A Chance to Earn 5.8% Interest from Germany’s State-Owned Bank – LBBW

Key Points

• LBBW has maintained a broadly stable earnings profile. In FY25, LBBW recorded a 7.0% YoY increase in operating income, supported by stronger contributions from net interest income (+3.8% YoY) and net fee and commission income (+8.5% YoY).
• As the largest state-owned bank in Germany, LBBW has consistently maintained strong and stable credit metrics with CET1 ratio of 16.9%, an LCR of 180%, and an NSFR of 115%, all comfortably exceeding the regulatory minimum requirements of 10.53%, 100% and 100% respectively.
• In terms of asset quality, LBBW's Non-Performing Exposure (NPE) ratio increased modestly to 1.0% in FY2025 (FY2024: 0.6%), primarily due to the deterioration of its Commercial Real Estate (CRE) portfolio. Nevertheless, we do not view this as a significant concern as Stage 3 financing (defaulted loans) represents only a negligible proportion of the overall portfolio.
• Considering LBBW's significant presence in Germany as a state-owned bank, its relatively stable earnings profile and strong balance sheet, we maintain a positive view of the bank. Investors may consider LBBW's 5.000% 17 May 2028 Corp (AUD), which is currently yielding around 5.83%.

LBBW business portfolio is predominantly in Germany (62%) and the remaining is spread across Western Europe and North America in particular.

Chart 1: Geographic breakdown

Financials – stable earnings growth despite ECB rate cuts in 2025

Historically, LBBW has maintained a broadly stable earnings profile. As shown in Table 2, both operating income and profit before tax have grown steadily over the years.

In FY2025, despite the ECB's lower interest rate environment, LBBW recorded a 7.0% YoY increase in operating income, supported by stronger contributions from net interest income (+3.8% YoY) and net fee and commission income (+8.5% YoY).

The growth in net interest income was primarily driven by the strong performance of the Corporate Customers business, supported by higher lending volumes, increased financing and commitment fees, expansion in infrastructure financing, and continued deposit growth. These factors more than offset the impact of the ECB's interest rate cuts.

Meanwhile, the increase in net fee and commission income was underpinned by stronger sales across the Private Customers/Savings Banks and Capital Markets businesses, alongside higher income from wealth management, institutional asset management, securities and syndication, pension products, real estate transactions, and lending-related fees.

On the cost side, LBBW's cost/income ratio increased to 62.0% in FY2025 from 60.4% in FY2024. This was mainly attributable to one-off costs associated with the integration of Berlin Hyp, including transformation expenses, IT system migration costs, restructuring provisions, and higher personnel expenses incurred as part of the acquisition.

Overall, profit before tax increased by 4.2% YoY to EUR1,284 million. Considering the challenging environment, the management expects profit before tax to be slightly below the previous year’s level, but it is likely to remain higher than EUR 1.1 billion.

Table 2: Profitability indicators (EUR million)

Source: Company Reports, iFAST Compilations. Data as of 31 Dec 2025.

Chart 2: Operating Income – breakdown by segment (EUR million)

Solid liquidity and credit position

As the largest state-owned bank in Germany, LBBW has consistently maintained strong and stable credit metrics. The bank continues to demonstrate a solid capital and liquidity position, as reflected in the three key prudential metrics under the Basel III regulatory framework—the Common Equity Tier 1 (CET1) ratio, Liquidity Coverage Ratio (LCR), and Net Stable Funding Ratio (NSFR).

In FY2025, LBBW reported a CET1 ratio of 16.9%, an LCR of 180%, and an NSFR of 115%, all comfortably exceeding the regulatory minimum requirements of 10.53%, 100% and 100% respectively. These metrics underscore the bank's strong loss-absorbing capacity, ample liquidity buffer, and stable long-term funding profile.

LBBW's CET1 ratio improved significantly to 16.9% in FY2025, driven by stronger internal capital generation through retained earnings and the transition from the Capital Requirements Regulation (CRR) II to CRR III, which resulted in a notable reduction in risk-weighted assets (RWAs).

As CRR III is an EU-wide regulatory framework applicable across all EU member states, we believe other EU banks are also likely to be benefited by the transition, particularly through changes in risk-weighted assets (RWAs) and capital requirements.

***CRR III:  replaced the previous "one-size-fits-all" approach to real estate risk weights with an LTV-based system, where loans secured by properties with lower LTVs receive lower risk weights and loans with higher LTVs receive higher risk weights, making capital requirements more risk-sensitive. (Note: LBBW average portfolio by LTV is <60%).

Overall, we view LBBW's credit profile as solid, underpinned by its strong capitalisation (CET1 ratio of 16.9%) and ample liquidity buffers (LCR of 180%).