Highlights:
- In FY2023, net interest income and profit before tax (adjusted for badwill) increased by 23% and 52.5% YoY, mainly bolstered by growth in all operating segments, especially from Corporate Customers segment and Private Customers/Savings Banks.
- CET1 ratio and LCR ratio of 14.6% and 150.5%, well-above regulatory requirement.
- Despite challenging economic environment, LBBW managed to maintain their non-performing exposures (NPE) at 0.5% in FY2023 (FY2022: 0.4%).
- We recommend investors to consider LBBW 4.900% 29Jun2027 Corp (AUD), yielding at approximately 5.8% area. For investors who opt for shorter tenure and don’t care about lower coupon, they may consider LBBW 1.500% 03Feb2025 Corp (GBP), yielding at 4% area.
***In this article, figures are based on the latest financial results as of 31 Dec 2023 (FY2023)
Introduction
Landesbank Baden-Wuerttemberg (LBBW) is one of Germany's largest banks, primarily owned by the government of the federal state of Baden-Wuerttemberg (40.5%), the Savings Banks Association of Baden-Wuerttemberg (40.5%), and the City of Stuttgart (19%).
As a universal bank, LBBW offers a broad array of financial services including corporate banking, real estate, capital market activities and retail services.
LBBW is rated A+ by Fitch, reflecting its solid financials and strong support from the Sparkassen-Finanzgruppe (a network of savings banks in Germany).
Acquisition of Berlin Hyp
In second half 2022, LBBW had completed its acquisition on Berlin Hyp – a major real estate bank based in Berlin, Germany. It provides wide range of services including mortgage lending, real estate financing and etc in Germany and selected areas in Europe. After the acquisition, Berlin Hyp operates as a subsidiary of LBBW and will contribute to LBBW’s real estate/project financing segment.
Operating segments and geographic breakdown:
LBBW operates across 4 segments:
Table 1: Operating segments
Operating Segments | Descriptions |
Corporate Customers | offers wide range of products and services to SMEs and major corporate customers and the public sector. |
Real Estate/Project Finance | offers conventional financing, property, portfolio, and corporate financing structures. |
Capital Market Business | offers products for the management of interest rate, currency and credit risk and liquidity management for institutional, banks and savings banks customer groups |
Private Customers/ Savings Banks | comprises activities with private customers in retail banking in addition to services high net-worth private clients |
Corporate items | comprises business activities not included in the above segments, such as financial investments |
Source: Company's Reports, iFAST compilations. Data as of 31 Dec 2023 | |
LBBW has high concentration in Germany and Western Europe:
Chart 1: Geographic breakdown (as of 31 Dec 2023)
Strong business growth continued in FY2023
In FY2023, LBBW continued to demonstrate a strong business growth in which net interest income surged by 23% YoY to € 2,826 million. The sharp increase was primarily bolstered by stronger contributions from all business segments, especially Corporate Customers segment and Private Customers/Savings Banks segment as well as higher interest rate environment. This has also led to higher operating income and lower cost/income ratio.
Profit before tax declined by 26.6% YoY from the unadjusted previous year's figure of €1,873 million. However, when adjusted for the consolidation (non-recurrence) of Berlin Hyp of €972 million, profit before tax was €901 million in FY2022. Excluding this non-recurring impact, LBBW recorded a 52.5% YoY increase in profit before tax compared to previous year’s figure.
Table 2: Profitability indicators (€ million)
Financial year ended 31 Dec | 2021 | 2022 | 2023 |
Net interest income | 2,031 | 2,305 | 2,826 |
Operating income | 2,997 | 3,316 | 4,036 |
Operating cost | 1,940 | 2,175 | 2,407 |
Consolidated profit/(loss) before tax (excluding badwill)* | 817 | 901 | 1,374 |
Net consolidated profit/(loss) | 418 | 538 | 996 |
Cost/Income ratio | 64.7% | 65.6% | 59.6% |
Return on equity (RoE) | 6.0% | 6.2% | 9.1% |
Source: Company's Reports, iFAST compilations. Data as of 31 Dec 2023 | |||
*Adjusted for badwill (non-recurring income) in 2022
In FY2023, LBBW saw improvement in overall operating segments, except for corporate items/reconciliation/consolidation saw a substantial decline. This was due to the previous year figure reflected the consolidation of Berlin Hyp (badwill). Without this consolidation, LBBW would have recorded a YoY increase in this segment in FY2023.
