Business Performance
Economic conditions
Russia’s war of aggression against Ukraine had a considerable adverse impact on the German economy in 2022. Adjusted for inflation, gross domestic product (GDP) rose by 1.8 percent year on year, representing significantly weaker growth in economic output than in 2021. Driven by the war, general inflation continued to rise. At 6.9 percent as measured by the consumer price index (CPI), inflation was at its highest rate since Germany’s reunification.
The year started with strong growth in economic output, primarily thanks to the burgeoning recovery of the services sector, which had slumped when the pandemic broke out in 2020 because it tends to involve a lot of face-to-face contact. As 2022 continued, however, the economy deteriorated markedly and ultimately contracted for the year as a whole. The main reason for this deterioration was the economic fallout from Russia’s invasion of Ukraine in late February, including surging prices for energy and food as well as a worsening of the disruptions to supply chains and the availability of materials. Economic growth was further hampered by the shortage of skilled workers that had existed even before the war broke out.
Thanks to the scaling back of infection control measures, consumer spending was the biggest driver of growth in 2022 as a whole. Spending on capital equipment rose significantly too. However, construction investment declined due to the shortage of materials and labor, higher mortgage rates, and other factors. Foreign trade also acted as a brake on overall economic growth because there was a sharper increase in imports than in exports.
The labor market continued to bounce back from the crisis in 2020, with a further fall in the number of people registered as unemployed. Despite a temporary rise as a result of Ukrainian refugees being included in the figures for the first time, the average number of people out of work decreased by around 200,000 to roughly 2.4 million in 2022. This meant a further reduction in the unemployment rate, from 5.7 percent in the previous year to 5.3 percent. The number of people in work in Germany in 2022 swelled by almost 600,000 to approximately 45.6 million, thereby reaching a new high.
In its monetary policy, the European Central Bank (ECB) responded to the high inflation rates and, on July 27, 2022, raised its key interest rates for the first time since 2011. By the end of the year, the rate for the deposit facility had climbed from minus 0.5 percent to 2.0 percent. The interest rate for main refinancing operations advanced from 0.0 percent to 2.5 percent, while the rate for the marginal lending facility grew from 0.25 percent to 2.75 percent. In addition, the ECB stressed that these rate hikes would be followed by further increases in 2023 in order to bring down inflation.
As part of its tightening of monetary policy, the ECB also changed the conditions of its longer-term refinancing operations by raising the interest rate to the level of the deposit facility for the remaining term. Furthermore, the ECB discontinued its bond purchases on June 30, 2022 when it stopped making net purchases under the asset purchase program (APP), having already ended its net purchases under the pandemic emergency purchase program (PEPP) on March 31, 2022. On December 15, 2022, the ECB Governing Council also decided that it would stop fully reinvesting the principal payments from maturing securities under the APP from March 2023 onward and would instead reduce the volume by €15 billion per month. However, principal payments under the PEPP are to be fully reinvested until at least the end of 2024.
Volksbanken Raiffeisenbanken Cooperative Financial Network
Business situation
Despite the difficult market conditions resulting from the sharp interest-rate rises, the war in Ukraine, and the lingering effects of COVID-19 restrictions, the Volksbanken Raiffeisenbanken Cooperative Financial Network reported a profit before taxes of €3,892 million in 2022 (2021: €10,522 million).
The cooperative banks’ lending to retail and corporate customers increased by 6.5 percent in 2022, almost repeating the record growth of the previous year (2021: 6.9 percent). The market share of the cooperative banks in the retail and corporate customer segment stood at 17.8 percent (2021: 17.9 percent).
The Cooperative Financial Network’s deposit-taking business did not grow as strongly as in previous years, with customer deposits coming to €1,032,861 million (December 31, 2021: €984,926 million). These deposits played a crucial part in funding the Cooperative Financial Network’s lending business.
Equity amounted to €127,569 million at the end of the reporting year (December 31, 2021: €129,543 million). The Cooperative Financial Network’s capital resources provide it with a risk buffer and also form the foundations on which it can expand its lending business with retail and corporate customers.
The Cooperative Financial Network had a rating of A+ (2021: A+) from credit rating agency Standard & Poor’s, while the rating from Fitch Ratings was AA– (2021: AA–). In 2022, the number of members of the Cooperative Financial Network fell slightly year on year, predominantly due to demographic change. As at the end of the financial year, the cooperative banks had 17.9 million members (individuals and companies) in total, compared with 18.2 million at the end of 2021.
