernLB’s credit portfolio were among the factors that ensured the Group still had a very solid capital base as at 31 December 2019. Athough BayernLB had to significantly increase its pension provisions as a result of the historically low interest rates, the fully loaded CET1 ratio as at the year-end was 15.6 percent before appropriation of profits; one year earlier the figure was 14.7 percent.
At 65.8 percent, the cost/income ratio (CIR) was still within the target range (FY 2018: 61.9 percent). Return on equity (RoE) was 6.7 percent (FY 2018: 9.4 percent).
Distributions to the owners
BayernLB’s owners, the Free State of Bavaria and the Bavarian savings banks, should share in BayernLB’s financial success. To this end, the Bank had planned to pay out the reported distributable profit of EUR 150 million to the owners. However, the European Central Bank has since recommended a stop on dividend payments for the duration of the corona pandemic and at least until 1 October 2020. The General Meeting of BayernLB has therefore followed the recommendation by the Supervisory Board and Board of Management and has postponed the decision on appropriation of profit for the time being.
Earnings in the customer-serving operating segments
Corporates & Mittelstand
In the Corporates & Mittelstand segment, profit before taxes was EUR 13 million (FY 2018: EUR 161 million). The drop was mainly due to changes in risk provisions. In the previous year a positive figure of EUR 55 million was posted, due to releases and recoveries on written down receivables, whereas in 2019 gains or losses on risk provisions was a negative EUR 81 million. By contrast, despite the constant great pressure on margins and difficult competitive environment, the segment managed to keep net interest and net commission income largely stable with higher average credit volumes. The sum of net interest and net commission income was EUR 369 million (FY 2018: EUR 373 million). Earnings from Financial Markets’ capital market products were up year on year.
Real Estate & Savings Banks/Association
Profit before taxes in the Real Estate & Savings Banks/Association segment rose to EUR 298 million (FY 2018: EUR 284 million). This was driven largely by good new business and positive operating performance in the Real Estate Division, which posted profit before taxes of EUR 246 million (FY 2018: EUR 243 million). Net interest and net commission income in the division rose by EUR 17 million to EUR 208 million.
The Savings Banks & Association Division’s loss before taxes of EUR 15 million was also an improvement on the prior year (FY 2018: loss before taxes of EUR 18 million). As before, the main reason for the negative result was the damage wrought by low interest rates. Earnings of EUR 56 million from net interest and net commission income were on par with the previous year (EUR 56 million). Earnings from foreign notes and coins and precious metals trading and Financial Markets’ capital market products were up year on year.
BayernLabo, BayernLB’s development bank, posted profit before taxes of EUR 51 million (FY 2018: EUR 45 million). The increase was due mainly to the EUR 5 million rise in net interest income to EUR 66 million. Profit before taxes at real estate asset manager Real I.S. improved to EUR 16 million (FY 2018: EUR 13 million).
The Financial Markets segment posted a loss before taxes of EUR 21 million (FY 2018: profit before taxes of EUR 12 million). A big impact in 2019 came from measurement losses on issues and derivatives; in the previous year measurement gains had been reported. Earnings from the customer business rose to EUR 178 million (FY 2018: EUR 163 million) despite the difficult market environment. The earnings generated from Financial Markets products on behalf of the other customer-serving business segments continued to be reported under those segments. Earnings from transactions with financial institutions improved to EUR 78 million (FY 2018: EUR 72 million). BayernInvest posted profit before taxes of EUR 8 million (FY 2018: EUR 7 million).
The DKB segment’s profit before taxes was EUR 301 million, just falling short of the previous year’s very good performance (FY 2018: EUR 317 million). The slight drop was due mainly to strategic investments in digitalisation and customer service and higher expenses for the bank levy and deposit guarantee scheme. Net interest income contracted slightly as expected to EUR 961 million (FY 2018: EUR 977 million), as a result of the market-induced tightening of interest mar-gins. However, this was more than compensated by measurement gains. At EUR 58 million, expenses for risk provisions were considerably down on the previous year (FY 2018: EUR 105 million) due in part to the still good levels of economic growth and an improvement in portfolio quality. The subsidiary Bayern Card-Services (BCS), which is part of this segment, posted profit before taxes of EUR 10 million (FY 2018: EUR 14 million) with operating earnings stable. DKB expanded its retail customer base to more than 4.3 million (FY 2018: 4.0 million), thereby further consolidating its position as Germany’s second-largest online bank and one of the country’s market leaders in digital banking.
The next important steps in the transformation programme
BayernLB will push forward resolutely with its transformation in the next few months and years. As announced in December 2019, the Bank will focus its corporate customer business primarily on five innovative sectors of the future: energy, mobility, technology, mechanical engineering, and construction and basic materials. It will make systematic use of its “home advantage” in one of the economically strongest regions and will continue to strategically consolidate its expertise in these five sectors and its structuring competence. The Bank has already started implementing its sector focus by establishing a rail sector team, with promising results. Other teams are set to follow gradually in the next few months.
BayernLB will also continue to expand its already strong position in real estate finance. This growth is expected to take place in Germany and in selected foreign markets, especially in western Europe, the UK and the US. BayernLB can rely on its expertise built up over many years and its dense network of customers and investors to achieve this. In addition, the Group will invest a high triple-digit million sum in infrastructure and IT at the core Bank and DKB. This investment will create the conditions to enable further growth at DKB and improve the efficiency of the platform in Munich.
At the core Bank, processes are currently being optimised and levers to reduce costs identified. As announced at the end of 2019, more jobs will need to be cut in a socially responsible manner, over and above the 400 mentioned at the time. It is not yet possible to put a specific number on this. As part of its transformation, the Bank is currently developing a range of measures to optimise costs, which will only be formulated in full in the next few weeks. But one thing’s for sure: social aspects will be taken into account in the additional job cuts. BayernLB has ruled out redundancies until autumn 2022.
The BayernLB Group faces a period of exceptionally high uncertainty during 2020, especially on account of the coronavirus pandemic. Nevertheless it is already evident that the negative impact on global economic output in the first half of the year will be colossal, and this will become even more pronounced the longer the pandemic lasts.
Considering the potential impact on the Bank’s finances, it is not possible to make a serious earnings forecast for 2020 at the moment.
Furthermore, the transformation programme will entail higher capex than the previous year and additional charges for the second stage of reducing the workforce.
The complete press release, including tables, is available in the download box.