Business Performance of the Volksbanken Raiffeisenbanken Cooperative Financial Network
Economic conditions
In 2023, conditions in the German economy were influenced by the impact of Russia’s war of aggression against Ukraine and the resulting energy crisis as well as by high inflation, a weak global economy, and escalation of the conflict in the Middle East. The difficulties created by this situation caused inflation-adjusted gross domestic product (GDP) to edge down by 0.3 percent year on year, compared with a marked increase of 1.8 percent in 2022. Moreover, inflationary pressure remained exceptionally high, even though the rate of inflation fell from an average of 6.9 percent in 2022 to 5.9 percent in 2023.
The period of economic weakness that had begun in the second half of 2022 essentially continued for the whole of 2023 as dampening factors continued to stack up. At the start of the year, the effect of elevated inflation and shortages of materials eased only slowly, acting as a brake on the economy. As the year continued, sharp interest-rate hikes introduced by western central banks to tackle inflation took their toll on the economic situation both in Germany and worldwide. These effects were further exacerbated by the ongoing shortages of labor and skills and from heightened uncertainty stemming from, for example, the fallout from Hamas’s terrorist attack on Israel in October 2023 and the Israeli military campaign launched in response.
On the demand side, the main drivers of the fall in GDP in 2023 were consumer spending and exports, both of which declined noticeably due to the reduction in purchasing power resulting from the rise in consumer prices and global economic conditions. In terms of investment, the picture was mixed. Spending on capital equipment went up thanks to the easing of supply bottlenecks. By contrast, construction investment slumped, primarily because of rising interest rates and the only slowly diminishing surge in construction costs. There was also a decline in foreign trade owing to muted conditions in the global economy and feeble domestic demand. However, imports fell more sharply than exports, which meant that foreign trade overall notionally helped to offset the decrease in GDP.
Despite the general weakness of the economy, the labor market remained in fundamentally good health. The statistics showed a rise in the number of people out of work from 2.4 million in 2022 to 2.6 million in the reporting year, although this was partly because refugees were increasingly included in the data. Nevertheless, the unemployment rate of 5.7 percent remained relatively low and was up only slightly on the prior-year figure of 5.3 percent. Moreover, employment levels climbed once again, with the number of people in work growing by just over 300,000 year on year to set a record of around 45.9 million.
The European Central Bank (ECB) continued to tighten monetary policy in 2023, raising its key interest rates by 200 basis points in the period between its first meeting of the year in February and September 20, 2023. At the end of the year, the deposit facility rate stood at 4 percent, the interest rate for main refinancing operations at 4.5 percent, and the marginal lending facility interest rate at 4.75 percent. The ECB kept its interest rates unchanged from October onward, stating that it would adjust them if the inflation situation made this necessary.
In parallel, the ECB set out the timetable for ending its bond-buying programs. Starting in March 2023, it stopped fully reinvesting the principal payments from maturing securities under the asset purchase program (APP). By the end of June, an average of €15 billion per month was no longer being reinvested and, from July onward, no amounts from maturing bonds were being used to purchase assets. The ECB also announced at the end of 2023 that it would stop fully reinvesting maturing bonds under the pandemic emergency purchase program (PEPP) in July 2024, from which point it would reduce the portfolio by €7.5 billion per month. It plans to stop reinvestment entirely at the end of 2024.
Volksbanken Raiffeisenbanken Cooperative Financial Network
Business situation
Against a backdrop of challenging market conditions fueled by continued high levels of inflation and geopolitical crises, the Cooperative Financial Network generated a significantly higher profit before taxes of €14,375 million in 2023 compared with the figure of €4,238 million reported for 2022.
The institutions in the Cooperative Financial Network increased their loans and advances to customers by 2.4 percent in the year under review (2022: 5.9 percent).
In the Cooperative Financial Network’s deposit-taking business, the higher level of interest rates led to reallocations to fixed-term products but the overall volume held steady over the course of the year, with customer deposits coming to €1,033,200 million (December 31, 2022: €1,032,861 million). These deposits played a crucial part in funding the Cooperative Financial Network’s lending business.