Financial performance
Net interest income amounted to €20,546 million in the year under review (2021: €18,232 million). This figure was primarily influenced by the 6.5 percent growth in the volume of lending at the cooperative banks and the resulting rise in interest income, whereas there was an only moderate increase in deposits due to customers’ reduced ability to save. Within the net figure, interest income rose sharply to €22,593 million (2021: €19,448 million) and interest expense to €3,499 million (2021: €2,622 million). The cooperative banks’ net interest income is the biggest source of income for the Cooperative Financial Network.
Net fee and commission income stabilized at the prior-year level, dropping by just €29 million to €8,646 million in the year under review (2021: €8,675 million). It was therefore in line with expectations. The main sources of income continued to be payments processing (including card processing) and securities brokerage business with entities in the Cooperative Financial Network. The bulk of net fee and commission income is attributable to the cooperative banks. Net fee and commission income also included the volume-related net income contribution resulting from an increase in the average assets under management.
The Cooperative Financial Network’s gains and losses on trading activities amounted to a net gain of €1,009 million in the reporting year (2021: net gain of €339 million). Gains and losses on trading activities are largely influenced by the DZ BANK Group and improved thanks to the good performance of the capital markets operating business, in particular due to valuation effects resulting from significant changes in the fair value of own issues and other instruments.
The net loss under gains and losses on investments came to €6,774 million (2021: net loss of €152 million). This significant deterioration had been anticipated and was largely attributable to realized gains and losses on sales of securities during the year and to measurement effects at the cooperative banks. In this context, the jump in interest rates over the course of the year resulted in valuation adjustments in the securities portfolios that were almost entirely interest-rate-related. However, the cooperative banks tend to hold the securities to maturity.
Loss allowances were calculated at a significantly higher level in 2022, as had been forecast in 2021, and amounted to a net addition of €1,363 million (2021: net reversal of €337 million). The gloomy economic conditions were reflected in the increased additions that had to be made to parameter-based loss allowances, whereas the economic recovery in the previous year had meant a low level of company insolvencies and income from the reversal of loss allowances for individual exposures.
Other gains and losses on valuation of financial instruments deteriorated markedly year on year and came to a net loss of €211 million in the reporting year (2021: net gain of €190 million). This was due to the deterioration in this key figure in the DZ BANK Group, which was primarily driven by the valuation of guarantee commitments and own-account investments in the Union Investment Group, the performance of bonds from eurozone periphery countries, and the gain/loss from ineffectiveness in hedge accounting. Gains and losses from fair value hedge accounting amounted to a net loss of €45 million (2021: net gain of €20 million), gains and losses on derivatives used for purposes other than trading amounted to a net loss of €6 million (2021: net gain of €58 million), and gains and losses on financial instruments designated as at fair value through profit or loss amounted to a net loss of €160 million (2021: net gain of €111 million).
Net income from insurance business, which is exclusively attributable to the R+V Group, 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. As expected, net income from insurance business fell sharply to €243 million in 2022 (2021: €1,293 million).
The reduction was primarily due to the deterioration – driven by the situation in the capital markets – in gains and losses on investments held by insurance companies and other insurance company gains and losses to a net loss of €3,405 million (2021: net gain of €5,233 million). Some of these decreases were offset by a fall in insurance benefit payments to €12,127 million (2021: €20,356 million). In the non-life insurance business, the overall claims rate was above the level of the prior year but below the three-year average. In the inward reinsurance business, the series of winter storms in Europe, plus tornadoes, hurricanes and other natural disasters outside Germany, resulted in claims incurred of €285 million. Premiums earned declined to €18,397 million (2021: €18,994 million), while insurance business operating expenses incurred in the course of ordinary business activities amounted to €2,622 million (2021: €2,578 million).
Administrative expenses came to 19,078 million in the year under review, which was a little higher than the prior-year figure of €18,577 million. The bulk of the administrative expenses were attributable to staff expenses amounting to €10,456 million (2021: €10,402 million), which primarily went up owing to pay rises, appointments, and higher expenses relating to additions to provisions for pensions and other post-employment benefits. Other administrative expenses, which comprise general and administrative expenses plus depreciation/amortization and impairment losses, totaled €8,622 million (2021: €8,175 million) and were predominantly attributable to additional capital expenditure on infrastructure and growth, the rise in energy costs, and general inflation.
