- Stable operating performance: net interest income on par with year-before period, net commission income slightly higher
- Support for customers in the form of a high number of subsidised loans – in concert with the Bavarian savings banks and in direct business
- Risk provisions raised to EUR 75 million to cover potential risks from the coronavirus pandemic
- Investments, primarily in DKB’s growth strategy, cause administrative expenses to rise
- Transformation continues unabated despite operational challenges from the coronavirus pandemic; strategic vision confirmed
- Solid capital base: CET 1 ratio of 15.0 percent
Munich - BayernLB posted profit before taxes of EUR 158 million in the first half of 2020 (H1 2019: EUR 316 million) despite increased risk provisions and challenges in connection with the coronavirus pandemic. BayernLB’s operating earnings power remained stable, with combined net interest and net commission income even slightly up on the same period last year at around EUR 1 billion. Consolidated profit (after taxes) was EUR 101 million (H1 2019: EUR 295 million).
“Despite the challenges posed by the coronavirus pandemic, we are satisfied with the first half of 2020, because we not only generated solid operating income, but at the same time pushed ahead with BayernLB's transformation at an unabated pace. We continue to serve our customers’ needs as a stable, reliable partner to ensure their liquidity supply even during the coronavirus crisis,” said Stephan Winkelmeier, CEO of BayernLB. “To this end, we have simplified aspects of our credit processes and increased our consulting capacities, especially for the programmes offered by the state development banks. This enabled us, particularly in our proven close cooperation with the Bavarian savings banks, to process over 6,000 applications for subsidies with a volume of around EUR 2 billion in the first half of the year, solely from the coronavirus programmes,” Winkelmeier continued.
Financial data for the first half of the year: stable performance
Despite the persistently unfavourable interest rate environment, the BayernLB Group’s net interest income was on par with the year-before period at EUR 873 million (H1 2019: EUR 867 million). Net commission income climbed 9.1 percent to EUR 154 million (H1 2019: EUR 141 million).
To cover the potential risks anticipated in connection with the coronavirus pandemic, BayernLB increased risk provisions to EUR 75 million (H1 2019: EUR 10 million) although so far the Bank has not had any notable cases with acute risk provisioning requirements. BayernLB’s NPL ratio, which represents the share of non-performing loans in the total loan volume, fell further. At 0.6 percent, it reached a new record low.
Gains or losses on fair value measurement climbed to EUR 51 million (H1 2019: a loss of EUR 23 million). This figure is largely made up of other financial transactions of EUR 44 million, in particular from business with precious metals. Gains or losses on hedge accounting was a negative EUR 9 million (H1 2019: a loss of EUR 4 million). Gains or losses on financial investments amounted to EUR 31 million (H1 2019: EUR 50 million). As in the previous-year period, this resulted mainly from proceeds from the sale of securities.
Investments, particularly to modernise DKB’s IT and expand sales activities, was a major factor in increasing administrative expenses to EUR 764 million (H1 2019: EUR 713 million). Administrative expenses at BayernLB's core Bank remained stable. Expenses for the bank levy and deposit guarantee scheme rose by EUR 23 million to a total of EUR 142 million. This included EUR 68 million for the bank levy (H1 2019: EUR 56 million) and EUR 74 million in contributions to deposit guarantee schemes (H1 2019: EUR 63 million).
BayernLB’s total assets rose by 14.2 percent to EUR 258.0 billion (31 December 2019: EUR 226.0 billion). The increase is mainly due to BayernLB's participation in the third tranche of the ECB's long-term tender and the increase in the subsidised loan business.
Risk-weighted assets (RWAs) climbed to EUR 67.6 billion (31 December 2019: EUR 64.6 billion) predominantly due to the increase in volume.
The Group continued to enjoy a solid capital base in the first half of the year, with a CET1 ratio as at 30 June 2020 of 15.0 percent (31 December 2019: 15.6 percent).
The cost/income ratio (CIR) rose to 67.2 percent (H1 2019: 61.2 percent), partly because of the increase in investments. Return on equity (RoE) was 3.2 percent (H1 2019: 6.5 percent).
Progress in the transformation process
In recent weeks, BayernLB has examined in detail the long-term impact of the coronavirus pandemic on its new strategic vision. This review confirmed the strategy of the BayernLB Group and its segments: shedding its universal bank-like business model to create a streamlined, efficient, customer bank, with DKB as an innovative online bank under its Group umbrella, is the right path to take.
