04-03-2017

Shipping Financier DVB Bank posts consolidated net loss

DVB

DVB Bank SE (ISIN DE0008045501), the international transport finance specialist, reported a consolidated net loss before taxes of €135.3 million for 2016 (previous year: consolidated net income of €46.1 million). Since DVB Bank SE, the parent company of the DVB Bank Group, did not generate a net retained profit during the financial year, regretfully no dividends will be paid.

Ralf Bedranowsky, CEO and Chairman of DVB Bank SE’s Board of Managing Directors, commented on the Bank’s consolidated results:

“During 2016, DVB’s business performance was characterised by challenges as well as by positive developments.

Results were burdened by two factors in particular: by an increased allowance for credit losses, and by a decline in the net result from financial instruments in accordance with IAS 39.

Due to the persistent downturn in numerous segments of the shipping industry and an ongoing challenging environment for the offshore industry caused by low oil prices, allowance for credit losses largely required for legacy exposures in the Shipping Finance portfolio, and for financings in the Offshore Finance portfolio, rose by €239.9 million to €381.4 million (previous year: €141.5 million). This increase was triggered, in particular, by the following market developments in the shipping industry – which has struggled for the past eight years, and continued to do so in 2016:

High tonnage overcapacity, being the main contributor to the continued decline in many segments of the shipping industry;

As further tonnage capacities entered the market, this pushed charter rates down even further. In the offshore segments, charter rates have been under pressure since 2015. In the first half of 2016, earnings in the dry bulk shipping markets hit their lowest mark since the shipping crises of the 1980s. Likewise, in container shipping, charter rates slumped during the third quarter of 2016 due to structural overcapacities.

Vessel values developed in accordance with the decline in charter rates.

These market distortions persisted throughout the third and fourth quarters of 2016, further burdening the shipping clients’ liquidity cushions. This in turn affected lenders to a higher extent than before.

Also geopolitical developments brought about lower trading activities in the Eastern Mediterranean, imposing an additional burden for some shipping markets during the third quarter of 2016.

Net result from financial instruments in accordance with IAS 39 – which is generally volatile – amounted to €–2.7 million (previous year: €70.8 million). In the previous year, the result from investment securities had included substantial non-recurring income generated by the Bank’s Aviation Investment Management, due to the disposal of a stake in Wizz Air Holdings Plc.

However, there were five positive factors:

DVB generated a healthy level of new business in our Transport Finance divisions, contributing to a sound operational performance in our core business. As at 31 December 2016, the Bank’s new business in Shipping Finance, Aviation Finance, Offshore Finance and Land Transport Finance comprised 157 transactions with an aggregate volume of €6.5 billion – compared to 190 transactions with an aggregate volume of €7.2 billion during the previous year.

Net interest income rose by 13.8%, from €183.7 million to €209.0 million, due to new business originated.

Net fee and commission income, which primarily includes fees and commissions from new Transport Finance business as well as asset management and Corporate Finance advisory fees, developed favourably, rising by 15.4%, from €103.3 million to €119.2 million.

General administrative expenses were reduced to €177.5 million (previous year: €180.9 million), despite the continued high demands posed by regulatory-driven projects.

Net other operating income/expenses amounted to €99.6 million (previous year: €14.7 million), including a €150.0 million contribution to income by DZ BANK AG Deutsche Zentral-Genossenschaftsbank, Frankfurt am Main, to the parent company DVB Bank SE as a special effect.

Outlook and goals for 2017:

We aim to exploit the macroeconomic environment in 2017 as an opportunity to continue offering our range of financing, advisory and other services tailored to transport assets, and will therefore continue to support our transport sector clients with new business on a selective basis during the forecast period.

We plan to sustain the positive business development in Aviation Finance and Land Transport Finance, and indeed further leverage the earnings potential of these businesses.

Moreover, we will undertake every possible effort to avoid having to record a loss as in 2016. We intend to reduce the higher risk costs in Shipping Finance and Offshore Finance during 2017 and 2018. This is based on assumptions that the persistent tonnage overcapacity in some shipping segments will not rise beyond existing levels, and that charter rates and asset values will not decline further. The offshore sector remains under pressure, due to the low oil price levels. We expect this pressure to prevail during 2017, which might lead to further charges on the portfolio. Hence, we will continue to apply a very intensive risk management to these areas.”

