Business situation

Despite the continuation of extremely low interest rates and thus challenging market conditions, the Volksbanken Raiffeisenbanken Cooperative Financial Network was able to increase its profit before taxes by a substantial 31.0 percent year on year in 2019. Profit before taxes was strongly influenced by capital market trends and amounted to €10,179 million in 2019, compared with €7,771 million in 2018.

The cooperative banks’ lending to retail and corporate customers increased by 6.1 percent in 2019 and thus grew at a faster pace than in the previous year (2018: 5.5 percent). This upward trend is mainly attributable to demand for real estate loans. Market share in the retail and corporate customer segment increased again year on year to 17.2 percent (up by 0.3 percentage points).

The Cooperative Financial Network’s deposittaking business saw customer deposits grow by a further 4.5 percent to €880,398 million in 2019. These deposits played a crucial part in funding the Cooperative Financial Network’s lending business.

Equity increased again and was up by 7.7 percent at the end of the reporting year, at €116,013 million (December 31, 2018: €107,704 million). The Cooperative Financial Network’s capital resources provide it with a risk buffer and, at the same time, the foundations on which it can expand its lending business with retail and corporate customers. Credit rating agencies Standard & Poor’s and FitchRatings have each given the Cooperative Financial Network a rating of AA–.

In the reporting year, the number of members of the Cooperative Financial Network remained stable year on year at a high level. As at the end of the financial year, the cooperative banks had 18.6 million members (individuals and companies) in total.

Financial performance

Net interest income decreased year on year to €18,185 million in 2019 (2018: €18,368 million). The cooperative banks’ net interest income – the biggest source of income for the Cooperative Financial Network – declined by 1.1 percent, from €15,783 million in 2018 to €15,610 million in 2019. Margins continued to shrink in light of the ECB’s low-interest-rate policy. However, this effect was partially offset by growth in lending.

Net fee and commission income improved by 4.0 percent, from €6,816 million in 2018 to €7,092 million in 2019. The main sources of income were payments processing and securities brokerage business with entities in the Cooperative Financial Network. With a contribution of €5,666 million, the cooperative banks accounted for most of the net fee and commission income (2018: €5,334 million).

The Cooperative Financial Network’s gains and losses on trading activities rose from a net gain of €461 million in 2018 to a net gain of €643 million in 2019. Gains and losses on trading activities are largely influenced by the DZ BANK Group.

Gains and losses on investments improved, mainly as a result of reversals of impairment losses that offset negative effects from 2018. Securities price gains of €961 million were recorded in the reporting year (2018: loss of €913 million). As a result, gains and losses on investments exceeded the forecasts from the previous year by a significant margin.

Loss allowances determined in the reporting year amounted to a net addition of €832 million (2018: net addition of €151 million). The loss allowances are mainly influenced by the Retail Customers and SMEs and the Central Institution and Major Corporate Customers operating segments.

Other gains and losses on valuation of financial instruments improved from a net loss of €122 million in 2018 to a net gain of €226 million in the reporting year. The main cause of this increase was the narrowing of credit spreads on interest-bearing securities and specifically bonds from the peripheral countries of the eurozone. By contrast, the previous year had seen a widening of these credit spreads.

Net income from insurance business comprises premiums earned, gains and losses on investments held by insurance companies and other insurance company gains and losses, insurance benefit payments, and insurance business operating expenses. In 2019, this figure rose to €1,652 million (2018: €863 million).

Administrative expenses amounted to €18,142 million in the year under review (2018: €18,079 million). The bulk of the administrative expenses were attributable to staff expenses, which came to €10,100 million (2018: €10,076 million), and general and administrative expenses, which amounted to €6,976 million (2018: €7,011 million).

Income taxes amounted to €3,133 million (2018: €2,369 million), with most of this amount (€2,758 million; 2018: €2,731 million) attributable to current income taxes.

The consolidated net profit after taxes rose to €7,046 million in 2019 (2018: €5,402 million).

The Cooperative Financial Network’s cost/income ratio came to 62.2 percent in 2019 (2018: 69.5 percent).