Equity amounted to €143,238 million at the end of the reporting year (December 31, 2022: €131,899 million).
The Cooperative Financial Network had a rating of A+ (2022: A+) from credit rating agency Standard & Poor’s, while the rating from Fitch Ratings was AA– (2022: AA–). In 2023, the number of members of the Cooperative Financial Network fell slightly year on year. As at the end of the financial year, the cooperative banks had 17.8 million members (individuals and companies) in total, compared with 17.9 million at the end of 2022.
Financial performance
Net interest income amounted to €24,107 million in the year under review (2022: €20,546 million). As had been predicted in 2022, the growth in net interest income was predominantly due to the increase in market interest rates and the 2.4 percent rise in loans and advances to customers at the institutions in the Cooperative Financial Network. The increase in interest rates, combined with the reallocation of customer assets to higher-interest deposits and the almost unchanged volume of customer deposits, led to higher interest expense overall. Within the net figure, interest income rose sharply to €36,988 million (2022: €22,593 million) and interest expense surged to €14,291 million (2022: €3,499 million). The cooperative banks’ net interest income is the biggest source of income for the Cooperative Financial Network.
Net fee and commission income income rose slightly to €8,829 million in the year under review (2022: €8,646 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. The bulk of net fee and commission income is attributable to the cooperative banks.
The Cooperative Financial Network’s gains and losses on trading activities deteriorated significantly compared with the previous year to stand at a net gain of €19 million in 2023 (2022: net gain of €1,009 million). The year-on-year change in gains and losses on trading activities was largely influenced by the DZ BANK Group. This change was due to the significant volatility of market prices, which – as a result of risk management – had opposing effects on gains and losses on non-derivative financial instruments on the one hand and on gains and losses on derivatives on the other.
Gains and losses on investments came to a net gain of €1,338 million (2022: net loss of €6,774 million). This significant improvement had been anticipated and was primarily due to the absence of the negative interest-rate-related valuation effects at the cooperative banks that had weighed heavily on the prior-year figure. These valuation effects had been attributable to reversals of write-downs and realized gains and losses on sales of securities during the year.
The loss allowances calculated in 2023 were up substantially, as had been forecast in 2022, and amounted to a net addition of €1,809 million (2022: net addition of €1,472 million). This increase in additions to loss allowances was a reflection of the still gloomy economic conditions, with muted economic prospects, the rise in interest rates, and a growing number of corporate and personal insolvencies over the course of the year.
Other gains and losses on valuation of financial instruments improved markedly compared with the previous year and came to a net gain of €227 million in the reporting year (2022: net loss of €211 million). This was primarily attributable to a year-on-year improvement in the valuation of guarantee commitments and in the fair value measurement of Union Investment’s own-account investments. Within the overall line item, gains and losses on financial instruments designated as at fair value through profit or loss amounted to a net gain of €114 million (2022: net loss of €160 million), gains and losses on derivatives used for purposes other than trading amounted to a net gain of €156 million (2022: net loss of €6 million), and gains and losses from fair value hedge accounting amounted to a net loss of €44 million (2022: net loss of €45 million).
Net income from insurance business, which is exclusively attributable to the R+V Group, comprises the insurance service result, gains and losses on investments held by insurance companies and other insurance company gains and losses, and insurance finance income or expenses.
IFRS 17 superseded the previous standard for accounting for insurance contracts (IFRS 4) with effect from January 1, 2023. IFRS 17 requires comparative information to be presented for the period immediately preceding the date of initial application of IFRS 17. Retrospective initial application thus resulted in adjustments to the income statement for the previous year.
