Half-yearly Financial Report as at 30 June 2016

Transcription

1 Half-yearly Financial Report as at 30 June 2016 in accordance with the German Commercial Code (HGB) Westdeutsche ImmobilienBank AG

2 Key Figures for Westdeutsche ImmobilienBank AG * Change million million million % Income Statement Net interest income and current income Net fee and commission income Net other operating income and expenses Administrative expenses Risk provisions > 100 Result from ordinary activities > 100 Taxes Net income for the financial year before profit transfer > June Dec Change million million million % Balance Sheet Total assets 6, , Equity June Dec Change % % % Key Figures Tier 1 ratio Cost/Income Ratio Return on equity before taxes > June Dec Change Number Number Number % Employees Employees (annual average) Rating Fitch Rating for Westdeutsche ImmobilienBank AG long-term BBB+ short-term F2 * Comparison shown is with 2015 half-yearly financial report due to short financial year from 1 June December 2015

3 Content Interim Management Report At a Glance... 2 Market Environment in Net Assets, Financial Position and Results of Operations... 5 Employees... 6 Risk Report... 6 Report on Post-balance Sheet Date Events... 7 Forward-looking Statements... 8 Expected Developments at WestImmo... 8 Half-yearly Financial Statements Balance Sheet Figures (condensed) Income Statement Figures (condensed) Notes (Condensed) Accounting policies Income statement disclosures Balance sheet disclosures Changes in derivatives Responsibility Statement

4 Interim Management Report of Westdeutsche ImmobilienBank AG At a Glance Since 1 June 2015, Westdeutsche ImmobilienBank AG (WestImmo) has been a wholly owned subsidiary of GEV GmbH, Wiesbaden, which is in turn a wholly owned subsidiary of Aareal Bank AG, Wiesbaden. GEV GmbH and WestImmo have entered into a control and profit and loss transfer agreement. The Bank twice changed its financial year in 2015 in connection with the change in ownership. The short financial year from 1 January to 31 May 2015 was followed by a second short financial year from 1 June to 31 December Comparability with the previous year is only possible to a limited extent, in particular for the income statement. The main focus of the past six months was on further integrating WestImmo with Aareal Bank Group. In the process, synergies were leveraged in the Group and a large number of areas were standardised. This also included aligning WestImmo's remuneration systems with Aareal Bank Group, with the result that WestImmo now complies with the Group-wide remuneration principles. In accordance with a notification by the European Central Bank (ECB) dated 11 February 2016, WestImmo was permitted to start using the Credit Risk Standardised Approach (CRSA) again for certain types of risk exposure. This decision was retrospectively effective as from 31 December 2015 and was applied correspondingly in the reporting period. As a commercial real estate financing specialist, WestImmo continued its business activities of pro viding its existing customers with interest rate extensions and term renewals and, to a very limited extent only, of topping up existing commitments in order to implement restructuring and/or maintenance measures. The main focus here within the Bank's commercial real estate financing activities is on managing its cover pools. The reporting period saw a further reduction in the loan and bond portfolios. Loan renewals amounted to 50.0 million. In light of the further integration of WestImmo with Aareal Bank Group and the resulting alignment of human resources capacity, talks were held with the employee representatives from April 2016 onwards about a reconciliation of interests. The Bank has already recognised the probable associated costs in the current half-yearly financial report. The net loss before the profit and loss transfer agreement amounted to 7.0 million. 2