Financial position

The consolidated total assets of the Volksbanken Raiffeisenbanken Cooperative Financial Network had risen by €90,911 million to €1,384,088 million as at December 31, 2019 (December 31, 2018: €1,293,177 million). The volume of business increased from €1,724,917 million in 2018 to €1,870,742 million in the reporting year.

Of the total assets before consolidation, 61.6 percent was attributable to the cooperative banks (December 31, 2018: 62.1 percent) and 35.4 percent to the DZ BANK Group (December 31, 2018: 34.9 percent). As had also been the case at the end of 2018, the remaining 3.0 percent was attributable to Münchener Hypothekenbank, the BVR protection scheme, and BVR Institutssicherung GmbH.

On the assets side of the balance sheet, loans and advances to customers grew by €49,636 million or 6.2 percent to €844,552 million (December 31, 2018: €794,916 million). As in previous years, this upward trend was mainly driven by an increase in lending by the cooperative banks.

Financial assets held for trading increased by €6,835 million or 18.2 percent to €44,335 million as at December 31, 2019 (December 31, 2018: €37,500 million). This was mainly due to a rise in derivatives (positive fair values) to €19,291 million (December 31, 2018: €15,647 million), a rise in bonds and other fixed-income securities to €12,421 million (December 31, 2018: €10,788 million ), a rise in shares and other variable-yield securities to €1,220 million (December 31, 2018: €1,002 million), and a rise in loans and advances to €11,080 million (December 31, 2018: €9,714 million).

Investments rose to €248,509 million as at December 31, 2019 (December 31, 2018: €239,083 million). The principal reasons were growth in the portfolio of bonds and other fixed-income securities to €177,788 million (December 31, 2018: €171,621 million) and a rise in the portfolio of shares and other variable-yield securities to €66,548 million (December 31, 2018: €63,192 million), although some of these increases were offset by a decrease in investments in joint ventures to €293 million (December 31, 2018: €462 million).

Investments held by insurance companies went up from €99,855 million as at December 31, 2018 to €112,554 million as at December 31, 2019. Variable-yield securities increased to €11,300 million (December 31, 2018: €9,186 million) and fixed-income securities to €55,551 million (December 31, 2018: €48,764 million). Assets related to unit-linked contracts rose to €14,368 million (December 31, 2018: €11,710 million).

On the equity and liabilities side of the balance sheet, deposits from banks increased from €119,300 million as at December 31, 2018, to €119,955 million at the end of 2019. Deposits from customers grew from €842,420 million as at December 31, 2018 to €880,398 million as at the end of the reporting year. Debt certificates issued including bonds rose to €79,610 million (December 31, 2018: €56,111 million).

Financial liabilities held for trading went up to €49,202 million (December 31, 2018: €42,451 million). This comprised a rise in derivatives (negative fair values) to €18,901 million (December 31, 2018: €16,080 million) and an increase in bonds issued including share certificates, index-linked certificates, and other debt certificates to €22,261 million (December 31, 2018: €20,250 million).

The Cooperative Financial Network’s equity grew by 7.7 percent to €116,013 million in the reporting year (December 31, 2018: €107,704 million). The main reason for this rise was the appropriation of profits generated in 2019 to boost reserves. The cooperative banks account for 84.7 percent of the equity while the other entities in the Cooperative Financial Network account for 15.3 percent. This equity allocation highlights the local corporate responsibility and great significance of the cooperative banks for the Cooperative Financial Network.

Capital adequacy and regulatory ratios

The disclosures relating to own funds and capital requirements are based on the outcome of the extended aggregated calculation in accordance with article 49 (3) of the Capital Requirements Regulation (CRR) in conjunction with article 113 (7) CRR.

The consolidation carried out as part of the extended aggregated calculation demonstrates that by far the greatest proportion of the consolidated own funds consists of the own funds of the cooperative banks. The growth in own funds therefore arises primarily from the profits generated by the cooperative banks and network institutions. Rights issues by the network institutions are for the most part subscribed internally and consolidated within the Cooperative Financial Network.

