WestLB Posts Positive Result
Considerable charges from the financial market crisis absorbed
Market positions improved, customer business expanded
Costs reduced sharply
Risk-weighted assets trimmed substantially in conformity with the Bank´s strategy
Sustainable consolidation solution remains the goal
WestLB Group closed the year under review with a positive result despite the further deepening of the financial market crisis and the noticeable slowdown of the economy. Profit before income tax amounted to € 26 mil-lion in 2008 (2007: € -1,498 million), whilst the profit after income tax stood at € 18 million (2007: € -1,597 million). In the single-entity accounts according to HGB, WestLB generated a pre-tax profit of € 188.2 million (2007: € -1,048.1 million) and an after-tax profit of € 100 million (2007: € -1,163.6 million). The result includes additional valuation losses on securities caused by the acute market distortions, expenses for restructuring and higher risk provisions. Offsetting items included the effects from the risk shield at the end of the first quarter of 2008 and substantial cost savings achieved in the course of restructuring, which is proceeding ahead of target.
Operationally, WestLB’s performance in 2008 was in line with expectations. Income increased in the customer business and market positions were improved. Overall, net interest income and net fee and commission income increased. In addition, the Bank ensured the availability of sufficient liquidity without external support and improved the core capital ratio from 5.6% to 6.4%. Moreover, the Phoenix transaction freed WestLB from “bad bank assets”: WestLB is the only bank in Germany which no longer carries its “toxic securities” on the balance sheet. As a result, WestLB was much less affected by the escalation of the crisis in the financial markets and the exacerbating effects of IFRS/Basel II accounting rules.
Heinz Hilgert, Chairman of the WestLB Managing Board, said: “WestLB performed comparatively well in 2008 in what was an extremely difficult year for banks. We remained on course operationally, improved our market position and expanded the customer business.” The Chairman pointed out that WestLB also made solid progress in 2008 in tackling the strategic challenges facing the Bank. Risk-weighted assets were reduced further and non-strategic assets – which are not “toxic” securities – were pooled in a Portfolio Exit Group. By doing so, an essential step had been taken towards freeing the Bank from non-customer-related activities and focusing on the core business operations.
Operationally on Course, Market Positions Improved
In an extremely difficult market environment, WestLB remained on course operationally in 2008, improving key market positions in its core busi-nesses. In the core markets new lending business totalling € 21 billion was serviced in spite of the dramatic framework conditions. WestLB was the top project finance bank in Germany and advanced from 18th to 7th place in-ternationally in 2008. In syndicated lending, WestLB more than quadrupled its market share in Germany. In October 2008, our subsidiary readybank ag became the official partner of the S-Finanzverbund NRW in the consumer credit business and has already entered into binding commitments for co-operation with approximately half of all savings banks in North Rhine-Westphalia. Westdeutsche ImmobilienBank AG (WestImmo) increased its volume of new business with the savings banks by 13%. WestImmo more than held its own in 2008, a year dominated by the crisis, and repercus-sions of the crisis, in the financial markets. In contrast to the trend demon-strated by many other mortgage banks, its profit before income tax rose by 6%.
Net Interest Income Up 10%, Costs Down 15%
The operating successes in the WestLB Group are reflected, amongst other things, in the net interest income. In the year under review it amounted to € 1,216 million, up € 107 million, or 10%, from the previous year, with particularly solid increases in project finance, commercial real estate finance and money market transactions. A net allocation of € 479 million is being reported under the impairment charge for credit losses, compared with € 238 million a year earlier. The gross allocation of € 803 million is primarily attributable to the repercussions of the financial market crisis as well as the rating downgrade occasioned by the economic downturn. Adequate provisions have been made for all discernible risks.
The decrease in net fee and commission income by € 69 million to € 341 million is largely the result of the crisis in the international financial markets. Substantial impairments in the securities and custody business compared with relatively moderate decreases in the lending and syndicated lending business. Net fee and commission income from payment transactions was level with the previous year.
The net trading result totalled € 47 million. The previous year’s result, at € -1,635 million, was largely driven by substantial valuation losses on structured securities portfolios, which were ring-fenced off the balance sheet in the first quarter of 2008 as part of the risk shield. The resulting ring-fence gain had a substantial impact on the net trading result, driving it € 763 million higher. The ongoing turmoil in the international financial markets had an offsetting effect. For example, the valuation of top-rated government bonds and similar assets alone resulted in losses of approximately € 540 million. WestLB reclassified certain trading assets and other assets in the second half of the year, which drove the net trading result higher by € 413 million.
The result from financial investments fell from € 291 million to € -19 million. The year-earlier result was largely fuelled by gains earned on the sale of holdings in the private equity and equity investments business.
Administrative expenses were reduced by € 235 million to € 1,341 million, a drop of 15%. Personnel expenses amounted to € 645 million, which is 22% below the previous year. The absence of bonus payments for 2008 and the reduction of headcount by 484 full-time employees contributed significantly to these savings. Agreements for additional headcount reduc-tions have been signed, which will take effect in the further course of the year. As a result, 57% of the targeted headcount reductions of at least 1,350 full-time employees by the end of 2010 have already been achieved. The decrease in other administrative expenses by 8% to € 696 million is also a reflection of the lasting successes of the cost-cutting measures.
The net figure for other operating income and expense, at € 402 million, was € 295 million above the previous year. The deconsolidation of various special purpose vehicles in connection with the risk shield had a considerable bearing on this improvement. Restructuring expenses were a net € 141 million, with allocations of € 253 million offset by a reversal of € 112 million in restructuring provisions no longer needed. Thus, all essential expenses for restructuring measures initiated have already been included in the 2008 result.
