Release 29 August 2011 BayernLB Interim Report 2011: Stable earnings trend in customer business continues in the second quarter Earnings before taxes of EUR 244 million in H1 2011 are generated entirely from core business Net interest and net commission income remain unchanged on H1 2010 Expenses of EUR 88 million for the Hungarian and German bank levies and impairments on Greek government bonds amounting to EUR 79 million weigh heavily Reduction of non-core business accelerated Total assets fall below EUR 300 billion for the first time since the year 2000 Positive forecasts for full year 2011 confirmed Munich BayernLB continued its stable earnings trend in the first half of 2011. Overall, the Bank generated earnings before taxes of EUR 244 million in the first six months of this year, in line with its forecasts. The second quarter accounted for earnings of EUR 95 million (Q2 2010: EUR 56 million), making it the sixth consecutive quarter since the disposal of Hype Group Alpe Adria (HGAA) in which BayernLB has posted a pre-tax profit. H1 earnings were once again generated entirely from BayernLBs core business: activities with corporate, real estate and retail customers, as well as the savings banks and the public sector. A comparison with the previous-year period must take into account that the EUR 554 million in earnings before taxes for H1 2010 was
Release upwardly skewed by a host of special factors such as the positive restructuring results but also by performance on the financial markets. Page 2 of 11 Net interest and net commission income performed well in the first half of 2011 and almost equalled that of the previous-year period, despite the reduction in non-core activities. The following events weighed heavily on the interim figures: BayernLB's income statement as at 30 June 2011 included the full amount for the year of the bank levy in Hungary and the pro rata amount of the German bank levy due for the first time. The total expenses for these charges were EUR 88 million. Measurement losses which arose in the first quarter through cross-currency swaps amounted to EUR -78 million in the fiscal six month period. Crosscurrency swaps are instruments which BayernLB used in the past for funding transactions in foreign currencies, such as loans in dollars and sterling for German companies with business abroad. During the term, cross-currency swaps must be marked to market on the reporting date, which can have a significant impact on the income statement in volatile currency markets. These measurement effects are closed out again at maturity. Since the end of 2010, BayernLB has built up a strategic liquidity reserve as a precautionary measure to ensure it is equipped to deal with sudden crises in the interbank market. The costs associated with this have the character of an insurance premium and EUR 38 million have been recognised through profit or loss. In the second quarter, BayernLB took impairments of EUR 79 million for the Greek government bonds still held by Banque LB Lux and DKB. Banque LBLux and DKB acquired the Greek government bonds prior to 2006 under their li-
Release Page 3 of 11 quidity management policies, which were still independent of BayernLB at the time, but sold a substantial portion of them in the first half of 2010. Both institutions wrote down the Greek bonds by around 50 percent of their nominal value to the market value as at 30 June 2011, in accordance with the strict requirements of the IFRS accounting standards. BayernLB forged ahead with its already far advanced restructuring and its policy of focussing more strongly on core business in the first half of the year. The disposal of Deka Bank shares in the second quarter further streamlined the Bank's portfolio. The Bank made great progress in reducing non-core business in the first half of the year and is ahead of schedule: The nominal volume of the loan and securities portfolios pooled in the internal Restructuring Unit (RU) was cut by EUR 8.7 billion to EUR 31.0 billion, in particular as a result of active management and maturing issues. BayernLB's total assets as at 30 June 2011 shrank by a further 6.0 percent against the end of 2010 to EUR 297.4 billion through planned cuts in business. Compared to H1 2010, total assets have fallen by more than EUR 43 billion or 13 percent. This took total assets below EUR 300 billion for the first time since the year 2000. In line with the Bank's clear focus on its core regions, loans and advances to foreign customers reported on the balance sheet decreased noticeably, while loans and advances to domestic customers climbed slightly, partly due to the expansion of business with Mittelstand companies. Risk positions were trimmed by EUR 8.4 billion to EUR 115.5 billion. The BayernLB Group's core capital ratio improved by a further 0.7 percentage points on 31 December 2010 and now stands at 11.9 percent. The stress test recently conducted by the European Banking Authority (EBA) confirmed the quality and robustness of BayernLB's capital base. Even in the simulated adverse scenario, which assumed a considerable deterioration in economic conditions, the Bank had a sufficient core capital ratio of 7.1 percent. In light of its solid capital base compared to its peers,
Release BayernLB expects to fulfil all the requirements posed by Basel III in full by 2015 at the latest. Page 4 of 11 Gerd Haeusler, CEO of BayernLB, commented on the publication of the interim report "Six consecutive quarters in the black prove that BayernLB is on the right track with its realignment. Benefiting from its conservative and relatively low-risk business model, the Bank maintained its trend of stable earnings in customer business in the first half of 2011. The Bank's operating business is running smoothly, despite all the upheaval on the financial markets and government debt crises. It was therefore able to withstand the considerable headwinds created by the mistakes of the past and painful regulatory interventions. The extensive impairments on the remaining Greek government bonds and the very high bank levy are slowing the recovery of the Bank's earnings. However, the turnaround has been accomplished and we are on the right track. We therefore hope to reach a speedy conclusion to the state aid proceedings with the EU Commission." Income statement for the first half of 2011 Despite the planned reduction in business, BayernLB reported net interest income of EUR 976 million, which almost brought it up to the H1 2010 figure of EUR 983 million. Lower contributions from foreign branches and MKB were offset by higher earnings in Germany, especially at DKB. Risk provisions in the credit business of EUR -112 million were significantly lower than the previous year's figure of EUR -392 million, which was mainly related to MKB. In addition to a conservative risk policy and the related high portfolio quality, the robust German economy also contributed to the low provision requirements in the first half of 2011. However, the low provision expenses cannot be extrapolated to the full year, as risk provision requirements usually rise in the second half of the year.
