Central Institution and Major Corporate Customers operating segment

The net interest income of the Central Institution and Major Corporate Customers operating segment declined to €1,337 million in the year under review (2019: €1,421 million). The decrease was essentially due to the absence of interest income following the sale of the aviation finance and land transport finance businesses in 2019.

Net interest income in the Corporate Banking business line rose to €481 million due to the increase in the lending volume (2019: €446 million). At €162 million, net interest income from structured finance was higher than the prior-year figure of €151 million. The drivers behind this increase were successful acquisitions at the beginning of 2020 and at the end of 2019, together with the conclusion of new income-generating deals in the reporting year in virtually all product groups, as a result of which there was a significant rise in net interest income particularly in the infrastructure, international trade finance, and project finance businesses.

Net interest income in the investment promotion business rose to €55 million (2019: €50 million). The year-on-year increase was mainly due to substantial growth in volume driven by the strong demand for business support programs in connection with the COVID-19 pandemic and for residential development loans. At €23 million, net interest income from the separately managed real estate lending portfolio was down compared with the prior-year figure of €46 million due to the reduction in the size of portfolio caused by the transfer of some of its components to DZ HYP. In the Capital Markets business line, net interest income advanced by 19.6 percent to €275 million (2019: €230 million). This was primarily attributable to business with institutional customers, the treasury portfolios, and other net interest income. The main reasons for the increase were the larger volume of money market business, lower interest expense on the specific funding structure, and the beneficial effect of the tiered interest rates introduced by the ECB.

The expansion of the core business, which involved a further rise in the volumes of the digital solutions, had a positive impact on net interest income. However, it was unable to compensate for the absence of the income from the non-core areas of business that have been scaled back or sold in line with the strategy. In 2019, the strategy had resulted in the sale of the following areas of the business: real estate leasing (VR IMMOBILIEN LEASING GmbH), centralized settlement, and IT leasing (BFL Leasing GmbH). The proportion of total new business (leasing and lending) accounted for by contracts entered into online reached 98.3 percent in the reporting period (2019: 90.0 percent). In response to the COVID-19 pandemic, a needs-based support package derived from the entire range of solutions was introduced for small-business and self-employed customers. In connection with these measures, the ‘VR Smart flexibel’ financing solution was temporarily withdrawn until the end of November 2020 and the ‘VR Smart flexibel support loan’ solution, which was eligible for support from Germany’s KfW development bank, was introduced at short notice.

Net fee and commission income in the Central Institution and Major Corporate Customers operating segment came to €521 million and was therefore lower than in the previous year (2019: €531 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).

The decline was essentially due to the absence of income following the sale of DVB Bank’s aviation finance and land transport finance businesses. Moreover, activity in the shipping finance and offshore finance businesses at DVB Bank was now limited to the occasional extension of existing transactions. Net fee and commission income from finance for small businesses was down year on year due to 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 €506 million in 2020, up from a net gain of €450 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 €521 million, up from a net gain of €430 million in 2019. The institutional client business was expanded in 2020, with year-on-year growth in the product volume. The level of income was higher than the prior-year figure. In terms of asset classes, the increase in product sales arose predominantly from trading in sovereign, supranational and agency (SSA) bonds, bank bonds, government bonds, and covered bonds, from business involving interest-rate structures and interest-rate derivatives, and from spot exchange business. In 2020, customer use of electronic trading platforms again exceeded the level of the previous year. Other gains and losses on trading activities resulting from non-operating, IFRS-related effects amounted to a net loss of €33 million (2019: net gain of €7 million). For the assets and liabilities recognized at fair value in the ‘financial assets and liabilities measured at fair value through profit or loss’ category (fair value PL) and in the ‘financial assets and liabilities designated as at fair value through profit or loss’ category, the adjustment of the valuation curves gave rise to a significant net gain in 2020, as it had in the previous year. This gain was offset by a number of factors, notably negative valuation effects from interest-rate-sensitive derivatives in the banking book.

Gains and losses on investments improved from a net gain of €37 million in 2019 to a net gain of €53 million in the reporting year. This was due to income from the sale of securities. Some of the gains were offset by expenses arising from the unwinding of hedges in the context of portfolio fair value hedge accounting.

The net addition to loss allowances in the Central Institution and Major Corporate Customers segment amounted to €517 million in the reporting year (2019: net addition of €226 million). In stages 1 and 2, this change was primarily attributable to additions in connection with COVID-19. The required addition resulting from the measurement of loss allowances reflects observable and unobservable effects of the COVID-19 pandemic that were taken into account by validating the rating-related default probabilities and, in particular, by factoring in the anticipated macroeconomic conditions through adjustment of the model-based default probability profiles (referred to as shift factors) and that were taken into account when determining the expected losses. Loss allowances in stage 3 also went up due to significant individual additions that were not solely attributable to the COVID-19 pandemic.

Other gains and losses on valuation of financial instruments came to a net loss of €34 million in 2020 (2019: net loss of €5 million). The main reason for the difference compared with the previous year was a negative valuation impact in respect of derivatives that were not included in hedge accounting. Some of this impact was offset by positive valuation effects compared with the previous year from the application of the fair value option.

Administrative expenses fell to €1,866 million in the year under review (2019: €1,971 million). The decrease was primarily the result of a reduction in staff expenses that was mainly due to the lower headcount.

Due to the factors described above, profit before taxes in the Central Institution and Major Corporate Customers operating segment declined to €119 million in the year under review (2019: €352 million). The cost/income ratio was 74.6 percent in 2020 (2019: 77.3 percent).

Management Report 2020