As expected, net income from insurance business rose sharply, amounting to €1,293 million in 2023 (2022: €697 million). The increase was primarily due to the improvement – 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 gain of €2,982 million (2022: net loss of €3,776 million). Some of the increase was offset by a deterioration in insurance finance income or expenses to a net expense of €4,107 million (2022: net income of €1,951 million) and in the insurance service result to a profit of €2,418 million (2022: profit of €2,522 million). Major claims in the non-life insurance business amounted to €246 million as at December 31, 2023. Expenses of €279 million arose for major claims in the inward reinsurance business.
As predicted in 2022, administrative expenses were up year on year, totaling €20,370 million in 2023, compared with €19,078 million in 2022. The bulk of the administrative expenses were attributable to staff expenses of €11,063 million (2022: €10,456 million), which primarily went up owing to appointments, pay rises (including collectively agreed increases), and the non-recurring effect of the inflation compensation payment that many entities in the Cooperative Financial Network paid to their employees. Other administrative expenses, which comprise general and administrative expenses plus depreciation/amortization and impairment losses, rose to €9,307 million (2022: €8,622 million). This rise was predominantly attributable to general inflation, additional capital expenditure on IT, and consultancy expenses, although it was partly offset by smaller contributions to the bank levy.
Other net operating income declined to €742 million (2022: €875 million), mainly as a result of larger additions to provisions in connection with restructuring in the DZ BANK Group and impairment of recognized customer relationships at Union Investment. By contrast, the prior-year figure had included higher income from the reversal of provisions and contributions to earnings from the cooperative banks, including gains on the disposal of assets and income from property rentals.
Profit before taxes jumped to €14,375 million (2022: €4,238 million) and was thus higher than had been predicted in the previous year.
Income taxes amounted to €3,571 million (2022: €1,944 million), with most of this amount (€3,558 million; 2022: €2,807 million) attributable to current income taxes.
The consolidated net profit after taxes stood at €10,805 million in 2023 (2022: €2,294 million).
The Cooperative Financial Network’s cost/income ratio came to 55.7 percent in 2023 (2022: 77.0 percent).
Financial performance
| 2023 € million | 2022 € million | Change (percent) | |
|---|---|---|---|
| Net interest income | 24,107 | 20,546 | 17.3 |
| Net fee and commission income | 8,829 | 8,646 | 2.1 |
| Gains and losses on trading activities | 19 | 1,009 | –98.1 |
| Gains and losses on investments | 1,338 | –6,774 | > 100.0 |
| Loss allowances | –1,809 | –1,4721 | 22.9 |
| Other gains and losses on valuation of financial instruments | 227 | –211 | > 100.0 |
| Net income from insurance business | 1,293 | 6971 | 85.5 |
| Administrative expenses | –20,370 | –19,078 | 6.8 |
| Other net operating income | 742 | 875 | –15.2 |
| Profit before taxen | 14,375 | 4,238 | > 100.0 |
| Income taxes | –3,571 | –1,9441 | 83.7 |
| Net profit | 10,805 | 2,294 | > 100.0 |
Income statement – breakdown of the change in profit before taxes by line item
€ million
Financial position
The consolidated total assets of the Cooperative Financial Network advanced to €1,597,180 million as at December 31, 2023 (December 31, 2022: €1,582,211 million). Trust activities amounted to a volume of €3,239 million (December 31, 2022: €3,579 million).
On the assets side of the balance sheet, loans and advances to banks contracted to €38,158 million (December 31, 2022: €45,292 million). Loans and advances to customers rose to €1,023,602 million (December 31, 2022: €999,937 million). This upward trend in the year under review was mainly driven by increased lending by the cooperative banks. Cash and cash equivalents swelled to €119,757 million (December 31, 2022: €117,964 million).
Hedging instruments (positive fair values) fell to €5,259 million (December 31, 2022: €10,169 million). Financial assets held for trading decreased to €34,127 million at the end of 2023 (December 31, 2022: €49,015 million). This reduction was predominantly due to a decline in receivables to €7,735 million (December 31, 2022: €18,064 million), a fall in derivatives (positive fair values) to €16,482 million (December 31, 2022: €21,474 million), and a drop in shares and other variable-yield securities to €1,346 million (December 31, 2022: €1,408 million). However, bonds and other fixed-income securities rose to €8,188 million (December 31, 2022: €7,602 million).
