NORD/LB returns to profit After Shedding Shipping Loans

NORD/LB Norddeutsche Landesbank concluded the financial year 2017 with earnings before taxes of € 195 million. Consolidated profit totalled € 135 million. In the financial year 2016, the Bank posted a loss before taxes of € 1.9 billion as a result of the marked intensification of the global shipping crisis.

“We achieved the four major objectives that we set ourselves for 2017,” said Thomas Bürkle, Chairman of the Management Board of NORD/LB. “The Bank returned to profit again and managed to push its capital ratios up. We have also made much faster progress than originally planned with reducing our shipping loan portfolio. And we took the first important step in repositioning the Group with the complete integration of Bremer Landesbank into NORD/LB.”

Triggering loan loss provisions of € 986 million, the shipping crisis left its mark on the Bank’s Annual Report for 2017. However, the impact on earnings was much smaller than in the previous year. At the same time, the Bank made good progress again with reducing its shipping loan portfolio. By the end of 2017, the portfolio was reduced to € 12.1 billion, after € 16.8 billion just twelve months before.

“During the ongoing reduction in the shipping loan portfolio, we will be focusing on non-performing loans (NPL),” added Bürkle. “We want to bring the NPL portfolio down from € 8.2 billion today to less than € 5 billion by no later than the end of 2019. In addition, we still give top priority to further strengthening our capital ratios as capital requirements of banks will continue to rise.”

NORD/LB’s common equity tier 1 capital ratio, which was 10.5 per cent in the first quarter of 2017, increased to 12.2 per cent by the end of 2017. This means NORD/LB clearly meets all of the regulatory requirements regarding capital. The reduction in risk-weighted assets and securitisation transactions contributed to this.

“We want to continue reinforcing the Bank’s crisis resilience and prepare ourselves for higher capital requirements. This is why we aim to lift our common equity tier 1 capital ratio to at least 13 per cent. Together with our owners, we are currently working on a comprehensive concept to reinforce our capital ratios on a sustained basis and to boost the Bank’s profitability,” said Bürkle. “We are examining various options in this regard, including the possibility of opening the Bank up to private capital.”

The Bank has already taken important steps towards implementing a group-wide transformation programme that Bürkle launched a year ago. Bremer Landesbank (BLB) was fully merged with NORD/LB as at 31 August 2017. This involved concentrating the group-wide business with northern German corporate customers, German wind energy financing and private banking at the former locations of BLB in Bremen and Oldenburg.

“The transformation of the Bank is progressing at full steam. Deutsche Hypo remaining in the Group as well as the partnership with Warburg Bank in the field of asset management are the first decisions taken with regard to the future positioning of the Group,” said Bürkle. “We have also made very good progress in realising synergy effects from the integration of BLB.” Specific contractual solutions reached voluntarily with staff have already fulfilled roughly 90 per cent of the downsizing target (423 jobs) in connection with the BLB merger, either in the form of early retirement measures or termination agreements with severance payments. These would be implemented by the end of 2020 at the latest.

Income statement for the financial year 2017

In the financial year 2017, net interest income in the Group amounted to € 1,417 million (previous year’s figure: € 1,735 million). The decline compared to the previous year was caused not only by the low level of interest on the market but also by the continuous fall in total assets in recent years. In this context, there was a substantial drop in earnings from the shipping loan portfolio, which the Bank has scaled back greatly.

Net allocations to loan loss provisions total € 986 million (€ 2,956 million) and are still exceptionally high, but is significantly lower than in the previous year. This relates almost exclusively to the Ship Customers segment.

Net commission income stood at € 112 million (€ 219 million). This was affected by premiums paid for securitisation transactions totalling € 101 million. Furthermore, the previous year’s figure was overstated on account of a positive special effect stemming from the transfer of the custody business to Landesbank Baden-Württemberg.

The fair value result (including hedge accounting) totalled € 354 million (€ 415 million), while the profit/loss from financial assets rose to € 147 million (€ 49 million). The profit/loss from investments accounted for using the equity method rose from minus € 2 million to € 38 million.

Administrative expenses amounted to € 1,185 million (€ 1,113 million). This increase can be explained by the higher expenses for IT infrastructure on account of the rising regulatory requirements. Administrative expenses also comprise expenditures of € 22 million for the Landesbanks’ deposit security reserve and the ECB provision.

Other operating profit/loss jumped to € 383 million (minus € 173 million) having benefited strongly from special effects from securities transactions. This includes expenditures for the EU banking levy of € 52 million.

Reorganisation expenses amounting to € 85 million (€ 39 million) are connected to provisions for the One Bank transformation programme launched in the previous year. This mainly relates to HR measures associated with the merger of Bremer Landesbank and NORD/LB.

In accordance with IFRS, income taxes totalling € 60 million (€ 94 million) are included in the income statement.

