Finance Group German Savings Banks Association Check against delivery! Statement by Georg Fahrenschon President of the German Savings Banks Association DSGV Financial Press Conference 15 March 2016, Frankfurt/Main Deutscher Sparkassenund Giroverband Charlottenstrasse 47 10117 Berlin
Ladies and Gentlemen, A warm welcome to the Financial Press Conference of the Savings Banks Finance Group. I m pleased to have Dr Karl-Peter Schackmann-Fallis and for the first time Dr Joachim Schmalzl on board. As a member of the Executive Board of Sparkasse KölnBonn over many years, he has extensive expertise, in particular in process and product management, as well as in controlling, finance and risk management. In the DSGV, which he joined on 1 March, he is responsible for Marketing, Business and Human Resources Strategy. 2015 was a good year for the savings banks, in particular in the light of the very difficult interest-rate environment: The deposit volume increased significantly. In loans to enterprises and loans for home purchases, we achieved record results, which demonstrates that we have invested the additional deposit volumes prudently. And our operating profit was virtually at the previous year s level if we disregard the substantial increase in the bank levy. We know that the ECB s interest-rate policy will place extremely high demands on our entrepreneurial skills in the next few years. However, we can respond to this challenge from a position of strength: In 2015 alone, savings banks generated EUR 6.2 billion, which significantly increased their total assets and thus continued the sustainable expansion of the savings banks equity base. And the executive board members of the savings banks have lived up to their entrepreneurial responsibility by taking resolute countermeasures and will continue to do so in the future. However, there is cause for concern with regard to the stability of Germany s economy as a whole. I will say more about this later. But first, I would like to explain our key financials: 2
I. Key financials of savings banks As of 31 December 2015, the balance sheet total of Germany s savings banks amounted to EUR 1,145 billion, which was 1.6 percent higher than in the previous year. In the past, many observers had assumed that, at times of extremely low interest rates, customers would tend to withdraw their deposits from savings bank accounts. The opposite is the case: In fact, customer deposits grew by 3 percent or EUR 24.8 billion, even faster than in the previous year. At 3.6 percent, growth was particularly strong for deposits from private individuals. It is no surprise that this growth was related to sight deposits due to interest rates. In the lending business, we can report not just one but two new records: In new loans to enterprises and self-employed persons, savings banks increased their lending volume by 16.9 percent. In this segment alone, new loans amounted to a total of EUR 81.2 billion, which was EUR 11.8 billion more than in 2014. New loan commitments for home purchases increased by as much as 23.3 percent, which meant that the total volume of new loans amounted to EUR 52.2 billion. Never before in their history have savings banks helped so many people to acquire a house or flat of their own. During the low-interest phase, it was very attractive for many borrowers to repay higher interest-rate loans prematurely. We are particularly pleased to report that the portfolio of customer loans also increased by 3.4 percent. By the end of the year, savings banks had EUR 745 billion in loans on their books. The portfolio of loans to enterprises grew significantly by 3.7 percent or EUR 12.8 billion. Since deposits held by enterprises also increased substantially, their liquidity improved once again. In the business segment of loans to enterprises, the savings banks market share increased by 0.6 percentage points. And in the business segment of loans for home purchases, we also increased our portfolio by 4.5 percent. Here again, we outperformed the overall market and increased our market share once again by 0.3 percentage points to 34.9 percent. The savings banks business model of turning deposits into loans pays off, particularly in these difficult times: Savings banks were able to invest all the acquired deposits in highquality lending activities in their regions, in residential properties and loans to enterprises. 3
Good results were also achieved in the customer securities trading business. The previous year s total trading volume was substantially surpassed, by a solid 10.2 percent. Demand was particularly high for equities and investment funds, while trading volumes of fixed-income securities declined. In 2015, savings banks, savings banks and DekaBank held customer securities in 6.3 million custodial accounts. In 2015, net sales of securities amounted to EUR 7.2 billion, which was the highest figure since 2007. Mixed funds were particularly popular. We were successful with our joint securities initiative due to the DSGV s concept, stronger support of savings banks by DekaBank and, more importantly, the sales efforts of the savings banks themselves. DekaBank is of course the preferred partner of savings banks. However, it is wrong to believe that savings banks only sell Deka products. Slightly more than one-quarter of all the funds sold came from providers outside our own group. What matters is always what customers want and what is best for them. Due to the savings banks broad product base and the good advice they provide, the customers of savings banks acquired EUR 34.2 billion in additional financial assets. This was an increase by 26.3 percent - the highest growth rate in 14 years. At times of extremely low interest rates, savings banks of course pay particular attention to profitability. First the good news: Savings banks successfully compensated