Investments increased to €241,273 million as at December 31, 2023 (December 31, 2022: €240,192 million), predominantly due to the growth in holdings of shares and other variable-yield securities to €85,751 million (December 31, 2022: €82,289 million). By contrast, the volume of bonds and other fixed-income securities contracted to €149,864 million (December 31, 2022: €152,460 million).
Investments held by insurance companies went up from €104,356 million as at December 31, 2022 to €114,329 million at the end of 2023. This increase was largely due to the rise in fixed-income securities to €53,193 million (December 31, 2022: €47,259 million), in assets related to unit-linked contracts to €20,563 million (December 31, 2022: €16,429 million), in mortgage loans to €12,008 million (December 31, 2022: €10,960 million), in registered bonds to €4,859 million (December 31, 2022: €4,790 million), and in promissory notes and loans to €5,913 million (December 31, 2022: €5,857 million). Conversely, variable-yield securities declined to €11,871 million (December 31, 2022: €13,023 million), investment property to €3,866 million (December 31, 2022: €4,028 million), and derivatives (positive fair values) to €159 million (December 31, 2022: €278 million).
On the equity and liabilities side of the balance sheet, deposits from banks contracted to €137,444 million (December 31, 2022: €166,002 million). Deposits from customers amounted to €1,033,200 million (December 31, 2022: €1,032,861 million).
Debt certificates issued including bonds advanced to €97,433 million (December 31, 2022: €71,149 million), mainly because bonds issued rose to €81,504 million (December 31, 2022: €56,733 million) and other debt certificates issued increased to €15,929 million (December 31, 2022: €14,416 million).
Financial liabilities held for trading stood at €44,043 million as at December 31, 2023 (December 31, 2022: €48,825 million). This reduction was attributable, in particular, to derivatives (negative fair values) amounting to €17,136 million (December 31, 2022: €26,642 million) and short positions of €701 million (December 31, 2022: €1,017 million). By contrast, liabilities swelled to €5,329 million (December 31, 2022: €1,104 million) and bonds issued including share certificates, index-linked certificates, and other debt certificates issued advanced to €20,836 million (December 31, 2022: €20,014 million).
Insurance contract liabilities increased to €105,151 million (December 31, 2022: €98,328 million), primarily owing to the growth of the liability for remaining coverage to €93,033 million (December 31, 2022: €86,740 million).
Equity rose to €143,238 million as at the end of 2023 (December 31, 2022: €131,899 million). Within this figure, retained earnings increased to €123,107 million (December 31, 2022: €113,400 million), subscribed capital to €17,410 million (December 31, 2022: €16,485 million), and the reserve from other comprehensive income to minus €360 million (December 31, 2022: minus €874 million).
The cooperative banks accounted for 84.4 percent of equity while the other entities in the Cooperative Financial Network accounted for 15.6 percent. This equity allocation highlights the local entrepreneurial responsibility and the great significance of a decentralized governance model for the cooperative banks in 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 cooperative banks hold 85.4 percent of consolidated own funds. Growth in own funds 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, the related amounts are generally not consolidated. The consolidation measures carried out 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. 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 slightly higher year on year at 15.6 percent as at December 31, 2023 (December 31, 2022: 15.0 percent). There was also a small improvement in the regulatory total capital ratio to 16.2 percent (December 31, 2022: 15.6 percent). In absolute terms, the Cooperative Financial Network’s consolidated own funds increased by €9.2 billion to €130.4 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 2022 financial statements and by a change in accounting treatment affecting the valuation of the equity investment in R+V Versicherung AG following the initial application of IFRS 17 for insurance contracts in the DZ BANK Group.