5 Market Environment 2016 Macroeconomic environment Global economic growth was muted in the first six months of the year, recording only slight expansion compared with the year before. Whereas the first quarter was marked by a range of uncertainties and volatility in the emerging economies, the Brexit referendum in the UK dominated the second quarter. The Ifo World Economic Climate index rose slightly in the second quarter compared with the first quarter of It improved particularly strongly in North America, but remained at a low level in Asia. Nevertheless, the uncertainties and factors weighing on the world economy were substantial; in particular geopolitical risks, structural upheavals for example in China and continuing uncertainty regarding interest rate changes in the USA had an additional negative impact. Oil prices picked up slightly over the course of the first half of the year and remained stable at the mid-year point. Volatility on the financial markets was stronger at the beginning of the year, but stabilised over the first six months in light of improving economic prospects. However, the UK s decision to leave the EU led to a considerable increase in volatility towards the end of the second quarter. The major central banks stuck to their monetary policy stances and did not make any changes to their fundamentally expansionary monetary policy. The first six months were marked by differences in interest rate movements: short-term rates in the USA and Canada remained largely unchanged 1). By contrast, short-term rates fell significantly in the eurozone, Sweden, Denmark, Japan and Switzerland. On the other hand, long-term interest rates 2) fell in all of the above-mentioned currency zones, in some cases heavily. The yield on ten-year Bunds slid into negative territory in mid-june, and other ten-year government bond yields also declined. The euro exchange rates of key currencies for WestImmo were exposed to strong fluctuations at the end of June. Sterling fell heavily against the euro following the Brexit vote; the euro rose slightly against the dollar in the first half of the year, but lost ground sharply following the EU referendum. The exchange rate at the mid-year point was on a level with end The Harmonised Index of Consumer Prices (HICP) continued to be affected by low energy prices in the eurozone in the first six months of the year, with the growth rate at almost zero for this period. Core inflation remained unchanged at just under one per cent. However, the impact of energy prices weakened at the end of the first half of the year. By contrast, medium-term expectations of inflation 3) continued to decline. Non-seasonally adjusted inflation in the USA at the end of June was one per cent. 1) 3-month EURIBOR or, for non-euro currencies, the corresponding LIBOR or comparable rates 2) 10-year swap rate 3) 5Y5Y EUR forward swap 3

6 Real estate markets The persistently low interest rates and associated lack of alternative investments continued to boost global real estate investments in the first half of the year. However, transaction volumes dropped noticeably compared with the extraordinarily high volume in the prior-year period. The decline was particularly strong in the UK, German, French and Italian markets. In addition to market uncertainties, a lack of products in the market and a particularly high prior-year figure were the reasons for the decrease. Yields for newly acquired prime commercial properties were largely constant in the European business centres compared with the end of The yield spread between primary and secondary cities and between the office, retail and logistics property classes generally continued to narrow. Rents in most of the European business centres were stable in the second quarter. Rents rose slightly on some markets. This was the case for office, retail and logistics properties. Rent increases were recorded in Madrid, Barcelona and prime office properties. Retail rents rose in Berlin, the City of London and Italy. Transaction volumes for commercial properties in North America declined noticeably year-on-year in the first six months. In addition to the particularly high prior-year figure, the decline in the volume attributable to Asian investors was a driving factor in the first six months. Yields rose only slightly in the office properties, retail and logistics segments. Rents for the various property classes rose slightly compared with the end of 2015, with vacancy rates largely constant. This trend also applied to numerous leading regional markets in the USA. The appeal of real estate as an investment class is expected to remain high as the year progresses, continuing the positive performance to date. Refinancing markets Refinancing will remain comparatively unproblematic for the majority of banks as a result of the support measures adopted by the European Central Bank (ECB). The number of investors seeking alternative forms of investment is only expected to increase if returns are extremely low. The risk of negative interest rates means that investors with a short-term investment horizon will spread their volumes over substantially more banks in the future, which will in turn lead to a broader investor base there. 4