Other net operating income swelled to €875 million (2021: €186 million), partly thanks to income from the reversal of provisions and partly because of the DZ BANK Group’s higher restructuring expenses in the previous year. There were also contributions to earnings from the cooperative banks, including gains on the disposal of assets and income from property rentals.
Income taxes amounted to €1,790 million in 2022 (2021: €3,017 million), with most of this amount (€2,807 million; 2021: €3,084 million) attributable to current income taxes.
The consolidated net profit after taxes stood at €2,102 million in 2022 (2021: €7,505 million).
The Cooperative Financial Network’s cost/income ratio came to 78.4 percent in 2022 (2021: 64.6 percent).
Financial performance
| 2022 € million | 2021 € million | Change (percent) | |
|---|---|---|---|
| Net interest income | 20,546 | 18,232 | 12.7 |
| Net fee and commission income | 8,646 | 8,675 | –0.3 |
| Gains and losses on trading activities | 1,009 | 339 | > 100.0 |
| Gains and losses on investments | –6,774 | –152 | > 100.0 |
| Loss allowances | –1,363 | 337 | > 100.0 |
| Other gains and losses on valuation of financial instruments | –211 | 190 | > 100.0 |
| Net income from insurance business | 243 | 1,293 | –81.2 |
| Administrative expenses | –19,078 | –18,577 | 2.7 |
| Other net operating income | 875 | 186 | > 100.0 |
| Profit before taxes | 3,892 | 10,522 | –63.0 |
| Income taxes | –1,790 | –3,017 | –40.7 |
| Net profit | 2,102 | 7,505 | –72.0 |
Income statement – breakdown of the change in profit before taxes by line item
€ million
Financial position
The consolidated total assets of the Volksbanken Raiffeisenbanken Cooperative Financial Network rose by €14,653 million to €1,581,104 million as at December 31, 2022 (December 31, 2021: €1,566,451 million). Trust activities amounted to a volume of €3,579 million (December 31, 2021: €3,830 million). Of the total assets before consolidation, 62.7 percent was attributable to the cooperative banks (December 31, 2021: 62.3 percent) and 34.2 percent to the DZ BANK Group (December 31, 2021: 34.7 percent).
On the assets side of the balance sheet, loans and advances to banks went up by €29,449 million to €45,292 million (December 31, 2021: €15,843 million) and loans and advances to customers by €55,909 million to €999,937 million (December 31, 2021: €944,028 million). As in previous years, this upward trend was mainly driven by increased lending by the cooperative banks. By contrast, cash and cash equivalents declined to €117,964 million (December 31, 2021: €156,973 million).
Hedging instruments (positive fair values) rose to €10,169 million (December 31, 2021: €389 million). Financial assets held for trading increased by €1,573 million to €49,015 million at the end of 2022 (December 31, 2021: €47,442 million) largely due to the growth in derivatives (positive fair values) to €21,474 million (December 31, 2021: €16,188 million). Conversely, bonds and other fixed-income securities declined to €7,602 million (December 31, 2021: €10,815 million), shares and other variable-yield securities to €1,408 million (December 31, 2021: €1,772 million), and receivables to €18,064 million (December 31, 2021: €18,294 million).
Investments fell to €240,192 million as at December 31, 2022 (December 31, 2021: €248,390 million). The principal reason for this was the decrease in bonds and other fixed-income securities to €152,460 million (December 31, 2021: €163,582 million), whereas shares and other variable-yield securities increased to €82,289 million (December 31, 2021: €79,710 million).
Investments held by insurance companies went down from €127,782 million as at December 31, 2021 to €104,763 million at the end of 2022. This reduction was largely due to the fall in fixed-income securities to €47,259 million (December 31, 2021: €60,951 million), in registered bonds to €4,790 million (December 31, 2021: €7,795 million), in assets related to unit-linked contracts to €16,429 million (December 31, 2021: €18,719 million), in mortgage loans to €10,960 million (December 31, 2021: €13,005 million), in promissory notes and loans to €5,857 million (December 31, 2021: €7,072 million), and in variable-yield securities to €13,023 million (December 31, 2021: €13,742 million). However, investment property increased to €4,028 million (December 31, 2021: €3,813 million) and derivatives (positive fair values) to €278 million (December 31, 2021: €199 million).