Due to the exclusion of internal exposures within the network in accordance with article 113 (7) CRR, risk-weighted exposure amounts are generally not consolidated. Consolidation measures primarily include directly and indirectly held own funds instruments within the Cooperative Financial Network and therefore particularly affect equity investments of cooperative banks and subordinate receivables due to them from the network institutions, especially from DZ BANK AG. The amounts are consolidated in the relevant own funds categories.

The impact of consolidation on the level of the risk-weighted exposure amounts is therefore negligible, whereas own funds decrease. The method by which the consolidation is carried out results in a total capital ratio for the Cooperative Financial Network that is lower than the corresponding ratio for the sum of all cooperative banks.

The Cooperative Financial Network’s Tier 1 capital ratio increased again to stand at 13.7 percent as at the end of 2019 (December 31, 2018: 13.6 percent). If the reserves pursuant to section 340f of the German Commercial Code (HGB) are classified as Tier 1 capital, the Tier 1 capital ratio is 15.5 percent (December 31, 2018: 15.6 percent). At 15.6 percent, the regulatory total capital ratio was down slightly compared with a year earlier (December 31, 2018: 15.8 percent), due in large part to the fact that certain Tier 2 capital instruments ceased to be eligible for regulatory purposes (members’ commitments and phase-out of subordinated capital). Overall, the Cooperative Financial Network’s own funds increased by €5.3 billion to €107.0 billion. The rise in own funds was largely attributable to the retention of profits from 2018 by the cooperative banks.

As at December 31, 2019, risk-weighted assets stood at €685.4 billion, which was up by €43.0 billion year on year (see table Breakdown of risk-weighted assets). This increase was predominantly due to the growth of loans and advances in customer-related business. In total, credit risk exposures made up 90.2 percent of risk-weighted assets (December 31, 2018: 89.6 percent). The banks in the Cooperative Financial Network primarily use the Standardized Approach to credit risk to determine their regulatory capital requirements. Some institutions also apply internal ratings-based (IRB) approaches, including the DZ BANK Group, Münchener Hypothekenbank eG, and Deutsche Apotheker- und Ärztebank eG.

Using Tier 1 capital (including reserves in accordance with section 340f HGB and applying the new CRR provisions in full) as the capital basis, the leverage ratio as at December 31, 2019 was unchanged year on year at 7.8 percent. This ratio underlines the sound capital adequacy of the Cooperative Financial Network.

Retail Customers and SMEs operating segment

The net interest income generated by the Retail Customers and SMEs operating segment amounted to €16,197 million in the reporting year (2018: €16,321 million). This figure was primarily influenced by the low-interest-rate policy of the ECB and the resulting deterioration of margins. However, the decrease was partially offset by growth in lending. Net interest income from consumer finance business rose once again, mainly thanks to an increase in the consumer finance volume.

Net fee and commission income advanced from €6,918 million in 2018 to €7,281 million in the year under review. The main positive influences on net fee and commission income in the Retail Customers and SMEs operating segment in 2019 were once again income from payments processing and from the securities and funds business. The volume-related income contribution generated as a result of the increase in average assets under management from €330.7 billion in 2018 to €349.4 billion in 2019 was one of the key factors in the increase in net fee and commission income in the Retail Customers and SMEs operating segment. Income from real estate fund transaction fees was also up year on year at €36 million in 2019 (2018: €33 million). However, income from performance-related management fees came to just €9 million and thus fell short of the amount generated in 2018 (€16 million). The contribution to income from the fund services business also fell slightly year on year, whereas the volume of assets under management relating to high-net-worth clients rose from €16.7 billion as at December 31, 2018 to €18.8 billion as at December 31, 2019.

Gains and losses on trading activities in the Retail Customers and SMEs operating segment came to a net gain of €196 million (2018: net gain of €195 million). Gains and losses on trading activities are derived from trading in financial instruments, gains and losses on trading in foreign exchange, foreign notes and coins, and precious metals business, and gains and losses on commodities trading.

Gains and losses on investments came to a net gain of €711 million (2018: net loss of €1,130 million). This improvement was mainly due to reversals of impairment losses as a result of higher prices for securities in the capital market despite a deterioration in the gains or losses realized on the sale of funds in own-account investing activities. The prior year loss was primarily attributable to write-downs prompted by widening credit spreads on interest-bearing securities.