In conformity with the strategy, the volume of risk-weighted assets was reduced considerably, from € 104.3 billion to € 88.5 billion, or 15%. At € 288.1 billion, total assets were almost unchanged. The systematic reduc-tion in non-customer-related assets was offset by a sharp increase in market values of derivative financial instruments, mainly as a result of the sharp fall in interest rates since September 2008. Core capital increased by 4% to € 5.7 billion and the core capital ratio rose from 5.6% to 6.4%.
The profit participation certificates issued by the Bank as well as the hybrid capital issued in 2005 are being serviced in full according to the terms on which they were issued.
Customer Business Segments on Target
Despite the financial market crisis, the customer-driven units performed as planned and proved to be largely crisis-resistant. Total net interest income and net fee and commission income rose year-on-year in three of the four customer segments (Verbund & Real Estate, Capital Markets and Transac-tion Banking). Net interest income and net fee and commission income were below their year-earlier level only in the Corporates & Structured Finance segment, which has been particularly affected by the crisis in the financial markets. Whereas corporate and project finance business fared well, in particular valuation losses from secondary market portfolios – above all government bonds and similar assets – drove the pre-tax result lower. These portfolios have been pooled in the Portfolio Exit Group (PEG) and are being wound down. Risk provisioning was likewise higher on account of the repercussions of the financial market crisis as well as the rating downgrade occasioned by the economic downturn. Overall, the pre-tax loss amounted to € 830 million (2007: pre-tax profit of € 241 million); without PEG a pre-tax profit of € 23 million was achieved. Operating income in the Verbund & Real Estate segment developed satisfactorily, up € 65 million from the year before. Net interest income, in particular, rose by € 42 million, mainly because of the favourable business performance of WestImmo. Profit before taxes in this segment increased by a total of € 25 million. In the Capital Markets segment, the solid results from the money ma-ket business and from the business with structured interest rate products could not quite compensate for the valuation losses caused by credit spread widening in the secondary market portfolios as a result of the financial market crisis. The result before taxes amounted to € -26 million (2007: € -1,508 million). In Transaction Banking, growth in domestic and international payment transactions and in the card business as well as an increase in new business in the automotive and savings banks distribution channels of readybank ag led to higher net interest income and net fee and commission income. This segment’s result before taxes reached € 5 million (2007: € 1 million).
Bidding Procedure Does Not Preclude Landesbank Consolidation
On August 8, 2008, the owners of WestLB AG had stated to the European Commission that they preferred to bring about the change of ownership demanded by the Commission in the context of the restructuring through a consolidation solution in the Landesbank sector. However, the enormous repercussions of the financial market crisis and the strategic framework conditions in the Landesbank sector currently do not make a consolidation possible in the given timeframe. For this reason, WestLB and its owners will shortly begin negotiations with the European Commission on the basis of a concept for a transparent and non-discriminatory bidding procedure. The shared goal of the owners, the Bank and the Commission is to achieve a sustainable business model and allay market uncertainties. Both a Landesbank consolidation and a successful bidding transaction hinge on the separation and winding down of activities which are not in conformity with the strategy and the accompanying reduction in total assets. Moreover, a bidding procedure does not preclude a consolidation solution in the Landesbank sector.
Core Bank Structure Offers Prospect of a Viable Future
Through the initiative of the Managing Board to ring-fence approximately € 80 billion in activities not in conformity with the strategy and transfer them to a new “consolidation bank”, WestLB will be positioned competitively for a viable future in the remaining core bank. The ring-fencing is compatible with the requirements of the European Commission and is the logical implementation of the restructuring plan which WestLB submitted to the European Commission in August of last year.
The consolidation bank is not a “bad bank”, since WestLB already created a bad bank with the Phoenix transaction. On the contrary, the main reason for ring-fencing activities is to meet major strategic demands which are currently being made on the Bank, including:
- the recommendations made by the heads of the savings banks associations in November 2008 to ring-fence activities not in conformity with the strategy as an essential prerequisite for a consolidation in the
Landesbank sector, - the requirements of the European Commission regarding a reduction in total assets, and
- the eligibility requirements stipulated by the Financial Market Stabilisation Fund (SoFFin) which Landesbanks have to meet in order to gain access to SoFFin funds.
Heinz Hilgert: “Our deliberations concerning the ring-fencing of activities which are not in conformity with the strategy are congruent with the requirements articulated by the heads of the savings banks associations, the European Commission and the SoFFin for creating and sustaining viable business models.”
Outlook
WestLB will undertake the necessary strengthening of its customer business in what remains a challenging market environment. Accordingly, higher risk provisioning is expected in 2009. Moreover, an end to the ongo-ing financial market crisis is not yet in sight. The development of our operating business in the first two months indicates, however, that WestLB is on the right track. Earnings are well above target. On the other hand, the market valuations of government securities continue to have a detrimental ef-fect. Therefore, WestLB remains cautious with respect to the further course of business.
By increasing efficiency and focusing the business on core operations, the Bank will realise additional, steady reductions in its administrative expenses beyond the substantially reduced level already achieved as of the end of 2008. This will involve a Group-wide headcount reduction of at least 1,350 full-time employees by the end of 2010 (baseline: end of 2007). In the targeted structure the share of employees in client-driven areas of the business will increase at the expense of nonclient functions.