On the equity and liabilities side of the balance sheet, deposits from banks contracted to €166,002 million (December 31, 2021: €193,809 million). The prior-year figure had been boosted by the expansion of support loan business in connection with the COVID-19 pandemic. The volume was back at normal levels at the end of 2022.
Deposits from customers grew from €984,926 million as at December 31, 2021 to €1,032,861 million as at the end of the reporting year. This rise can be explained by the increase in other deposits, whereas savings deposits and home savings deposits declined overall.
Debt certificates issued including bonds advanced to €71,149 million (December 31, 2021: €63,521 million), mainly because bonds issued rose to €56,733 million (December 31, 2021: €50,298 million) and other debt certificates issued increased to €14,416 million (December 31, 2021: €13,223 million).
Financial liabilities held for trading stood at €48,825 million as at December 31, 2022 (December 31, 2021: €40,045 million). This rise was attributable, in particular, to derivatives (negative fair values) amounting to €26,642 million (December 31, 2021: €15,402 million) and liabilities of €1,104 million (December 31, 2021: €804 million). By contrast, short positions fell to €1,017 million (December 31, 2021: €1,548 million) and bonds issued including share certificates, index-linked certificates, and other debt certificates issued decreased to €20,014 million (December 31, 2021: €22,245 million).
Insurance liabilities fell to €103,795 million (December 31, 2021: €118,863 million), primarily owing to the reduction in provisions for premium refunds to €4,436 million (December 31, 2021: €11,237 million).
Equity declined to €127,569 million as at the end of 2022 (December 31, 2021: €129,543 million). Within this figure, there was a reduction in the reserve from other comprehensive income to minus €3,940 million (December 31, 2021: €1,947 million) that was mainly due to a fair-value-related fall in financial instruments measured at fair value through other comprehensive income. Conversely, subscribed capital swelled from €14,938 million as at December 31, 2021 to €16,485 million as at December 31, 2022 and retained earnings increased to €112,710 million (December 31, 2021: €109,874 million). The cooperative banks accounted for 88.5 percent of equity while the other entities in the Cooperative Financial Network accounted for 11.5 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.
By far the greatest proportion of the consolidated own funds is held by the cooperative banks. The growth in own funds therefore arises primarily from the profits generated, and in most cases retained, 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 own funds instruments are consolidated in the relevant own funds categories and in the total risk exposure.
The impact of consolidation on the level of the risk-weighted exposure amounts is negligible. The method by which the consolidation is carried out results in a reduction in own funds. The total capital ratio for the Cooperative Financial Network is therefore lower than the corresponding ratio for the sum of all cooperative banks.
The Cooperative Financial Network’s Tier 1 capital ratio was virtually unchanged year on year at 15.1 percent as at December 31, 2022 (December 31, 2021: 15.2 percent). The regulatory total capital ratio also held steady compared with a year earlier at 15.7 percent (December 31, 2021: 15.8 percent). In absolute terms, the Cooperative Financial Network’s own funds increased by €1.8 billion to €121.7 billion. The changes in the capital ratios – both overall and in-year fluctuation – were influenced by the rise in own funds resulting from the retention of the profits reported in the 2021 financial statements and by negative effects that were attributable to almost exclusively temporary, interest-rate-related impairment in the securities portfolio and to the impact of phasing out some components of Tier 2 capital.
As at December 31, 2022, risk-weighted assets stood at €775.8 billion, which was up by €18.1 billion year on year (see table on page 23). This increase was predominantly due to the growth of loans and advances in customer-related business. In total, credit risk exposures made up 91.2 percent of risk-weighted assets (December 31, 2021: 90.9 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 institutions in the DZ BANK Group, Münchener Hypothekenbank eG, and Deutsche Apotheker- und Ärztebank eG.
The leverage ratio stood at 7.4 percent as at December 31, 2022 (December 31, 2021: 8.0 percent). The decrease was due to special arrangements that had been introduced during the coronavirus pandemic and are now expiring.