7 Interim Management Report Refinancing Assets were mainly refinanced using long-term, unsecured bearer debt securities and borrower s note loans, as well as Pfandbriefe. Short-term deposits and subordinated bonds played a minor role. As a general rule, WestImmo met its short-term financing needs in the reporting period via the repo market and short-term borrowings in Aareal Bank Group. The Bank had sufficient liquidity in the reporting period and did not require long-term funding. In the future, too, the Bank s refinancing will be closely aligned with further developments within the limits of its reduced business activities and the resulting funding requirements. Net Assets, Financial Position and Results of Operations Earnings The key factor influencing the Bank s earnings was the decline in its loan portfolio and new business volume, as well as the recognition of costs associated with the reconciliation of interests that has been signed. Net interest income stood at 33.9 million, while net fee and commission income amounted to 0.3 million. The other operating result of 3.3 million includes interest expenses for pension provisions amounting to 2.9 million, unwinding of discounts on provisions amounting to 0.7 million and income and expenses from service level agreements (SLAs) with the new and old shareholders. Within the administrative expenses item, additions to the provision for personnel adjustment measures taken in connection with downsizing the Bank were recognised in personnel expenses. Adequate account was taken of the risks from the Bank s real estate lending business by recognising risk provisions. The positive balance of credit risk provisions amounting to 9.8 million is a result of income from the reversal of specific valuation allowances and recoveries on receivables previously written off. The net loss before the profit and loss transfer agreement amounted to 7.0 million. This will be absorbed by the parent company in line with the profit and loss transfer agreement. 5

8 Financial position and net assets WestImmo s total assets amounted to 6,233.4 million as at 30 June 2016 (previous year: 6,285.8 million). Receivables from customers declined to 4,887.6 million (previous year: 5,275.2 million), reflecting the decrease in the lending portfolio and in new business volumes. The reduction in liabilities to customers to 3,844.9 million (previous year: 4,284.2 million) and in securitised liabilities to million (previous year: million) is related to the Bank s business development and the associated reduction in its refinancing requirements. Reported equity was unchanged at million. The Bank s total capital ratio in accordance with the Capital Requirements Regulation (CRR) amounted to 20.5 % as at 30 June 2016 (previous year: 19.3 %). The core capital (Tier 1) ratio was % as at the balance sheet date (previous year: %). Employees WestImmo employed 175 people at the 30 June 2016 reporting date. This represents a decline of 22.9 % compared with the figure of 227 for 31 December The decline in employee numbers is primarily due to WestImmo s reduced business volume and mirrors the course of business. Risk Report Extensive risk management and risk monitoring activities are performed for all of the Bank s departments and processes. Risk management is an integral part of WestImmo s strategic and operational end-to-end management. It is also a core component of the Bank s three lines of defence approach, which was implemented as part of the Minimum Requirements for Risk Management (MaRisk). Following the end of the second short financial year 2015, work continued in the first six months of 2016 on integrating the Bank with the group management of Aareal Bank Group. The implementation of specialist and technical Group standards, including for bank management purposes, saw further processes being harmonised and the Bank being integrated with Group-wide risk management. The Bank s aim is to closely integrate and coordinate all areas involved in the lending and other key banking processes with a view to ensuring a uniform risk culture, identifying and analysing risks as early as possible and taking steps to counter them in good time. 6

9 Interim Management Report Adequate provisions for risks from the Bank s real estate lending business were recognised in the balance sheet. Specific valuation allowances for the lending business amounted to 52.3 million as at 30 June 2016 (previous year: 62.6 million). Since the beginning of 2016, WestImmo s risk-bearing capacity has been assessed using Aareal Bank Group s standardised methodology. This primarily uses a going concern approach, which is supplemented by a gone concern approach as a secondary analysis tool. The primary approach resulted in the following outcomes for WestImmo on a standalone basis as at the 30 June 2016 reporting date: WestImmo s risk-bearing capacity as at 30 June 2016 Going concern approach * 30 June 2016 million Own funds for risk-taking potential 557 less 8 % of risk-weighted assets (core capital (T1)) 205 Freely available own funds 352 Utilisation of freely available own funds Credit risk 29 Market risk 27 Operational risk 14 Total utilisation 70 Utilisation in % of freely available own funds 20 % * Comparative figures as at year-end 2015 are not presented due to the change in the methodology used. WestImmo no longer has any investment risk. As at 30 June 2016, WestImmo s portfolio did not include any bonds issued by GIIPS states. Report on Expected Developments On 11 August 2016, the Managing Board and the Works Council signed a reconciliation of interests on workforce reductions in the period between 2016 and 2018, along with amendments to the framework agreement dated 11 May This contains the additional modifications to the organisational structure that are required and the accompanying significant reductions in the workforce. The probable associated costs were already recognised in the current half-yearly financial report. 7