Release Page 5 of 11 Net commission income rose slightly by EUR 4 million to EUR 125 million. Despite winding down business, BayernLB especially boosted net commission income in the credit card business. The Bank also used its good liquidity situation to buy back early a part of the bond guaranteed by the Special Fund for Financial Stabilisation (SoFFin) at the beginning of April. The fee payable to SoFFin fell to EUR 18 million in the first half of the year (H1 2010: EUR 24 million). Gains on fair value measurement including hedging gains was roughly as expected at EUR 197 million. This includes the measurement effects on cross-currency swaps totalling EUR -78 million. Customer-driven trading business, also reported in the gains or losses on fair value measurement item, accounted for EUR 117 million (H1 2010: EUR 161 million). Gains on fair value measurement of EUR 454 million in the first half of 2010 were upwardly skewed, partly due to high, market-related write-ups in the investment portfolios. The losses on financial investments of EUR -114 million includes impairments of EUR -79 million taken on the Greek government bonds held by Banque LBLux and DKB. At EUR -733 million, administrative expenses slid 2.5 percent below the EUR -751 million reported for the same period of last year. They include charges for lawyers fees and court costs amounting to several millions resulting from the bankinternal investigations into responsibility for the acquisition of HGAA and the ABS portfolio. Staff costs were EUR -346 million (H1 2010: EUR -348 million). Expenses for bank levies were EUR 88 million in the first half of 2011 (H1 2010: EUR zero). Of this amount, EUR 51 million related to MKB, EUR 34 million to BayernLB and EUR 3 million to DKB. The structure of the Hungarian bank levy is such that the full amount was taken as an expense at the start of the year. Half of the full annual amount for the German bank levy has been recognised. BayernLB anticipates expenses
Release for the bank levies in Germany and Hungary of around EUR 125 million for the full year. Page 6 of 11 Losses on restructuring were posted at EUR -7 million. The large gain of EUR 134 million seen last year included EUR 166 million of non-recurring gains. These arose primarily from changes to pension plans as a result of restructuring. Segment reporting Performance in the operating segments of the BayernLB Group in the first half of the year was as follows: The segment Corporates, Mittelstand & Retail Customers made the highest contribution to Group earnings in the first half of 2011, with earnings before taxes of EUR 222 million (H1 2010: EUR 227 million). Net interest and net commission income rose considerably. Earnings from customer business amounted to EUR 302 million (H1 2010: EUR 255 million), an increase of around 20 percent on the previous-year period. Despite intense competition, BayernLB significantly outperformed its forecasts in its entire corporate banking business. The Bank's growing Mittelstand division gained around 120 new customers and has expanded its credit volume by 6.0 percent to almost EUR 16 billion since the start of the year. The impairment on Greek government bonds held by Banque LBLux and DKB weighed on the segment's income to the tune of EUR -79 million. Both subsidiaries are allocated to the Corporates, Mittelstand & Retail Customers segment. Even with this setback, DKB more than doubled its earnings before taxes compared to H1 2010 to EUR 69 million. However, despite a satisfactory operating performance, LBLux reported a loss before taxes of EUR -22 million. The Real Estate & Savings Banks/Association segment boosted its earnings before taxes considerably to EUR 201 million in the first half of 2011 (H1 2010: EUR 115 mil-
Release Page 7 of 11 lion). The improvement in earnings arose from a major decrease in risk provisions and an increase in non-interest income. Rising new business figures in the real estate sector triggered much higher earnings. The Savings Banks & Association division reaped the benefits of good business with capital market products and booming trade in coins and precious metals, in particular on behalf of the savings banks. The Markets segment produced earnings before taxes of EUR -86 million (H1 2010: EUR 255 million) dampened especially by measurement effects on cross-currency swaps. The establishment of a liquidity reserve directed by the Board of Management since the end of 2010, as a precautionary measure to ensure that BayernLB is equipped to deal with potential bottlenecks, also weighed on