Breakdown of risk-weighted assets
| Dec. 31, 2022 (€ million) | Dec. 31, 2021 (€ million) | Change (percent) | |
|---|---|---|---|
| Total credit risk | 707,196 | 689,046 | 2.6 |
| Total under the Standardized Approach to credit risk | 601,413 | 567,392 | 6.0 |
| of which corporates | 195,799 | 186,025 | 5.3 |
| of which retail business | 157,312 | 151,832 | 3.6 |
| of which secured by mortgages on immovable property | 103,349 | 95,763 | 7.9 |
| of which undertakings for collective investment in transferable securities (UCITS) | 56,213 | 56,969 | –1.3 |
| Total under IRB approaches | 101,014 | 117,468 | –14.0 |
| of which corporates | 51,554 | 49,944 | 3.2 |
| of which retail business | 25,935 | 26,805 | –3.2 |
| of which equity investments | 13,284 | 29,382 | –54.8 |
| of which securitization exposures | 4,683 | 4,090 | 14.5 |
| Total market risk | 13,185 | 14,501 | –9.1 |
| Total operational risk | 51,943 | 50,894 | 2.1 |
| Total operational risk | 51,943 | 50,894 | 2.1 |
| Total other exposures (including CVAs1) | 3,459 | 3,272 | 5.7 |
| Total | 775,783 | 757,713 | 2.4 |
1 Total risk exposure based on the credit value adjustment (CVA).
Operating segments of the Volksbanken Raiffeisenbanken Cooperative Financial Network
Retail Customers and SMEs
The net interest income generated by the Retail Customers and SMEs operating segment amounted to €17,771 million in the reporting year (2021: €16,249 million). This figure was primarily influenced by the 6.5 percent growth in the volume of lending at the cooperative banks and the resulting rise in interest income, whereas there was an only moderate increase in deposits due to customers’ reduced ability to save. The interest margin at the cooperative banks went up relative to average total assets. TeamBank recorded a further rise in the average volume of consumer finance.
Net fee and commission income came to €8,697 million (2021: €8,843 million). In 2022, this line item was again influenced primarily by income from payments processing (including card processing) and from the securities and funds business. A further driver of net fee and commission income in the Retail Customers and SMEs operating segment was the volume-related income contribution generated by the Union Investment Group as a result of the average assets under management. DZ PRIVATBANK’s contributions to income from private banking and the fund services business were up year on year. As at December 31, 2022, high-net-worth individuals’ assets under management, which comprise the volume of securities, derivatives, and deposits of customers in the private banking business, came to €21.2 billion (December 31, 2021: €22.2 billion). The value of funds under management amounted to €168.0 billion as at December 31, 2022 (December 31, 2021: €182.1 billion).
Gains and losses on trading activities in the Retail Customers and SMEs operating segment came to a net gain of €234 million (2021: net gain of €218 million). This line item is 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.
The net loss under gains and losses on investments came to €6,524 million in the year under review (2021: net loss of €427 million). The change in the gains and losses was predominantly attributable to realized gains and losses on sales of securities during the year and to measurement effects at the cooperative banks. In this context, the jump in interest rates over the course of the year resulted in valuation adjustments in the securities portfolios. However, the cooperative banks tend to hold the securities to maturity.
Loss allowances amounted to a net addition of €1,119 million (2021: net reversal of €137 million), primarily due to additions to parameter-based loss allowances at stages 1 and 2 under IFRS. The gloomy economic conditions were reflected in the increased additions that had to be made, whereas the economic recovery in the previous year had meant a low level of company insolvencies.
In the view of the Bundesverband der Deutschen Volksbanken und Raiffeisenbanken e.V. (BVR) [National Association of German Cooperative Banks], the Cooperative Financial Network’s administrative expenses are subject to constant cost management. In the Retail Customers and SMEs operating segment, they amounted to €16,811 million in the reporting year (2021: €16,369 million). Staff expenses amounted to €9,143 million in 2022 (2021: €9,129 million). The biggest influences on staff expenses were appointments to new and vacant positions, higher provisions for pensions and other post-employment benefits, average pay rises, and collectively negotiated one-off payments, although there was a mitigating effect from people leaving – mainly due to retirement. Other administrative expenses advanced to €7,668 million (2021: €7,240 million), notably because of the rise in energy costs and general inflation as well as higher expenses for consultancy and IT.
Other net operating income swelled to €757 million (2021: €148 million) as a result of contributions to earnings from the cooperative banks, including gains on the disposal of assets and income from property rentals.