10 Forward-looking statements This report contains forward-looking statements on WestImmo s business and earnings performance, based on current plans, estimates, forecasts and expectations. These statements entail risks and uncertainties, as there are a variety of factors which influence our business and which are largely beyond our sphere of influence. These include in particular economic developments, the state of the financial markets and possible loan losses. Actual results and developments may deviate considerably from our current assumptions, which, for this reason, are valid only at the time of publication. We assume no obligation to revise our forward-looking statements in the light of either new information or unexpected events. Expected developments at WestImmo WestImmo s strategic focus is determined by Aareal Bank Group s objectives and planning. WestImmo will continue its integration with Aareal Bank Group and of further aligning its processes and methodologies with the systematic approach taken by the Group. This also entails implementing WestImmo s development forecast as presented in its last annual financial statements and continuing it unchanged. As part of this, the Bank focused mainly on managing its loan portfolios and actively managing its cover pools. WestImmo will renew existing loans, in particular as part of the management of its cover pools, and in doing so can take advantage of the opportunities offered by its integration with Aareal Bank Group. In the course of this process, WestImmo will further align itself with Aareal Bank Group s business strategy. The Bank is currently continuing to review the strategic options for its retail banking business, which is centred in Münster, since this is not part of Aareal Bank Group s core business. The limited new business and the reduction of the Bank s loan portfolios make cost savings and further structural adjustments necessary. An additional significant reduction in the headcount is an unavoidable consequence of this. For financial year 2016, the Managing Board expects a broadly break-even operating result before any potential non-recurring factors. Mainz, 30 August 2016 Rainer Spielmann Friedhelm Bullerdieck Elmar Monzel 8

11 Half-yearly Financial Statements as at 30 June 2016 in accordance with German Commercial Code (HGB) Westdeutsche ImmobilienBank AG 9

12 Balance Sheet Figures (condensed) Assets 30 June Dec million million 1. Cash reserve Receivables from banks Receivables from customers 4, , Bonds and other fixed-income securities Shares in affiliated companies Assets held in trust Intangible fixed assets Tangible fixed assets Other assets Prepaid expenses Total assets 6, ,285.8 Equity and Liabilities 30 June Dec million million 1. Liabilities to banks 1, , Liabilities to customers 3, , Securitised liabilities Trustee liabilities Other liabilities Deferred income Provisions Subordinated liabilities Fund for general banking risks Equity Total equity and liabilities 6, ,285.8 Contingent liabilities Other commitments

13 Income Statement Figures (condensed) Income Statement * million million Net interest income and current income Net fee and commission income Net other operating income and expenses Administrative expenses Non-personnel operating expenses Personnel expenses Risk provisions Allowance for losses on loans and advances Allowance for losses in the securities and investment business Result from ordinary activities Taxes Net income for the financial year before profit transfer * Comparison shown is with 2015 half-yearly financial report due to short financial year from 1 June December