earnings. Business conducted on behalf of customers in the Markets segment developed better than anticipated, with earnings of EUR 89 million. BayernLB has continued the process of focusing its capital market business on serving customers in the first half of 2011 and has expanded the product range to include physical gas trading and instruments to hedge price risks for agricultural commodities such as wheat and rapeseed. The Eastern Europe segment consists solely of the Hungarian Group subsidiary MKB and posted earnings before taxes for the fiscal six month period of EUR -61 million (H1 2010: EUR -175 million). The full amount for the year of the national bank levy, which is high compared to other countries and not related to earnings, was recognised as an expense of EUR 51 million and weighed heavily on earnings. In addition, the Swiss franc, which is strong against the Hungarian forint, had a dampening impact, as MKB, like many other Eastern European banks, had granted sizeable foreign currency loans, especially in francs, to its customers. Risk provision requirements at MKB of EUR -76 million were significantly down on the EUR -260 million in the previous-year period. Accordingly, BayernLB will intensify its efforts already begun to realign MKB's business model during the rest of the year in order to achieve as near as possible a breakeven result for the year.
Release The Restructuring Unit segment ended the first half of 2011 with earnings before taxes of EUR 80 million (H1 2010: EUR 221 million). Page 8 of 11 Outlook The BayernLB Board of Management still expects full-year earnings for 2011 to be positive, although they will not match the very good but upwardly skewed figures attained in the preceding financial year. This forecast is based on the assumption that the business cycle in the Bank's core markets will be dampened by the consolidation of government finances. However, it is not based on an assumption that the economy will slide into recession in the second half of the year. No definite statement can be made on further replenishing the hybrid capital instruments which shared in the losses in 2009 and paying back interest due until BayernLB's HGB (German GAAP) separate financial statements are prepared in March 2012. The HGB separate financial statements also show positive earnings at the halfway stage in 2011, and if the trend continues, these will be used to make further replenishments of the silent partner contributions. A PDF version of the BayernLB Interim Report for the first half of 2011 is available now in English and German at www.bayernlb.de.
Release Income statement for H1 2011 and H1 2010 Page 9 of 11 1 Jan-30 Jun 2011 1 Jan-30 Jun 2010 Change in percent/pp Net interest income 976 983-0.6 Risk provisions in the credit business -112-392 -71.4 Net commission income 125 121 3.3 Gains or losses on fair value measurement Gains or losses on hedge accounting Gains or losses on financial investments Income from interests in companies valued at equity 151 443-65.9 46 11 >100.0-114 -35 >100.0 8-2 - Administrative expenses -733-751 -2.5 Expenses for bank levies -88 - - Other income and expenses -8 43 - Gains or losses on restructuring -7 134 - Earnings before taxes 244 554-55.9 Cost/income ratio (in percent) 56.8 46.9 9.9 pp Return on equity (RoE) in % 5.2 7.5-2.3 pp
Release Quarterly comparison Page 10 of 11 Q2 2011 Q1 2011 Change in percent Net interest income 497 479 3.8 Risk provisions in the credit business -63-49 28.6 Net commission income 67 58 15.5 Gains or losses on fair value measurement Gains or losses on hedge accounting Gains or losses on financial investments Income from interests in companies valued at equity 91 60 51.7 10 36-72.2-69 -45 53.3 0 8 - Administrative expenses -370-363 1.9 Expenses for bank levies -18-70 -74.3 Other income and expenses -45 37 - Gains or losses on restructuring -5-2 >100.0 Earnings before taxes 95 149-36.2
Release IFRS balance sheet Page 11 of 11 30 Jun 2011 31 Dec 2010 Change in percent Total assets 297,399 316,354-6.0 Business volume 347,206 371,597-6.6 Loans and advances to foreign customers Loans and advances to domestic customers 41,923 45,983-8.8 111,328 109,431 1.7 Loans and advances to banks 54,440 61,688-11.7 Liabilities to banks 76,119 83,171-8.5 Liabilities to customers 91,964 91,734 0.3 Subordinated capital 7,065 7,727-8.6 Equity 14,325 13,911 3.0 Key figures and headcount 30 Jun 2011 31 Dec 2010 Change in percent/pp Core capital ratio (in percent) 11.9 11.2 +0.7 pp Risk positions (EUR billion) 115.5 123.9-6.7 Number of employees 10,754 10,853-0.9