As a result of the factors described above, the profit before taxes of the Retail Customers and SMEs operating segment amounted to €2,887 million in the reporting year (2021: €8,833 million). The cost/income ratio was 80.8 percent (2021: 65.3 percent).
Central Institution and Major Corporate Customers
The net interest income of the Central Institution and Major Corporate Customers operating segment rose to €1,577 million in the year under review (2021: €1,385 million).
In the Corporate Banking business line, net interest income went up owing to the growth of the lending volume in the operating lending business. Net interest income from structured finance was on a par with the previous year. The figure for 2022 was boosted by successful business activities that resulted in a greater lending volume in all product units and by the appreciation of the US dollar.
The year-on-year increase in net interest income from the investment promotion business primarily resulted from new business commitments and substantial portfolio growth in 2021, and from the fact that some of the associated development loans were only made available over the course of 2022 due to high demand for residential development funding. Net interest income went up in the Capital Markets business line. This increase was thanks to the growth of business with Cooperative Financial Network customers and institutional customers in the short-dated maturity segment, and to the treasury portfolios. Repayment gains on repurchased own issues also contributed to the improvement.
Net fee and commission income in the Central Institution and Major Corporate Customers operating segment came to €575 million in 2022 and was therefore higher than in the previous year (2021: €530 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 Corporate Banking business line, the rise in net fee and commission income was largely attributable to the syndicated loan business, fees and commission on loans in the securitization business, fees and commissions in connection with loan processing, and financial guarantee contracts / loan commitments. The contribution to net fee and commission income in the Capital Markets business line went down due to higher expenses for bonuses on own issues and lower income from securities brokerage business.
Gains and losses on trading activities in the Central Institution and Major Corporate Customers operating segment came to a net gain of €710 million in 2022, up from a net gain of €133 million in the previous year.
Gains and losses on trading activities essentially relate to DZ BANK’s business activities in the capital markets.
Gains and losses on operating trading activities amounted to a net gain of €528 million, compared with €616 million in 2021. Widening credit spreads had a substantial adverse impact on gains and losses on trading activities. Income in the business with institutional customers went up year on year across all customer groups. Helping customers to protect their investments against rising interest rates through the use of derivative hedge transactions was a focal topic. The foreign-exchange business improved too in light of volatility in the currency markets. Business in interest-rate structures also picked up in terms of both profitability and volume.
Secondary market business in bonds was weaker than in the previous year due to the market environment. Whereas there had been a significant negative impact from valuation effects in 2021, these effects made a positive contribution to gains and losses on trading activities in the reporting year. One of the primary drivers of such effects in 2022 were changes in fair value gains and losses on own issues in the subcategories ‘financial assets and liabilities measured at fair value through profit or loss’ (fair value PL) and ‘financial assets and liabilities designated as at fair value through profit or loss’ (fair value option). Whereas mark-ups had narrowed in the previous year, mainly due to calmer conditions in the bond markets following the COVID-19 crisis (2021: loss of €257 million), these mark-ups widened again in 2022, which gave rise to a net gain of €241 million for these issues under fair value gains and losses. Ineffectiveness in hedge accounting also boosted earnings. This income was matched by an expense in the same amount recognized under other gains and losses on valuation of financial instruments.
Gains and losses on investments deteriorated from a net gain of €225 million in the previous year to a net gain of €37 million in the year under review. This was predominantly due to expenses from the sale of securities, although some of the expenses were offset by gains arising from the unwinding of hedges in the context of portfolio fair value hedge accounting.
In 2022, the gloomy economic outlook resulted in a net addition to loss allowances of €93 million in the Central Institution and Major Corporate Customers operating segment (2021: net reversal of €241 million). This was largely a result of factoring in macroeconomic forecasts, which are taken into account when determining the expected losses in stages 1 and 2. Furthermore, loss allowances were increased in stages 2 and 3 owing to geopolitical risks and changes in the credit ratings of individual industries and counterparties.
Other gains and losses on valuation of financial instruments came to a net gain of €41 million in 2022 (2021: net gain of €102 million). Within this figure, there was a deterioration in the valuation of financial instruments measured at fair value through profit or loss, in credit-risk-related measurement effects relating to financial assets measured using the fair value option, and in the gain/loss from ineffectiveness in hedge accounting.