As at December 31, 2023, risk-weighted assets stood at €803.1 billion, which was up by €27.1 billion year on year (see table on page 26). This increase was predominantly due to the higher valuation of the equity investment in R+V Versicherung AG following the initial application of IFRS 17 for insurance contracts. In total, credit risk exposures made up 91.9 percent of risk-weighted assets (December 31, 2022: 91.2 percent). The institutions 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 8.0 percent as at December 31, 2023 (December 31, 2022: 7.4 percent). This increase was driven by the €8.6 billion rise in Tier 1 capital and a simultaneous slight decline in the total exposure measure.
Breakdown of risk-weighted assets
| Dec. 31, 2023 € million | Dec. 31, 2022 € million | Change (percent) | |
|---|---|---|---|
| Total credit risk | 737,956 | 707,2501 | 4.3 |
| Total under the Standardized Approach to credit risk | 605,244 | 601,4671 | 0.6 |
| of which: corporates | 193,809 | 195,7121 | −1.0 |
| of which: retail business | 150.300 | 157.2971 | −4.4 |
| of which: secured by mortgages on immovable property | 112,063 | 103,3241 | 8.5 |
| of which: undertakings for collective investment in transferable securities (UCITS) | 54,904 | 56,0551 | −2.1 |
| Total under IRB approaches | 127,808 | 101,014 | 26.5 |
| of which: corporates | 54,814 | 51,554 | 6.3 |
| of which: retail business | 27,635 | 25,935 | 6.6 |
| of which: equity investments | 32,398 | 13,284 | > 100 |
| Securitization exposures | 4,754 | 4,683 | 1.5 |
| Exposure amount for contributions to the default fund of a CCP22 | 149 | 86 | 74.1 |
| Total market risk | 10,289 | 13,1861 | −22.0 |
| Total operational risk | 52,116 | 51,9491 | 0.3 |
| Total other exposures (including CVAs3) | 2,690 | 3,524 | −23.7 |
| Total | 803,051 | 775,909 | 3.5 |
1 Amount restated.
2 Central counterparty (CCP).
3 Total risk exposure based on the credit value adjustment (CVA).
Operating segments
Retail Customers and SMEs
Net interest income amounted to €20,417 million in the year under review (2022: €17,771 million). The growth in net interest income was predominantly due to the increase in market interest rates and the 2.7 percent rise in loans and advances to customers at the cooperative banks (2022: 6.4 percent). The increase in interest rates, combined with the reallocation of customer assets to higher-interest deposits and the almost unchanged volume of customer deposits, led to higher interest expense overall. TeamBank recorded a rise in net interest income that was partly the result of growth in the average volume of loans and advances to customers. The net interest income of DZ PRIVATBANK received a particular boost from higher income in the money market business and from interest on deposits due to the changed interest-rate regime.
Net fee and commission income caame to €8,713 million (2022: €8,697 million). In 2023, this line item was again influenced primarily by income from payments processing (including card processing) and from securities brokerage 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 held steady year on year. As at December 31, 2023, 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 €23.4 billion (December 31, 2022: €21.2 billion). The value of funds under management was €189.0 billion as at December 31, 2023 (December 31, 2022: €168.0 billion).
Gains and losses on trading activities came to a net gain of €203 million (2022: €234 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.
There was a net gain under gains and losses on investments of €1,151 million in the year under review (2022: net loss of €6,524 million). This improvement was primarily due to the absence of negative interest-rate-related valuation effects at the cooperative banks that had weighed heavily on the prior-year figure and to the reversal of write-downs in 2023.
Loss allowances amounted to a net addition of €1,337 million (2022: net addition of €1,223 million). This increased requirement for additions to loss allowances was a reflection of the still gloomy economic conditions (including muted economic prospects), the rise in interest rates, and a growing number of corporate and personal insolvencies over the course of the year.
Other gains and losses on valuation of financial instruments improved markedly compared with the previous year and came to a net gain of €156 million in the reporting year (2022: net loss of €118 million). This was predominantly attributable to a year-on-year improvement in the valuation of guarantee commitments and in the fair value measurement of Union Investment’s own-account investments.