Despite the operational challenges posed by the pandemic, the Group is forging rigorously ahead with its extensive transformation program, which was launched in January 2020 and will span several years. BayernLB has already achieved key milestones under this project in recent months, such as implementing initial measures to boost earnings and profitability in the Group's business areas and launching the first efficiency initiatives in all units of the Bank. These include establishing a "Non-Core Markets" unit, further improving the credit process, launching IT modernisation projects and starting staff reductions in the core Bank. As specific measures to achieve the cost targets have been fleshed out, the need for further job cuts as announced in December 2019 has been confirmed. They will probably be similar in scope to those already included in the 2019 financial statements. The Bank’s Board of Management and the Staff Council are cooperating closely and constructively regarding the next steps. One thing is certain: these cuts will be carried out in a socially responsible manner, and BayernLB has ruled out redundancies until autumn 2022.
Earnings in the customer-serving operating segments
BayernLB reorganised its operating segments at the beginning of financial year 2020 and now reports the earnings from customer business in three instead of the previous four segments. The previous-year figures provided have been adjusted accordingly.
Profit before taxes in the Real Estate & Savings Banks/Financial Institutions segment was EUR 112 million, almost on par with the year-before period (H1 2019: EUR 117 million). The principal earnings driver was again the Real Estate Division, which made a major contribution of EUR 67 million to the segment’s earnings (H1 2019: EUR 79 million). The main reason for the fall on the year-before period was the net negative risk provisions of EUR -9 million (H1 2019: a positive EUR 18 million), partly to cover expected losses from the coronavirus crisis. Net interest and net commission income even rose to EUR 117 million (H1 2019: EUR 100 million) as a result of volume and margin growth.
Profit before taxes in the Savings Banks & Financial Institutions Division jumped compared to the year-before period to EUR 21 million (H1 2019: a loss of EUR 4 million). Despite the positive trend in the subsidised loan business, income from net interest and net commission income of EUR 60 million was slightly down on the year-before period (H1 2019: EUR 63 million) due to lower income from capital market products. However, the very good performance of the precious metals business was a significant factor in driving up gains and losses on fair value measurement to EUR 48 million (H1 2019: EUR 19 million).
BayernLabo, BayernLB’s development bank for residential construction, posted profit before taxes of EUR 12 million (H1 2019: EUR 28 million). The main reason for the fall was a loss on fair value measurement of EUR 8 million (H1 2019: gain of EUR 3 million) due to mark-to-market losses caused by fluctuations in yields. Real I.S.’s profit before taxes was on par with the previous year at EUR 9 million (H1 2019: EUR 9 million). Profit before taxes at BayernInvest stood at EUR 2 million (H1 2019: EUR 5 million). Besides the impact of the volatile market situation, earnings were dented by investment in IT infrastructure.
The pre-tax profit of the Corporates & Markets segment, which now combines business with corporate customers and BayernLB's capital market activities, was a negative EUR 8 million (H1 2019: a positive EUR 26 million). The decline is mainly due to net negative risk provisions of EUR 65 million to cover expected charges from the coronavirus crisis. In contrast, the previous-year period saw net positive risk provisions of EUR 9 million from reversals and recoveries on written-down receivables. Net interest and net commission income of EUR 184 mil-lion was slightly down on the year-before period (H1 2019: EUR 190 million). Gains or losses on fair value measurement rose to EUR 38 million (H1 2019: loss of EUR 2 million) in spite of market turmoil triggered by the coronavirus crisis. The increase is due, among other things, to the pleasing performance of interest rate and currency derivatives.
The DKB segment’s profit before taxes amounted to EUR 115 million, as expected falling short of the previous year’s good performance of EUR 147 million. Strategic investments in sales and digitalisation, measurement losses due to market turmoil in the wake of the coronavirus pandemic, and increased expenses for the levy and the deposit guarantee scheme were primarily responsible for this. The segment’s combined earnings from net interest and net commission income remained stable at EUR 485 million (H1 2019: EUR 478 million). At EUR 2 million, gains or losses on risk provisions was significantly higher than in the year-before period (H1 2019: loss of EUR 42 million), partly as a result of releases and recoveries on written-down receivables. Profit before taxes at Bayern Card-Services (BCS), a subsidiary belonging to the segment, amounted to EUR 1 million (H1 2019: EUR 2 million). DKB expanded its retail customer base to around 4.5 million (H1 2019: approximately 4.2 million, thereby further consolidating its position as Germany’s second-largest online bank and one of the country’s market leaders in digital banking.
Outlook for full-year 2020
As was clearly stated in the annual results press briefing and with the publication of the Q1 figures, the Group, like the entire banking sector, is facing exceptionally high uncertainty as a result of the coronavirus pandemic. The negative impact on global economic output will be considerable and will be greater the longer the pandemic continues. This will in turn require increased risk provisions. It is therefore still not possible to make a serious earnings forecast for 2020.