At €628 million, additions to loss allowances in the reporting year were higher than in the previous year (addition of €232 million). The main reasons for this were growth in the lending portfolio and shifts in the parameters of existing portfolios (e.g. recent PD and LGD data, offsetting of collateral) for the calculation of the expected loss.

The Cooperative Financial Network’s administrative expenses are subject to constant cost management. In the Retail Customers and SMEs operating segment, they amounted to €15,732 million in the reporting year (2018: €15,386 million). The main influences on this segment’s administrative expenses were appointments to new and vacant positions and average pay rises, although there was a mitigating effect from people leaving – mainly due to retirement. Capital expenditure on the cooperative banks’ digitalization initiative and spending on the standardization of IT banking processes also impacted on the Cooperative Financial Network’s costs.

As a result of the factors described above, the profit before taxes of the Retail Customers and SMEs operating segment rose from €6,926 million in 2018 to €8,211 million in 2019. Accordingly, the cost/income ratio decreased by 4.2 percentage points to 64.0 percent (2018: 68.2 percent).

Central Institution and Major Corporate Customers operating segment

The net interest income of the Central Institution and Major Corporate Customers operating segment increased to €1,421 million in the year under review (2018: €1,371 million). In the Corporate Banking business line, the Cooperative Financial Network generated growth in net interest income. This was mainly driven by the increase in lending volume and loan drawdowns by domestic corporate customers. Net interest income from capital markets business went up to €230 million (2018: €188 million), primarily as a consequence of higher income from money market business and a greater level of early-redemption fees. Net interest income from transport financing activities declined due to a decrease in lending volume. The expansion of finance for small businesses, which involved a further rise in the volumes of the digital solutions ‘VR Smart flexibel’ and ‘VR Smart express’, had a positive impact on net interest income. The proportion of total new business (leasing and lending) accounted for by contracts entered into online increased from 81.8 percent in 2018 to 90.0  percent in the reporting year. Some of this impact was offset by a contraction in net interest income caused by the implementation of the strategy to scale back or dispose of non-core activities.

Net fee and commission income in the Central Institution and Major Corporate Customers operating segment came to €531 million in 2019 and was therefore slightly lower than in the previous year (2018: €550 million). The principal sources of income were service fees in the Corporate Banking business line (in particular, from lending business including guarantees and international business), in the Capital Markets business line (mainly from securities issuance and brokerage business, agents’ fees, transactions on futures and options exchanges, financial services, and the provision of information), and in the Transaction Banking business line (primarily from payments processing including credit card processing, safe custody, and gains/losses from the currency service business). In the transport finance lending business, net fee and commission income declined. This was largely due to the absence of income following the sale of shares in LogPay Financial Services GmbH and the disposal of the land transport finance and aviation finance businesses, and to lower income caused by the fall in new lending business. Net fee and commission income from finance for small businesses was down year on year. The main reasons for this change were the level of trailer fees to be paid to the cooperative banks, which climbed in line with the volume of business, and the absence of income resulting from the disposal of the centralized settlement business.

Gains and losses on trading activities in the Central Institution and Major Corporate Customers operating segment came to a net gain of €450 million in 2019, up from a net gain of €267 million in the previous year. Gains and losses on trading activities relate to the business activities of the Capital Markets business line. This item also includes income from money market business entered into for trading purposes and all derivatives transactions. Gains and losses on trading activities in the Capital Markets business line amounted to a net gain of €430 million, up from a net gain of €315 million in 2018. One of the reasons for this was a higher level of sales with institutional and corporate customers and the associated boost to income. The rise in sales was evident in all asset classes, but the increase in derivatives business, the expansion of the structured products business, and the foreign-exchange business all made a particular contribution to the improvement in the net gains. On the other hand, the margins in fixed-income business declined because more deals were being entered into via electronic trading platforms. However, it was possible to offset the fall in margins with an increase in sales volume and sales in other asset classes. Further factors influencing the gains and losses on trading activities in the reporting year included interest-rate-related changes in the fair value of cross-currency basis swaps used for the hedging of financial instruments in the banking book denominated in foreign currency amounting to a loss of €13 million (2018: loss of €23 million).