The Cooperative Financial Network’s administrative expenses in the Retail Customers and SMEs operating segment amounted to €17,911 million in the reporting year (2022: €16,811 million). Staff expenses totaled €9,677 million (2022: €9,143 million) and included an increased financial commitment in the area of non-collectively-negotiated allowances in view of the shortage of skilled workers. Other administrative expenses advanced to €8,234 million (2022: €7,668 million), chiefly due to general inflation, additional capital expenditure on IT, and consultancy expenses.
Other net operating income declined to €559 million (2022: €757 million), mainly as a result of larger additions to provisions in connection with restructuring and impairment of recognized customer relationships at Union Investment. By contrast, the prior-year figure had included higher income from the reversal of provisions and 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, profit before taxes amounted to €11,951 million in the reporting year (2022: €2,783 million). The cost/income ratio was 57.4 percent (2022: 80.8 percent).
Central Institution and Major Corporate Customers
The net interest income of the Central Institution and Major Corporate Customers operating segment rose to €2,612 million in the year under review (2022: €1,577 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 edged down compared with the previous year. The increased volume of lending did not make up for the lower margins, which were partly due to the competitive situation. Net interest income from money market and capital markets business rose sharply. This increase was firstly attributable to the deposit-taking operating business in the short-dated maturity segment, particularly deposits from corporate customers. Secondly, the rise in interest rates in the money market led to increased net interest income from the investment of liquidity from the excess of non-interest-bearing liabilities (e.g. equity) over non-interest-bearing assets.
Net fee and commission income came to €638 million in 2023 and was therefore higher than in the previous year (2022: €575 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 from the currency service business). In the Corporate Banking business line, net fee and commission income was up significantly year on year. The increase was mainly attributable to fees and commissions in connection with loan processing and to financial guarantee contracts / loan commitments. The contribution to net fee and commission income in the Capital Markets business line rose considerably. One of the main reasons for this was the increase in transaction fees from the securitization business. Net fee and commission income in the Transaction Banking business line was up slightly year on year, principally owing to fees from the payments processing business and from the safe custody and securities management business. By contrast, income from currency service business declined.
Gains and losses on trading activities came to a net loss of €103 million in 2023, deteriorating markedly from a net gain of €710 million in the previous year. Gains and losses on trading activities essentially relate to DZ BANK’s business activities in the capital markets. This change was due to the significant volatility of market prices, which – as a result of risk management – had opposing effects on gains and losses on non-derivative financial instruments on the one hand and on gains and losses on derivatives on the other.
Gains and losses on investments improved from a net gain of €37 million in 2022 to a net gain of €48 million in the reporting year. This was predominantly due to gains arising from the unwinding of hedges in the context of portfolio fair value hedge accounting expenses, although some of the gains were offset by expenses from the sale of securities.
Loss allowances amounted to a net addition of €99 million (2022: net addition of €93 million).
Other gains and losses on valuation of financial instruments came to a net loss of €103 million in 2023 (2022: net gain of €41 million). Within this figure, there was a decline in credit-risk-related measurement effects relating to financial assets measured using the fair value option. In 2022, the positive influences on this line item had included measurement effects at DVB Bank SE.
Administrative expenses amounted to €2,017 million in 2023 (2022: €1,915 million). Staff expenses rose to €906 million (2022: €858 million), mainly because the higher number of employees led to increases in wages and salaries and in the associated expenses for social security. Other administrative expenses increased to €1,111 million (2022: €1,057 million), largely owing to a rise in IT costs, office expenses, and consultancy expenses.
Other net operating income declined to €79 million (2022: €116 million), mainly as a result of larger additions to provisions in connection with restructuring. The income from the reversal of provisions included in the prior-year figure had been higher than that included in the figure for 2023.