Table 3: Profit before tax from each segment (€ million)
Operating Segments | FY2022 | FY2023 | Change |
Corporate Customers | 513 | 678 | 32% |
Real Estate/ Project Finance | 328 | 361 | 10% |
Capital Markets Business | 183 | 230 | 26% |
Private Customers/ Savings Banks | 104 | 267 | 157% |
Corporate items/Reconciliation/Consolidation | 746 | -161 | -122% |
Source: Company's Reports, iFAST compilations. Data as of 31 Dec 2023 | |||
Liquidity and capital profiles remains sound, well-above regulatory minimum
In FY2023, LBBW remains well-capitalised with CET1 ratio of 14.6%, well above the regulatory minimum of 10.56% and was greater than CET1 in previous year (FY2022: 14.1%). Additionally, its total capital ratio also improved slightly to 20.1% from 20% in FY2022.
In terms of liquidity, LBBW’s liquidity coverage ratio (LCR) of 150.5% also fulfilled its regulatory requirements, increased slightly from 144.2% in previous year, indicating a good liquidity position. The net stable funding ratio stood at 109.7%.
Table 4: Liquidity and capital ratios
| 2021 | 2022 | 2023 |
CET1 | 14.6% | 14.1% | 14.6% |
Total capital ratio | 21.4% | 20.0% | 20.1% |
Liquidity coverage ratio (LCR) | 141.1% | 144.2% | 150.5% |
Net stable funding ratio (NSFR) | 108.5% | 111.3% | 109.7% |
Source: Company's Reports, iFAST compilations. Data as of 31 Dec 2023 | |||
Asset quality remains decent; slight increase in NPE compared to previous year
Despite a challenging economic environment in 2023, LBBW managed to maintain their non-performing exposures (NPE) at 0.5%, representing a 0.1% increase compared to previous year. This stability was attributed to their well-diversified portfolio across various sectors.
Outlook
LBBW is in a partnership with the crypto exchange platform – Bitpanda to offer crypto services to its corporate clients. Services offered including crypto custody and trading of digital assets like Bitcoin, ETH and more. LBBW is poised to benefit from the crypto services considering that demand for digital assets from their corporate clients is increasing. According to LBBW, they are planning to start this custody services in 2H2024, hence, we foresee it will start to contribute to the group in 2H2024 or 1H2025.
LBBW’s management has given guidance that economic growth will be slightly weaken in FY2024 with lower profit before tax of over € 1 billion (FY2023: € 1.374 billion). As mentioned, LBBW has high concentration in Germany, hence, their profitability will be closely tied to the performance of the German economy. We believe the economic outlook will remains challenging for German, given that the European Central Bank (ECB) pausing rate hikes and possibly considering rate cuts based on market expectations.
Our view and recommendation
LBBW has consistently recorded strong business performance and maintained well-capitalised despite a challenging economic environment. As a bank owned by public entities, it is expected to get substantial support from the state and we view that the chance of default to be lower.
Owing to this, investors may consider AUD issuances by LBBW as the yield offered is decent. We recommend investors to look into LBBW 4.900% 29Jun2027 Corp (AUD), yielding at approximately 5.8% area.
For those investors who opt for shorter tenure and don’t care about the lower cash flow (coupon), they may consider LBBW 1.500% 03Feb2025 Corp (GBP), yielding at 4% area.
Table 5: Bonds table
Bonds | Years to maturity | Yield to maturity# | Credit rating (Fitch) |
0Y7M | 4% area | A- | |
1Y5M | 4.8% area | A- | |
2Y10M | 5.8% area | BBB- | |
3Y9M | 6.2% area | BBB- | |
Source: BSM, iFAST Compilations. Data as of 01 Aug 2024 | |||
#Actual yield may vary slightly from the yield stated in the table
Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report holds a NIL position in the abovementioned securities.
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