The detailed items of the consolidated financial statements are provided below:

Net interest income rose by 13.8%, from €183.7 million to €209.0 million, due to the healthy level of new business originated. Interest income increased by 1.5% to €1,025.0 million (previous year: €1,009.4 million), while interest expenses fell by 1.2% to €816.0 million (previous year: €825.7 million). Allowance for credit losses increased to €381.4 million (previous year: €141.5 million), mainly required for legacy exposures in the Shipping Finance portfolio and for financings in the Offshore Finance portfolio. New allowance recognised for credit losses totalled €523.7 million, €344.7 million of which in Shipping Finance. Conversely, allowance for credit losses of €139.1 million was reversed (of which €114.8 million in Shipping Finance). Total allowance for credit losses (composed of specific and portfolio-based allowance for credit losses and provisions) increased from €291.8 million to €633.1 million as at 31 December 2016. As a consequence of higher allowance for credit losses, net interest income after allowance for credit losses was down from €42.2 million to €–172.4 million.

Net fee and commission income, which primarily includes fees and commissions from lending business as well as asset management and Corporate Finance advisory fees, developed favourably, rising by 15.4% to €119.2 million (previous year: €103.3 million). Fee and commission income thereby rose by 12.6% to €126.6 million (previous year: €112.4 million), whilst fee and commission expenses declined by 18.7% to €7.4 million (previous year: €9.1 million).

Results from investments in companies accounted for using the equity method increased from €3.9 million to €9.6 million.

Net other operating income/expenses rose from €14.7 million to €99.6 million. Net other operating income increased from €52.7 million to €198.8 million, and included a €150.0 million contribution to income by DZ BANK AG Deutsche Zentral-Genossenschaftsbank, Frankfurt am Main. Net other operating expenses amounted to €99.2 million (previous year: €38.0 million), mainly attributable to write-downs of goodwill in Offshore Finance and Investment Management.

General administrative expenses declined by 1.9% to €177.5 million (previous year: €180.9 million). Staff expenses decreased by 0.7%, from €104.2 million to €103.5 million. The number of employees rose by 15 (+2.5%), to 624 persons at the 2016 year-end. With 324 employees, staff levels in our core Transport Finance and Investment Management businesses showed an increase of ten during 2016 over the previous year’s level (previous year: 314 employees). With 242 employees, staffing levels in the service areas rose by seven staff members (+3.0%), predominantly due to the additional workload imposed by regulatory requirements. At €68.5 million, non-staff expenses were 4.6% below the previous year’s level (previous year: €71.8 million) and were largely composed of advisory expenses of €25.5 million (previous year: €27.2 million), ancillary labour costs of €16.1 million (previous year: €19.1 million), and occupancy costs of €9.6 million (previous year: €9.8 million). Net depreciation, amortisation, impairment and write-ups increased by 12.2%, from €4.9 million to €5.5 million.

Net result from financial instruments in accordance with IAS 39 (comprising the trading result, the hedge result, the result from derivatives entered into without intention to trade, and the result from investment securities) – which is generally volatile – amounted to €–2.7 million (previous year: €70.8 million). In the previous year, the result from investment securities had included substantial non-recurring income generated by the Bank’s Aviation Investment Management, due to the disposal of a stake in Wizz Air Holdings Plc.

Consolidated net income/loss before taxes totalled €–135.3 million (previous year: €46.1 million) and consolidated net income/loss (after taxes) amounted to €–138.7 million (previous year: €45.6 million).

At €29.2 billion, the business volume in 2016 was up 3.5% on the previous year (previous year: €28.2 billion) – due to currency translation effects. Besides total assets of €27.7 billion (previous year: €26.6 billion), the business volume includes irrevocable loan commitments of €1.5 billion (previous year: €1.6 billion). DVB’s nominal volume of customer lending (aggregate of loans and advances to customers, guarantees and indemnities, irrevocable loan commitments, and derivatives) rose by 2.4%, to €25.9 billion (previous year: €25.3 billion), also reflecting currency translation effects.

The key financial indicators which DVB Bank Group uses to manage its business reflected the regressive business performance: return on equity (before taxes) stood at –10.8% (previous year: 0.8%), the cost/income ratio at 44.3% (previous year: 55.3%) and risk-adjusted Economic Value Added totalled €–249.0 million (previous year: €–86.8 million).

DVB discloses capital ratios determined on the basis of Basel III (Advanced Approach) and after appropriation of profits: on this basis, the common equity tier 1 ratio amounted to 13.2% (previous year: 16.3%), whilst the total capital ratio was 20.7% (previous year: 22.4%).

Source: DVB Bank SE

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