Profit before taxes rose to €1,055 million (2022: €1,048 million). The cost/income ratio was 63.6 percent in 2023 (2022: 62.7 percent).
Real Estate Finance
Net interest income came to €1,868 million (2022: €2,070 million). Within this figure, the net interest income of Bausparkasse Schwäbisch Hall fell sharply and included a rise of €111 million in additions to provisions relating to building society operations. By contrast, the 2022 figure had mainly been influenced by a positive one-off item of €185 million in connection with the reversal of provisions relating to building society operations.
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 €71 million in the reporting year (2022: €82 million), representing a small year-on-year improvement that was predominantly due to lower fee and commission payments on the back of the fall in new business at Münchener Hypothekenbank eG.
Gains and losses on investments improved to a net gain of €10 million (2022: net loss of €84 million). The net loss reported for 2022 had been adversely affected, in particular, by the sale of bonds at Bausparkasse Schwäbisch Hall and the sale of government bonds at DZ HYP, whereas there were no material disposals during the year under review.
Loss allowances amounted to a net addition of €255 million in 2023 (2022: net addition of €166 million). The changes in the economic environment and the related increase in interest rates led to sharp falls in the value of properties in Münchener Hypothekenbank’s portfolio, particularly in the case of real estate markets outside Germany. At DZ HYP, the addition to loss allowances in 2023 was mainly a reflection of specific loan loss allowances on a small number of exposures, whereas the addition in 2022 had predominantly been due to portfolio loan loss allowances.
Other gains and losses on valuation of financial instruments improved year on year, amounting to a net gain of €82 million in 2023 (2022: net gain of €9 million). This was largely thanks to the contribution to earnings from issued instruments measured at fair value at DZ HYP.
Administrative expenses rose to €947 million in 2023 (2022: €930 million). Staff expenses increased to €463 million (2022: €443 million), principally as a result of salary increases, headcount growth and higher provisions for pensions and other post-employment benefits. Other administrative expenses decreased to €484 million (2022: €487 million), mainly due to a reduction in the bank levy.
Profit before taxes amounted to €801 million (2022: €856 million). The cost/income ratio in 2023 was 47.3 percent (2022: 47.6 percent).
Insurance
IFRS 17 Insurance Contracts superseded the previous standard for accounting for insurance contracts (IFRS 4 Insurance Contracts) with effect from January 1, 2023. IFRS 17 requires comparative information to be presented for the period immediately preceding the date of initial application of IFRS 17. Retrospective initial application thus resulted in adjustments to the income statement for the previous year.
The insurance service result amounted to a profit of €1,972 million (2022: profit of €1,980 million). This figure included insurance revenue amounting to €12,317 million (2022: €12,424 million) and insurance service expenses of €10,267 million (2022: €10,321 million). Net expenses from reinsurance contracts held stood at €78 million (2022: €123 million).
In the life and health insurance business, insurance revenue amounted to €3,042 million (2022: €3,674 million). Insurance service expenses amounted to €1,956 million (2022: €2,282 million). Net expenses from reinsurance contracts held in this business stood at €0 million (2022: €16 million). This included amortization of the contractual service margin in an amount of €273 million (2022: €243 million) and release of the risk adjustment in an amount of €53 million (2022: €36 million).
In the non-life insurance business, insurance revenue amounted to €7,239 million (2022: €6,831 million). The main influence on this revenue was premiums earned on portfolios measured under the premium allocation approach. The insurance service expenses of the non-life insurance business stood at €6,887 million (2022: €6,104 million). Of this sum, €5,104 million (2022: €4,656 million) was attributable to expenses for claims, comprising payments for claims of €4,980 million (2022: €4,614 million) and the change in the liability for incurred claims amounting to a decrease of €124 million (2022: decrease of €42 million). It also included the change in losses on insurance contracts, which amounted to a decrease of €119 million (2022: increase of €136 million). Other insurance service expenses totaled €1,664 million (2022: €1,584 million) and primarily consisted of insurance acquisition cash flows and administration costs of €1,664 million (2022: €1,584 million). Net expenses from reinsurance contracts held in this business came to €63 million (2022: €58 million). The combined ratio (gross), which is the ratio of insurance service expenses to insurance revenue, stood at 95.14 percent (2022: 89.36 percent). Major claims in this business amounted to €246 million as at December 31, 2023.
