DVB Bank SE
31.08.2017 / 10:35
The issuer is solely responsible for the content of this announcement.
- Significant increase in allowance for credit losses
- Volatile effects from the IAS 39 result
Frankfurt/Main, 31 August 2017 – DVB, the specialist in international transport finance, reported a consolidated net loss before taxes of EUR506.3 million in the first six months of 2017 (previous year: net income of EUR14.1 million). The net figure was dominated by a significant increase in allowance for credit losses, to EUR445.3 million (previous year: EUR83.4 million), reflecting market developments. Moreover, due to the continued narrowing of spreads for euro/US dollar cross-currency swaps, the net result from financial instruments in accordance with IAS 39 fell to EUR-67.9 million (previous year: EUR10.0 million).
Ralf Bedranowsky, CEO and Chairman of DVB Bank SE’s Board of Managing Directors, commented on the Bank’s consolidated results:
“The increase in allowance for credit losses was largely required for legacy exposures in the Shipping Finance portfolio, and for financings in the Offshore Finance portfolio. These developments reflected the following market trends:
- Given persistent oil price uncertainty, oil and gas companies have continued to reduce their exploration and production spending, which has further curtailed demand for offshore vessels and equipment. Shipowners remain under pressure from low charter rates and competition for employment. Against this background, owners of vessels and drilling rigs adjusted their capacities, through lay-ups, restructuring or consolidation.
- Excess capacity remained a major challenge on shipping markets throughout the first half of 2017. Container carriers, bulk carriers and tankers are the three most important sectors for the maritime industry, in terms of transport volumes and services.
Especially in container shipping, persistently difficult market conditions have burdened performance amongst shipowners. In this context, increasing consolidation of shipping lines is set to intensify competition amongst shipowners chartering their vessels to line operators. Even though charter rates in container shipping showed some improvement during the first half of 2017, whether this trend will in fact be sustainable is open to question, for two reasons. On the one hand, consolidation among shipping lines is accelerating, and on the other hand, charter rates are further burdened, given the continued delivery of a large number of 20,000 TEU container ships. Consequently, market values of container vessels have not been able to recover so far. Looking ahead, the cascading effect caused by substantial deliveries of large container carriers will mostly have a negative effect upon the development of charter rates and market values in the other size categories.
Bulk carriers enjoyed a strong increase in earnings during the first half of 2017. The Baltic Dry Index (BDI) was quoted at an average of 976 points during the first six months of the year – up 101% year-on year. Freight rates were supported by continued Chinese demand for iron ore and coal. The BDI reached its year-to-date high in April, albeit staying far away from the historical peak of more than 10,000 points in 2007/2008. A multi-year comparison shows that charter rates for bulk carriers have remained insufficient, given that a large number of vessels was bought and financed at record prices.
Following an improvement during the first quarter of 2017, which was driven by seasonal factors, tanker markets declined again during the second quarter, putting pressure on shipowners’ earnings. The extension of OPEC members’ agreement to reduce production volumes had a negative impact on tonne-mile demand in the crude oil tanker segment. Yet at the same time, the crude oil tanker fleet grew by 5.5% year-on-year. The significant volume of new tonnage on order – which rose further year-to-date – created an additional burden.
- Excess capacity was accompanied by escalating liquidity shortages faced by shipowners. These described challenging market conditions triggered numerous new restructuring measures, thus influencing the performance amongst many market participants.
As mentioned above, the net result from financial instruments in accordance with IAS 39 amounted to EUR-67.9 million (previous year: EUR10.0 million); this was largely driven by the measurement of cross-currency swaps, which the Bank is not allowed to include in its hedge accounting. Based on prudent economic risk management, these derivatives form hedging relationships with the related hedged items, whereby measurement gains and losses reported on a particular record date are neutralised over the entire term of the financings extended.
At the beginning of August 2017, DVB received a EUR500 million contribution to income from our parent company, DZ BANK AG, Deutsche Zentral-Genossenschaftsbank, Frankfurt am Main. DVB was unable to recognise this contribution in income as at 30 June 2017, but will recognise it in income during the third quarter of 2017. The contribution will stabilise both the common equity tier 1 ratio (which stood at 8.9% as at 30 June 2017) as well as the deteriorating key financial indicators, return on equity, cost/income ratio, and Economic Value Added.”
The individual items of the half-yearly financial statements are as follows:
Total income (before IAS 39) – composing net interest income after allowance for credit losses, net fee and commission income, result from investments in companies accounted for using the equity method and net other operating income/expenses – amounted to EUR-335.2 million (previous year: EUR106.5 million).
Net interest income declined by 13.2%, from EUR124.5 million to EUR108.1 million, driven mainly by more moderate new business in the Transport Finance divisions, lower interest income from operating leases, as well as by higher interest expenses on deposits and subordinated capital.
Whilst many international shipping financiers withdrew from the market, DVB continued to enter into new business with selected shipping clients, in a market environment characterised by less liquidity. This was conducted on a selective basis however – hence, with clearly lower volumes than in the previous year. New business in Aviation Finance, and in Land Transport Finance, where it finances rail rolling stock and other rail-related vehicles, showed stable, though subdued development, reflecting high liquidity and intensifying competition. Overall, the Bank originated EUR1.8 billion in new business during the first half of 2017 – down by EUR1.0 billion compared to the same period of the previous year.