14 Notes (Condensed) Accounting policies We prepared this condensed interim financial report as at 30 June 2016 in accordance with the Transparenzrichtlinie-Umsetzungsgesetz (TUG German Transparency Directive Implementing Act) that entered into force in Germany on 20 January 2007 and the Wertpapierhandelsgesetz (WpHG German Securities Trading Act). In accordance with section 37w(2) of the WpHG, a half-yearly financial report must at a minimum contain condensed financial statements, an interim management report and a responsibility statement in accordance with section 264(2) sentence 3 and section 289(1) sentence 5 of the Handelsgesetzbuch (HGB German Commercial Code). It should be read in conjunction with WestImmo s audited single-entity financial statements (annual financial statements and management report) for the period ended 31 December WestImmo s interim financial statements as at 30 June 2016 were prepared in accordance with the provisions of the HGB and the Verordnung über die Rechnungslegung der Kreditinstitute und Finanzdienstleistungsinstitute (RechKredV German Bank Accounting Regulation), German Accounting Standard 16, and the relevant provisions of the Aktiengesetz (AktG German Stock Corporation Act) and the Pfandbriefgesetz (PfandBG German Pfandbrief Act) on a going concern basis. WestImmo uses a present value analysis to assess measurement at net realisable value in accordance with IDW RS BFA 3 (Accounting Principle 3 issued by the Banking Committee of the Institute of Public Auditors in Germany). Based on this analysis, there was no requirement to recognise a provision as at 30 June There was no change in the accounting policies applied in this interim financial report compared with the financial statements as at 31 December The disclosures to be published each quarter in accordance with section 28 of the PfandBG are available on our website at under Investor Relations. In accordance with section 37w(1) of the WpHG, the half-yearly financial report is submitted to and published by the operator of the electronic Bundesanzeiger (German Federal Gazette WestImmo did not have its condensed interim financial statements and interim management report as at 30 June 2016 audited in accordance with section 317 of the HGB or reviewed by an auditor. Income Statement Disclosures The key factor influencing the Bank s earnings was the decline in its loan portfolio and new business volume. Net interest income stood at 33.9 million, while net fee and commission income amounted to 0.3 million. The other operating result of 3.3 million includes interest expenses for pension provisions amounting to 2.9 million, unwinding of discounts on provisions amounting to 0.7 million and income and expenses from service level agreements (SLAs) with the new and old shareholders. 12

15 Within the administrative expenses item, additions to the provision for personnel adjustment measures in connection with downsizing the Bank were recognised in personnel expenses. Adequate account was taken of the risks from the Bank s real estate lending business by recognising risk provisions. The positive balance of credit risk provisions amounting to 9.8 million is a result of income from the reversal of specific valuation allowances and recoveries on receivables previously written off. The net loss before the profit and loss transfer agreement amounted to 7.0 million. This will be absorbed by the parent company in line with the profit and loss transfer agreement. Balance Sheet Disclosures WestImmo s total assets amounted to 6,233.4 million as at 30 June 2016 (previous year: 6,285.8 million). Receivables from customers declined to 4,887.6 million (previous year: 5,275.2 million), reflecting the decrease in the lending portfolio and new business volumes. The reduction in liabilities to customers to 3,844.9 million (previous year: 4,284.2 million) and in securitised liabilities to million (previous year: million) is related to the Bank s business development and the associated reduction in its refinancing requirements. Reported equity was unchanged at million. Changes in derivatives As at the reporting date, WestImmo held derivatives with a notional value of 11.8 billion (previous year: 9.8 billion), of which derivatives with a notional value of 10.9 billion (previous year: 8.8 billion) were held to hedge interest rate risk and derivatives with a notional value of 0.9 billion (previous year: 1.0 billion) were held to hedge currency risk. 13

16 Responsibility Statement To the best of our knowledge, and in accordance with the applicable reporting principles for interim financial reporting, the interim financial statements give a true and fair view of the assets, liabilities, financial position and profit or loss of the Bank in accordance with German accepted accounting principles, and the interim management report includes a fair review of the development and performance of the business and the position of the Bank, together with a description of the material opportunities and risks associated with the expected development of the Bank for the remaining months of the financial year. Mainz, 30 August 2016 Rainer Spielmann Friedhelm Bullerdieck Elmar Monzel 14

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