The level of gains and losses on investments fell from a net gain of €195 million in 2018 to a net gain of €37 million in the reporting year. This change was attributable to losses arising from the termination of hedges in the context of portfolio fair value hedge accounting. In the transport finance business, the figure for the prior year had notably been affected by impairment losses recognized in respect of equity-accounted entities.

The net addition to loss allowances in the Central Institution and Major Corporate Customers segment amounted to €226 million in the reporting year (2018: net reversal of €70 million). The net reversal in the prior year was mainly due to improvements in borrowers’ credit ratings and the successful restructuring of loans. The change compared with 2018 in the transport finance business was due, in particular, to the increased need for loss allowances in the shipping and offshore businesses. In finance for small businesses, additions to loss allowances were required primarily in connection with the rise in lending volume generated with the ‘VR Smart flexibel’ product.

Other gains and losses on valuation of financial instruments came to a net loss of €5 million in 2019 (2018: net loss of €79 million). This change was mainly attributable to IFRS-related measurement effects relating to hedge accounting and to interest-rate-related measurements of cross-currency swaps.

Administrative expenses rose to €1,971 million in 2019 (2018: €1,944 million). Staff expenses increased, largely due to higher expenses for remuneration, whereas consultancy expenses were lower than in 2018. IT expenses, on the other hand, also went up year on year.

Due to the factors described above, profit before taxes in the Central Institution and Major Corporate Customers operating segment declined to €352 million in the year under review (2018: €431 million). The cost/income ratio fell from 84.3 percent in 2018 to 77.3 percent in the reporting year.

Real Estate Finance operating segment

The net interest income of the Real Estate Finance operating segment of the Cooperative Financial Network amounted to €1,305 million in 2019 (2018: €1,423 million) On the one hand, portfolio growth generated from new business and effects from the early redemption of loans had a positive impact on net interest income. But on the other hand, adverse effects arose in connection with the persistently low level of interest rates, which led to an additional charge of €280 million from the increase in interest bonus provisions for older rate scales in building society operations. Interest income arising on investments declined because capital market rates for investments remained low. Net interest income was also adversely impacted by an increase in fees and commissions directly assignable to the acquisition of home savings contracts and loan agreements and incorporated into the effective interest method applied to home savings deposits. With regard to loans issued under advance or interim financing arrangements, income from non-collective business in 2019 increased by €29 million to €940 million (2018: €911 million) on the back of the expansion in business over the last few years and despite a fall in average returns.

The net expense traditionally reported in the Real Estate Finance operating segment under net fee and commission income deteriorated to €121 million in the reporting year (2018: €110 million) due to a rise in fee and commission expense for loan brokerage. This was mitigated by a positive effect from the decrease in fees and commissions not directly attributable to the conclusion of a home savings contract.

Gains and losses on investments in the Real Estate Finance operating segment improved in 2019 to reach a net gain of €186 million (2018: net gain of €6 million). This change was mainly attributable to proceeds from the disposal of the shares in Czech building society ČMSS (€99 million) and the sale of securities (€64 million), especially Spanish government bonds, during the reporting year.

Loss allowances in the Real Estate Finance operating segment saw a net reversal of €26 million in the reporting year (2018: net reversal of €2 million). The level of loss allowances is influenced by the regular validation of credit risk parameters.

Other gains and losses on valuation of financial instruments in the Real Estate Finance operating segment improved year on year, amounting to a net gain of €287 million in 2019 (2018: net loss of €16 million). The main drivers behind this increase were narrowing credit spreads on bonds from the peripheral countries of the eurozone, particularly Italian and Spanish government bonds, and the early termination of interest-rate swaps.

Administrative expenses amounted to €875 million in 2019 (2018: €885 million). Staff expenses rose year on year as a result of an increase in headcount in connection with the expansion of the home finance business. But this rise was more than offset by a reduction in the bank levy, lower consultancy expenses, and a fall in expenses for regulatory projects.