Allowance for credit losses amounted to EUR445.3 million (previous year: EUR83.4 million). New allowances recognised for credit losses totalled EUR519.7 million (previous year: EUR196.4 million), of which EUR497.0 million (previous year: EUR167.0 million) was accounted for by Shipping Finance and Offshore Finance, due to the difficult environment surrounding the international shipping and offshore markets, as outlined above. Conversely, allowance for credit losses of EUR74.3 million (previous year: EUR112.2 million) was reversed, of which EUR61.2 million (previous year: EUR95.8 million) in Shipping Finance and Offshore Finance. Net interest income after allowance for credit losses thus amounted to EUR-337.2 million (previous year: EUR41.1 million).
Total allowance for credit losses (comprising specific allowance for credit losses, portfolio-based allowances for credit losses, and provisions) rose to EUR990.9 million, up 56.5% from year-end 2016 (EUR633.1 million).
Net fee and commission income, which primarily includes fees and commissions from new Transport Finance business, asset management fees, and fees generated from Corporate Finance advisory mandates, was down 8.3%, from EUR56.5 million to EUR51.8 million. Fee and commission income declined by 5.4%, to EUR56.5 million (previous year: EUR59.7 million); fee and commission expenses were up 46.9%, from EUR3.2 million to EUR4.7 million.
Results from investments accounting for using the equity method stood at EUR-7.2 million (previous year: EUR4.1 million).
Net other operating income/expenses amounted to EUR-42.6 million (previous year: EUR4.8 million). Other operating expenses largely comprised EUR59.2 million in impairment of goodwill in the Shipping Finance division.
DVB managed to lower general administrative expenses, by 1.0%, to EUR90.4 million (previous year: EUR91.3 million), despite the continued high expenses required for regulatory-driven projects. Staff expenses increased slightly, by 0.9%, to EUR55.7 million (previous year: EUR55.2 million). Non-staff expenses (including amortisation, depreciation and write-downs) decreased by 3.9%, from EUR36.1 million to EUR34.7 million.
Net result from financial instruments in accordance with IAS 39 (comprising the trading result, the hedge result, the result from derivatives entered into without intention to trade, and the result from investment securities) amounted to EUR-67.9 million (previous year: EUR10.0 million).
Consolidated net income/loss before bank levy, BVR Deposit Guarantee Scheme, and taxes fell to EUR-493.5 million (previous year: EUR25.2 million).
Consolidated net income/loss before taxes thus amounted to EUR-506.3 million (previous year: EUR14.1 million). Consolidated net income/loss (after taxes) was EUR-547.1 million (previous year: EUR10.6 million), largely due to EUR40.8 million in write-downs of deferred tax assets.
DVB’s total assets decreased to EUR24.9 billion as at 30 June 2017, down 10.0% from the 2016 year-end (31 December 2016: EUR27.7 billion).
DVB’s nominal volume of customer lending (the aggregate of loans and advances to customers, guarantees and indemnities, irrevocable loan commitments, and derivatives) declined by 13.1%, to EUR22.5 billion. In US dollar terms, it was down 5.9%, from US$27.3 billion to US$25.7 billion.
Key financial indicators developed as follows:
Return on equity (before taxes) decreased to -73.4% (previous year: 0.6%). Cost/income ratio stood at 91.2% (previous year: 52.6%). Risk-adjusted Economic Value Added amounted to EUR-496.0 million (previous year: EUR-47.2 million).
DVB discloses capital ratios determined in accordance with Basel III (Advanced Approach). On this basis, DVB’s common equity tier 1 ratio as at 30 June 2017 was 8.9% (31 December 2016: 13.2%), whilst the total capital ratio amounted to 16.8% (31 December 2016: 20.7%).
DVB’s outlook reads as follows:
DVB plans to sustain the positive business development in Aviation Finance as well as in Land Transport Finance, and strengthen the earnings power of these businesses.
Due to the persistent crisis in the shipping and offshore sectors, DVB expects risk costs in its Shipping Finance and Offshore Finance portfolios to remain high throughout the financial year 2017. Accordingly, risk management in these two divisions will continue to command particular attention, as well as proactive restructuring measures.
The Bank thus expects consolidated return on equity for 2017 (before taxes and before IAS 39) to significantly fall short of the forecast; it is also unlikely to match the forecasts for the other key financial indicators, cost/income ratio and Economic Value Added.
DVB strives to preserve sound core operational earnings before risk costs and before IAS 39. This means that, in addition to the lending business, the Bank will focus on value-added services for clients in its Transport Finance business – such as capital markets products and advisory services.
The Bank will keep supporting their shipping clients in a market environment characterised by less liquidity supply, on a selective basis – yet with markedly lower volumes of new business.
Structural changes with differing characteristics can be observed in the sub-markets of the global transport sector. Whilst aviation and land transport markets are predominantly shaped by high excess liquidity together with strong margin and competitive pressures, the shipping and offshore industries have yet to see the end of the ongoing consolidation phase.
DVB will continue to analyse the business environment in the markets they cover, in great detail – to focus on business opportunities which allow DVB to return to adequate profitability, and to sustainably stabilise for the future.