Administrative expenses amounted to €1,915 million in the year under review (2021: €1,851 million). Staff expenses went down, partly due to interest-rate-related measurement effects on provisions for employee benefits. Other administrative expenses increased, largely owing to a rise in IT costs, office expenses, and consultancy expenses.
Other net operating income swelled to €116 million (2021: net expense of €48 million), partly thanks to income from the reversal of provisions and partly because of higher restructuring expenses in the previous year.
Due to the factors described above, profit before taxes in the Central Institution and Major Corporate Customers operating segment rose to €1,048 million in the year under review (2021: €717 million). The cost/income ratio was 62.7 percent in 2022 (2021: 79.5 percent).
Real Estate Finance
The net interest income of the Real Estate Finance operating segment of the Cooperative Financial Network amounted to €2,070 million in 2022 (2021: €1,717 million).
Of this increase, €185 million was attributable to a one-off item in connection with the reversal of provisions relating to building society operations, €95 million to lower additions to provisions relating to building society operations, and €44 million to the lower interest rates applicable to current tariffs at Bausparkasse Schwäbisch Hall. By contrast, there was a further fall in net interest income arising on investments. However, growth in the volume of real estate loans at DZ HYP provided a boost to net interest income.
A net expense is traditionally reported in the Real Estate Finance operating segment under net fee and commission income as a result of agents’ fees. This net expense amounted to €82 million in the reporting year (2021: €100 million), representing a year-on-year improvement.
Gains and losses on investments in the Real Estate Finance operating segment deteriorated to a net loss of €84 million (2021: net gain of €73 million). The net loss reported for 2022 was predominantly influenced by the sale of bonds at Bausparkasse Schwäbisch Hall and of Portuguese government bonds at DZ HYP.
Loss allowances in the Real Estate Finance operating segment saw a net addition of €161 million in the reporting year (2021: net addition of €43 million). This can largely be explained by the updating of the measurement parameters at DZ HYP on the back of the substantial shift in economic conditions.
Other gains and losses on valuation of financial instruments in the Real Estate Finance operating segment deteriorated year on year, amounting to a net gain of €9 million in 2022 (2021: net gain of €56 million). A narrowing of credit spreads was evident in both 2022 and 2021, although this had resulted in a more positive overall valuation effect in 2021, particularly in respect of the fair value gains and losses on Italian, Spanish, and Portuguese government bonds.
Administrative expenses rose to €930 million in 2022 (2021: €894 million). Staff expenses went up, mainly due to the increase in headcount, higher provisions for pensions and other post-employment benefits, salary increases under collective pay agreements, and an inflation compensation payment.
Profit before taxes in the Real Estate Finance operating segment amounted to €861 million in the year under review (2021: €865 million). The performance of the Real Estate Finance operating segment, as outlined above, meant that the cost/income ratio improved to 47.6 percent (2021: 49.6 percent).
Insurance
Premiums earned came to €18,397 million (2021: €18,994 million), reflecting the integral position held by the R+V subgroup within the Cooperative Financial Network.
Premium income earned in the life insurance and health insurance business fell by a total of €693 million to €8,707 million (2021: €9,400 million).
Premiums earned from the life insurance business declined by €792 million to €7,842 million. Except for the business involving unit-linked products, all product groups recorded a downturn in premium income, with single premiums falling particularly sharply.
In the health insurance business, net premiums earned rose by a total of €99 million to €865 million across all product groups.
In the non-life insurance business, premium income earned grew by €174 million to €6,738 million, with most of this growth being generated from corporate customer business and banks/deposit business.
Premiums earned from the inward reinsurance business diminished by €77 million to €2,952 million. The portfolio in the UK motor vehicle liability division was scaled back. All other product groups, particularly loans and deposits, recorded increases in premium income. While business in the US and Asia improved, Europe and all other regions recorded downturns. Nonetheless, Europe remains the biggest market.
Gains and losses on investments held by insurance companies and other insurance company gains and losses deteriorated by €8,640 million to a net loss of €3,360 million (2021: net gain of €5,280 million). This figure includes the fair value-based gains and losses on investments held by insurance companies in respect of insurance products constituting unit-linked life insurance for the account and at the risk of employees, employers, and holders of life insurance policies (unit-linked contracts). The gains and losses on investments held by insurance companies attributable to unit-linked contract products generally have no impact on profit/loss before taxes, because this line item is matched by an insurance liability addition or reversal of the same amount.