The cost-income ratio totalled 51.4 per cent (50.7 per cent) and return on equity stood at 3.4 per cent (minus 24.7 percent) in the financial year 2017.

The total assets of the NORD/LB Group were scaled back again and as at 31 December 2017 totalled € 165.4 billion (2016 year-end: € 174.7 billion). Since 2010, the total assets of NORD/LB have fallen by 28 per cent. The total risk exposureamount that is crucial for calculating capital ratios dropped even more significantly. At the end of 2017, it totalled € 46,884 million, which is 22 per cent below the figure from the previous year (€ 59,896 million). Risk-weighted assets have fallen by almost half (46 per cent) since 2010.

The common equity tier 1 capital ratio (CET 1 ratio) of NORD/LB was 12.2 per cent on 31 December 2017. After falling to 10.5 per cent in the interim on account of absorbing the loss for the previous year, it is now higher than the end-2016 figure (11.3 per cent). Fully loaded, that is to say, after full application of the Basel III rules to be implemented by 2019, the CET 1 ratio rose from 9.9 to 11.7 per cent. The total regulatory capital ratio as at 31 December 2017 stood at 17.8 per cent (16.3 per cent), and fully loaded at 17.5 per cent (15.2 per cent).

Development of business segments

With the exception of ship finance, all of NORD/LB’s business segments remained profitable in 2017. In the Energy and Infrastructure Customers segment, NORD/LB managed to maintain its market position as one of the leading financiers of renewable energies in Europe. In the financial year 2017, one highlight was the financing for Europe’s largest wind farm in northern Sweden, for which NORD/LB was the mandated lead arranger. In the field of infrastructure financing, various project financing measures were successfully implemented in education.

In the Real Estate Banking Customers segment, Group subsidiary Deutsche Hypo, the competence centre for commercial real estate financing within NORD/LB Group, generated another high business result. From the new business in 2017, we should highlight the financing for the “Phoenixhof” business park in Hamburg, for a shopping centre in Danzig and for a real estate portfolio in France. At the end of 2017, Deutsche Hypo also became the second bank in Germany to successfully place a green mortgage Pfandbrief, which combines the quality product of a Pfandbrief with financing reserved exclusively for energy-efficient properties.

In spite of increased competition and rising pressure on margins, the profit in the corporate customer business increased sharply. The Bank positioned itself successfully on the market particularly with regard to acquisition financing and the issue of debt instruments. The Housing segment operating out of Magdeburg benefited from the rising demand for housing and managed to strengthen its position across Germany. The Bank also expanded its market position as a key specialist in financing agricultural banking.

Competitive pressure in the Aircraft Customers segment remains high too. This business area again focused on operating lease transactions in 2017. Transactions were entered into here with Japanese investors for the first time. The financing of cargo planes for the dynamically growing e-commerce business is becoming an increasingly important field. Here, NORD/LB took part in a cargo plane fund with a total volume of USD 150 million. Loan loss provisions in the Aircraft Customers segment are still very low.

Ship Customers remains the only loss-making business segment of the Group on account of the legacy portfolio loan loss provision allocations that are still very high. Activities here focus on an increased reduction of the NPL portfolio. A separate unit was established for this purpose in the middle of 2017. Certain low-risk and profitable new business transactions were entered into at the same time. The focus here is on expanding activities in the special tonnage segment and the cruise ship and ferry segment.

In the Markets segment, where the main activities focus on business with capital market products for institutional customers, NORD/LB again managed to demonstrate its expertise in placing both its own issues and third-party issues. In this respect, there was a particular focus on the market for euro-covered bonds. NORD/LB once again was ranked in the Top 15 of the “Global League Tables”, a global issuance ranking for covered bonds. As part of its own refinancing activities, NORD/LB placed both a 10-year and a 7-year Pfandbrief benchmark issue in 2017.

In the Private and Commercial Customers segment, which is dominated by Braunschweigische Landessparkasse (BLSK), the result improved slightly in the financial year 2017. The key challenge was the ground gained again by digitalisation. In the previous year, BLSK put in place a Chief Digital Officer and a Digital Management Board. The private banking business of the former Bremer Landesbank (BLB) increased the volume of new financing compared to the previous year. The Elite Report described BLB once more as an “excellent asset manager”.

Outlook for 2018

This year the Bank expects to see tougher regulatory requirements. In particular, the expectations regarding capital adequacy will rise again. This is why NORD/LB is working together with its owners on a comprehensive concept to reinforce its capital ratios. Thought is also being given to the further improvement of the business model and to the strategic and organisational realignment of the entire Group, including the possibility of opening the Bank up to private capital.

“We want to raise the Bank’s profitability, crisis resilience and its future scope for action on a sustained basis,” said Bürkle. “We are targeting profits again in the financial year 2018. Our top priority, though, is to strengthen capital ratios and continue the reduction of the NPL portfolio.”

Source: NORD/LB

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