Profit before taxes in the Real Estate Finance operating segment improved to €863 million in the year under review (2018: €477 million). The performance of the Real Estate Finance operating segment, as outlined above, meant that the cost/income ratio fell to 51.1 percent (2018: 65.1 percent).

Insurance operating segment

Premiums earned went up by €1,252 million to €17,249 million (2018: €15,997 million), reflecting the integral position held by the R+V subgroup within the Cooperative Financial Network.

Premium income in the life insurance and health insurance business grew by a total of €431 million to €8,299 million. Premiums earned from the life insurance business rose by €400 million to €7,673 million. Occupational pensions, traditional products, and new guarantees were the main areas of business contributing to these gains. The credit insurance business also saw rising premiums compared with the previous year. In the health insurance business, net premiums earned rose by €31 million to €626 million. All business segments generated year-on-year increases, with notably strong growth in private supplementary health insurance.

In the non-life insurance business, premium income earned grew by €342 million to €6,130 million, with most of this growth being generated from vehicle insurance and corporate customer business.

Premium income earned from the inward reinsurance business rose by €479 million to €2,820 million. Business performed well in all regions, with Europe remaining the largest market. Growth was generated in all divisions.

Gains and losses on investments held by insurance companies and other insurance company gains and losses increased by €4,850 million to a net gain of €6,192 million (2018: net gain of €1,342 million). At the end of the year under review, the level of long-term interest rates was below the corresponding level at the end of 2018. At the same time, the narrowing of spreads on interest-bearing securities had a positive impact on this item. Over the course of 2019, equity markets relevant to R+V performed better than in 2018. For example, the EURO STOXX 50, a share index comprising 50 large, listed companies in the EMU, saw a rise of 744 points from the start of 2019, closing the year on 3,745 points. In 2018, this index had fallen by 503 points. In the reporting year, movements in exchange rates between the euro and various currencies were generally more favorable than in the previous year.

Overall, these trends in the reporting year essentially resulted in a €4,882 million improvement in unrealized gains and losses to a net gain of €3,585 million (2018: net loss of €1,297 million), a €256 million improvement in the contribution to earnings from the derecognition of investments to a gain of €237 million (2018: loss of €19 million), and an increase of €63 million in the net gains under foreign exchange gains and losses to €244 million (2018: net gain of €181 million). In addition, net income under current income and expense rose by €1 million to €2,347 million (2018: €2,346 million) and the balance of depreciation, amortization, impairment losses, and reversals of impairment losses deteriorated by €24 million to a net expense of €74 million (2018: net expense of €50 million). Owing to the inclusion of provisions for premium refunds (particularly in the life insurance and health insurance business) and claims by policyholders in the fund-linked life insurance business, the change in the level of gains and losses on investments held by insurance companies also affected the ‘insurance benefit payments’ line item presented below.

Insurance benefit payments went up by €5,132 million, from €14,208 million in 2018 to €19,340 million in the reporting year. The increase in insurance benefit payments reflected both the trend in net premiums earned and the policyholder participation in gains and losses on investments held by insurance companies. At the companies offering personal insurance, the changes in insurance benefit payments were in line with the change in premium income and in gains and losses on investments held by insurance companies and other insurance company gains and losses. An amount of €647 million (2018: €305 million) was added to the supplementary change-in-discount-rate reserve.

In the non-life insurance business, a decline in the claims rate trend was evident compared with the prior period. For example, the overall claims rate remained below the prior-year level. Claims expenses for natural disasters and major claim costs both declined year on year. However, the underlying cost of claims increased.

In the inward reinsurance business, the net claims ratio was up by 2.3 percentage points compared with the prior year. The ratios for major and medium claims were above those in 2018. Notably, typhoons Hagibis and Faxai, together with Hurricane Dorian, gave rise to claims of around €169 million, with a corresponding impact on earnings.

Insurance business operating expenses went up by €252 million to €2,973 million (2018: €2,721 million) in the course of ordinary business activities in all divisions, with a particularly sharp rise in the inward reinsurance and non-life insurance segments.

The factors described above meant that profit before taxes for the reporting year increased by €704 million to €1,117 million (2018: €413 million).