The level of long-term interest rates was significantly higher than in 2021. The 10 year swap rate was 3.20 percent as at December 31, 2022 (December 31, 2021: 0.30 percent). The movement of spreads on interest-bearing securities had a negative impact on gains and losses on investments held by insurance companies and other insurance company gains and losses. In the year under review, spreads continued to widen. A weighted spread calculated in accordance with R+V’s portfolio structure stood at 89.8 points as at December 31, 2022 (December 31, 2021: 66.7 points). In the comparative period, this spread had risen from 50.3 points as at December 31, 2020 to 66.7 points as at December 31, 2021.
During the reporting year, equity markets relevant to R+V performed worse than in 2021. For example, the EURO STOXX 50, a share index comprising 50 large listed companies in the eurozone, fell by 504 points over the reporting year to 3,794 points. In 2021, this index had risen by 745 points.
In the reporting year, movements in exchange rates between the euro and various currencies were generally less favorable than in the previous year. For example, the US dollar/euro exchange rate on December 31, 2022 was 0.937 compared with 0.879 as at December 31, 2021. In the previous year, the exchange rate had moved from 0.817 as at December 31, 2020 to 0.879 as at December 31, 2021.
Overall, these trends in the reporting year essentially resulted in a €7,918 million negative change – resulting from the effects of changes in negative fair values – in unrealized gains and losses to a net loss of €5,302 million (2021: net gain of €2,616 million), a €937 decrease in the contribution to earnings from the derecognition of investments to a loss of €866 million (2021: gain of €70 million), a €354 million deterioration in foreign-exchange gains and losses to a net gain of €407 million (2021: net gain of €761 million), and a €25 million decline in the balance of depreciation, amortization, impairment losses, and reversals of impairment losses to a net expense of €101 million (2021: net expense of €76 million). However, net income under current income and expense rose by €133 million to €2,229 million (2021: €2,096 million), while other insurance gains and losses and non-insurance gains and losses improved by €460 million to a net gain of €272 million (2021: net loss of €187 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 amounted to €12,127 million, which equated to a fall of €8,229 million compared with the corresponding figure of €20,356 million in 2021. The change in these 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. For example, a large part of the change in gains and losses on investments held by insurance companies from unit-linked life insurance was also reflected in insurance benefit payments in the form of a €5,167 million fall in the expenses (2021: €2,846 million increase in expenses). Another factor in the decrease in insurance benefit payments was the change in premium refunds, which resulted from the change, recognized in profit or loss, in the provision for premium refunds. A reversal of €176 million was made from the supplementary change-in-discount-rate reserve (2021: addition of €730 million).
In the non-life insurance business, the overall claims rate was above the level of the prior year but below the three-year average. There was a major claim of around €71 million from a hotel business in December 2022. Expenses totaled €124 million from storms Nadia, Ylenia, Zeynep, and Antonia and €48 million from storms Emmelinde and Finja, with a corresponding impact on natural disaster claims during the reporting year.
In the inward reinsurance business, the net claims ratio was 73.3 percent (2021: 73.5 percent). The ratios for basic and medium claims were below those of the previous year. By contrast, the ratio for major claims went up. The series of winter storms in Europe resulted in claims incurred of €42 million. The claims in connection with flooding in the South African province of KwaZulu-Natal came to €75 million, while claims in connection with hurricane amounted to €89 million and claims resulting from tornado and hail events in April 2022 totaled €28 million. Moreover, expenses of €51 million associated with derecho storms in the United States were reflected in the ratio (a derecho is a widespread and long-lived straight-line wind storm).
Insurance business operating expenses incurred in the course of ordinary business activities went down by €10 million to €3,173 million (2021: €3,183 million). This change was attributable to the fact that the increase of €70 million in the non-life division was more than offset by decreases of €40 million each in the inward reinsurance and life/health insurance divisions.
Other net operating income decreased by €42 million to a net expense of €5 million (2021: net income of €37 million). The prior-year figure had been significantly boosted by gains on property disposals. This effect was not repeated in the reporting year.
The factors described above resulted in a loss before taxes of €268 million (2021: profit before taxes of €772 million).