Insurance revenue in the inward reinsurance business amounted to €2,036 million (2022: €1,920 million). This included not only premium income but also amortization of the contractual service margin in an amount of €231 million (2022: €174 million) under the general measurement model. Insurance service expenses came to €1,424 million (2022: €1,936 million). Net expenses from reinsurance contracts totaled €15 million (2022: €49 million). Expenses of €279 million arose for major claims in the inward reinsurance business.
Gains and losses on investments held by insurance companies and other insurance company gains and losses improved by €6,883 million to a net gain of €3,143 million (2022: net loss of €3,740 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), which amounted to a net gain of €2,070 million (2022: net loss of €2,764 million).
Long-term interest rates were lower than in 2022. The ten‑year Bund/swap rate was 2.49 percent as at December 31, 2023 (December 31, 2022: 3.20 percent). Spreads on interest-bearing securities largely narrowed during the reporting year and had a more positive impact on gains and losses on investments held by insurance companies and other insurance company gains and losses than in the previous year, when spreads had widened. A weighted spread calculated in accordance with R+V’s portfolio structure stood at 77.0 points as at December 31, 2023 (December 31, 2022: 89.8 points). In the comparative period, this spread had risen from 66.7 points as at December 31, 2021 to 89.8 points as at December 31, 2022.
During the reporting year, equity markets relevant to R+V performed better than in 2022. For example, the EURO STOXX 50, a share index comprising 50 large, listed companies in the eurozone, saw a rise of 728 points from the start of 2023, closing the year under review on 4,522 points (December 31, 2022: 3,794 points). The index had dropped by 504 points in 2022.
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, 2023 was 0.9053 compared with 0.9370 as at December 31, 2022. In the previous year, the exchange rate had moved from 0.8794 as at December 31, 2021 to 0.9370 as at December 31, 2022.
These trends resulted in a €7,213 million positive change – resulting from the effects of changes in positive fair values – in unrealized gains and losses to a net gain of €1,915 million (2022: net loss of €5,298 million), a €687 million increase in the contribution to earnings from the derecognition of investments to a loss of €255 million (2022: loss of €942 million), and a €145 million rise in net income under current income and expense to €2,423 million (2022: €2,278 million). However, there was a €681 million deterioration in foreign-exchange gains and losses to a net loss of €276 million (2022: net gain of €407 million) and a €133 million decline in the balance of depreciation, amortization, impairment losses, and reversals of impairment losses to a net expense of €234 million (2022: net expense of €101 million). Furthermore, other non-insurance gains and losses declined by €346 million to a net loss of €429 million (2022: net loss of €84 million). Changes in gains and losses on investments held by insurance companies are offset to an extent by corresponding changes in insurance finance income or expenses, so the effect on profit or loss is only partial.
Insurance finance income or expenses deteriorated by €6,058 million to a net expense of €4,107 million (2022: net income of €1,951 million). In the life and health insurance business, this line item deteriorated by €5,884 million to a net expense of €3,813 million (2022: net income of €2,071 million), which was mainly due to the aforementioned compensatory effect. Insurance finance income or expenses came to a net expense of €179 million in the non-life insurance business (2022: net expense of €48 million) and a net expense of €115 million in inward reinsurance (2022: net expense of €72 million). The amount within insurance finance income or expenses relating to discounting at the discount rate used at initial measurement (locked-in discount rate) amounted to a net expense of €125 million in non-life insurance (2022: net expense of €66 million) and a net expense of €115 million in inward reinsurance (2022: net expense of €73 million).
The factors described above resulted in an increase in profit before taxes to €1,008 million (2022: €186 million).