for the inevitable decline in net interest income by substantially higher net commission income. In 2015, net interest income amounted to EUR 23.0 billion, which is 154 million less than in the previous year, but much more than many pundits had assumed. On the other hand, net commission income increased by EUR 336 million. This was due to an increase in commission income from money transmission and clearing transactions, the card business, the brokerage business and in particular the securities trading business. Total net commission income was approx. EUR 184 million higher than in the previous year. In 2015, administrative expenses were subject to two special effects, which together accounted for most of the overall increase of approx. EUR 300 million. First, there was a significant wage increase following the most recent collective agreement pay rise in March 2015. Although savings banks reduced the number of their employees by 2.7 percent, they had to spend EUR 174 million more in personnel expenses. The second reason was the 4
substantial increase in the bank levy amounting to EUR 113.1 million, which was approx. EUR 100 million more than in 2014. Administrative expenses totalled EUR 19.4 billion. In 2015, the operating result before valuation amounted to EUR 10.8 billion, which was close to the previous year s level. The valuation result included a very positive effect. For the first time, write-ups were higher than write-downs in provisions for contingent losses in the lending business, resulting in valuation proceeds of EUR 200 million for 2015. Several factors contributed to this development, which may seem to be surprising at first glance: the stable economy, the good credit ratings of our business customers and more than anything else the savings banks very cautious risk policy. Because write-ups mean that the value adjustments expected earlier did not materialise. I think that it is also a positive signal for the regulator and for the owners that the savings banks valuation of their credit exposures was so conservative. In the savings banks own investment business, write-downs of EUR 500 million were required, following write-ups of EUR 500 million in the previous year. More than anything else, this effect had an impact on net income as a whole. I would specifically like to draw your attention to the additional accrual of EUR 4.2 billion in contingency reserves. Savings banks have accrued EUR 19.4 billion in new contingency reserves in the past five years, primarily with a view to the foreseeable charges due to the low-interest phase. With this in mind, you will understand that we will face the next few years which will be very difficult with healthy self-confidence. In 2015, earnings before taxes amounted to EUR 4.6 billion, which was EUR 200 million less than in 2014. Germany s tax authorities can look forward to tax payments of EUR 2.6 billion. This makes savings banks once again one of the biggest tax payers in Germany. Net income after taxes amounted to EUR 2.0 billion, which was roughly at the previous year s level. However, I would like to reiterate that this figure must be seen in connection with contingency reserves. The tier-1 ratio increased once again, from 14.5 to 14.8 percent. In 2015, savings banks had to spend EUR 65.60 to generate earnings of EUR 100. In light of these figures, in particular the strengthening of the asset base by EUR 6.2 billion, savings banks did very 5
well in 2015 despite an extremely difficult market environment much better than expected by some market observers. However, in view of the ECB s interest-rate policy, it is clear that it will not be possible to repeat this strong performance in the next few years. Instead, savings banks will be challenged much more in terms of their entrepreneurial skills. They will have to respond proactively to these challenges. I would like to mention four points in particular: We will continue to work on profitability. In this context, we would mainly like to grow qualitatively in the lending business and, where possible, gain additional market shares from competitors. We will continue to step up our commission-based business. We see significant opportunities, in particular in the securities trading business. For this purpose, we will continue to upgrade our advisory skills. We will reorganise our branch network, not least for this reason. In view of the interest-rate environment, we will have to charge fair prices for our services. It will no longer be possible to use net interest income for cross-subsidies. The end of current accounts available free of charge is drawing near. In view of the misguided interest-rate policy, all market players have to tap new sources of income. We will also cut costs. In 2015, savings banks already refrained from staffing 6,427 vacancies. I assume that this trend will continue. In view of an annual staff turnover rate of 3.5 percent, it will be possible to implement the necessary workforce reduction in a socially acceptable manner. However, I do not think that it is appropriate to see the changes in the branch network primarily as cost-cutting measures. In fact, savings banks are making major investments in access routes. They have to do this because customer needs are changing: The number of online contacts is increasing rapidly. With 2 billion online contacts per year approx. 800 million via the savings banks app alone savings banks today are already Germany s biggest online bank. We will continue to expand this position. Dr Schmalzl will comment on this in a moment. 6
And the need for branches will change significantly. Settlement and transaction tasks are increasingly being handled online. Today, a branch is expected to provide more and better financial advice to customers. This is a demand that the smallest branches are less and less able to fulfil. This is why their number will continue to decrease. This clearly shows that we are on our way towards larger branches providing higher-quality advisory services. II. Business performance of associated companies I will now briefly present the business performance of the companies associated with the Savings Banks Finance Group. The Landesbanken continue to pursue a course of consolidation: In 2015, the risk assets were cut back to EUR 347.3 billion, which was EUR 6.4 billion less than in the previous year. At the same time, the tier-1 ratio continued to grow from 13.2 percent in 2014 to 13.6 percent in 2015. Fewer high-risk transactions, more financial soundness: This is the formula that summarises the performance of the seven Landesbank groups. In fiscal 2015, DekaBank consistently developed its business model as the savings banks investment firm. Net sales to savings banks customers amounted to EUR 5.97 billion, which was 150 percent more than in the previous year. This growth was mainly achieved by funds of funds, property investment funds and asset management. Overall, the net sales performance of the Deka Group in the funds and certificates business once again increased significantly in 2015. Total assets grew to EUR 240 billion (2014: EUR 220 billion). At its financial press conference on 12 April 2016, DekaBank will present more detailed information and figures on fiscal year 2015. The new business generated by the Landesbausparkassen in 2015 amounted to a volume of EUR 36 billion, which was the second best performance in the history of the LBS Group. Disbursements of anticipatory loans amounted to EUR 3.5 billion, which was 5.8 percent more than in the previous year. At the end of the year, the Landesbausparkassen had a total of 9 million customers and 10.6 million home loan and savings agreements with a total volume of EUR 289 billion. In the home loan and savings market, they are the clear market leader, with a market share of 37 percent of the new business. Despite low interest rates and considerable reluctance on the part of enterprises to invest, savings banks increased their joint leasing business with Deutsche Leasing to EUR 3.54 7
billion in 2015, which constituted growth of 8.5 percent. This means that Deutsche Leasing grew twice as fast as the market overall. Preliminary figures suggest that the savings banks insurance companies increased their gross premium income to EUR 21.4 billion in fiscal 2015. While the overall sector was close to stagnation in the past year, with an average growth rate of 0.5 percent, the public-sector insurance companies grew by more than 3 percent, owing to their successful marketing efforts. III. Conclusion The Savings Banks Finance Group can respond to the difficult interest-rate environment from a position of strength. For one of two Germans, the principal bank is a savings bank. The next competitor accounts for 25 percent, and the biggest direct bank has a share of approx. 3 percent. Roughly 50 million customers trust our member institutions. Maintaining this trust is our most important task. You know that, a few weeks ago, policymakers made it mandatory for the banking sector to ensure access to a basic bank account. In the past year, savings banks already administered roughly 1.4 million basic accounts. According to a recent survey, our member institutions have set up approx. 250,000 accounts for refugees, as well. This means that savings banks are virtually the only banking group which has tackled this important challenge nationwide. Our customer relationship managers also personally visit shelters for refugees and have set up additional contact points for refugees. In our view, it is also part of our special mission to protect customers in particular retail customers from the serious effects of the ECB s monetary policy. In the short term, the key objective is to safeguard savers from negative interest rates. This is what we want to ensure. And this will certainly also be at the expense of the savings banks profitability. Nevertheless, no market player will be able to go against an artificially changed market environment for a longer period of time. For this reason, I expect that large deposit volumes of commercial investors will soon be subject to deposit fees. However, I expect much greater burdens on customers in the medium and long term because the lack of interest and compound interest will primarily affect Germany s pension schemes. The resulting shortfalls in old-age pensions are grossly underestimated in some cases. If pension commitments are no longer sufficiently funded, this will affect many players, 8
including institutions such as statutory and private health insurance funds, pension funds, supplementary pension schemes, statutory pension schemes, as well as foundations and companies. We should not be deceived by short-term developments: In the long term, the ECB s monetary policy will have a devastating impact on the current asset base. It rewards debtors and penalises creditors. In the medium term, there is a risk that higher contributions will have to be paid in all the affected areas. At that point in time at the latest, the impact of the ECB s low interest-rate policy will be felt in mainstream society. Let me therefore be very clear and reiterate that the monetary policy pursued by the ECB is wrong. It is dangerous. It is useless because there it has no positive effect whatsoever. And we believe that it is no longer appropriate because, in view of the development of oil prices, it is no longer aimed at a reasonable inflation target. The ECB has failed to achieve its own objectives and is now enticing market players to pursue a careless risk policy. Last Thursday was a black day for the asset base of our population and for a sustainable financial policy. Thank you very much for your attention. 9