Despite the very challenging market environment resulting from the COVID-19 pandemic, new lending and profitability remained stable at Berlin Hyp over the first nine months of 2020. The Bank’s conservative risk strategy and its focus on financing real estate of particularly lasting value have resulted in a high degree of stability, which the Bank has been able to enhance by further expanding its risk buffer.
With realised new lending of €4.2 billion after nine months, the Bank attained the new lending volume that was recorded in the same period of the previous year. At €119.7 million, the operating result before risk provisioning was slightly below the comparable figure of €122.5 million from the previous year.
“Given the extremely uncertain underlying conditions we have been facing, we are very satisfied with business development at the Bank, which overall was better than what we had anticipated just a few months ago”, says Sascha Klaus, Chair of the Board of Management of Berlin Hyp. The Bank took advantage of this positive development to add to its lending risk provisioning for potential negative effects arising from the COVID-19 pandemic, and to increase its equity capital. “Although the COVID-19 pandemic has not had any additional negative effect on the loans portfolio to date, we are nevertheless taking steps to ensure that we will be ready to deal with any problems that may arise in future”, Klaus explains.
The special balance sheet item for general banking risks pursuant to Section 340g of the German Commercial Code (HGB), which serves as an additional risk buffer, increased to €471 million in the third quarter of 2020 as a result of additional allocations. The operating result before income taxes and profit transfer amounted to €13.9 million at the reporting date, which as expected was lower than the comparable figure for the previous year (€43.9 million), but nevertheless exceeded the Bank’s expectations.
Digitalisation strategy continued; comprehensive sustainability agenda adopted
The Bank has also continued its digitalisation strategy with undiminished energy over the last few months, in order to achieve even better customer service performance and to prepare itself for constantly increasing regulatory requirements. Another important focus of activities during the reporting period involved the development of a comprehensive sustainability agenda. “We believe that we and our customers will need to utilise an entirely new set of assessment criteria and standards as we take on the challenges associated with achieving climate targets”, Klaus explains. “That’s why we have not only set ourselves a new sustainability target; we have also designed and adopted a far-reaching sustainability agenda. To this end, we have developed a comprehensive set of measures that make our contribution to the transformation even clearer”.
Significant increase in new lending in the real estate financing business in the summer months
New lending in the real estate financing business picked up noticeably during the summer following the lockdown in the first quarter of 2020. As at 30 September 2020, new loans issued by Berlin Hyp amounted to €4.2 billion (including long-term extensions), and thus remained at the previous year’s level. Extensions amounted to €828 million (comparable figure for the previous year: €738 million). Financing within Germany accounted for 78 per cent of the new volume. With a share of 67 per cent, the investor customer group accounted for most of the new business, followed by builders/developers (21 per cent) and housing companies (12 per cent).
Excellent access to the capital market
Berlin Hyp continues to enjoy solid access to the capital market and has consolidated its position as a pioneer and market leader for “Green Pfandbriefe”. Berlin Hyp was the first bank to issue a new bond (its second Green Pfandbrief in 2020) after the summer break on the covered bond market. The Bank therefore now has ten outstanding Green Bonds in benchmark format, with a total volume of €5.0 billion.
On 27 August 2020, the Bank also issued a syndicated bond in a foreign currency for the first time (eight-year senior preferred green bond in Swiss francs).
Outlook: Full-year earnings expected to slightly exceed the figure previously forecast
“We will take advantage of Berlin Hyp’s good performance in order to prepare our company for potential economic turbulence in the coming years, add to our reserves and increase our equity capital. Our other top priorities will be to complete our digitalisation strategy and implement our comprehensive sustainability agenda”, says Klaus as he looks to the months ahead.
At the moment, it is not possible to reliably predict whether the current dynamic increase of COVID-19 infection rates will continue, or what effect this might have on the further development of the economy as a whole or specifically on the banking and financial sector. Taking into account the current recessionary economic environment and the aforementioned unpredictable further development of the real estate and capital markets, Berlin Hyp continues to assume that earnings before profit transfer in the current financial year will be significantly lower than in 2019, but nevertheless slightly higher than what was indicated in the expectations described in last year’s forecast report.
Information on other earnings components:
Net Interest and Commission Income Increased
Net interest income amounted to €240.6 million. This figure significantly exceeded our expectations and was also €2.9 million higher than the comparable figure for the previous year (€237.7 million), whereby this was due to an increase of €1.3 billion in the average mortgage loans portfolio. The net interest income figure also includes one-off effects, such as interest income from the ECB’s targeted longer-term refinancing operations (TLTRO III), as well as default interest income and income from commitment fees. Despite there being no change in new lending volume, commission income rose slightly (by €1.1 million, to €14.0 million). Total net interest and commission income amounted to €254.6 million (comparable figure for the previous year: €250.6 million).
Increase in operating expenditure due to investment in the future of the Bank
At €134.4 million, operating expenditure was €9.9 million higher than in the same period in the previous year. Compared to the previous year, staff expenditure decreased by €8.5 million to €58.9 million. This decline was primarily due to lower allocations to pension provisions. Other operating expenditure amounted to €56.6 million (comparable figure for the previous year: €50.9 million). The higher expenditure here can be attributed to increasing demands on information technology and data storage, as well as the increased contribution to the European bank levy. Depreciation of property, plant and equipment and amortisation of intangible assets increased sharply by €12.7 million to €18.9 million. This increase largely relates to the significantly reduced remaining useful life of the existing building at Budapester Strasse 1 in Berlin in connection with the planned new building at that location. The new building will serve as a modern energy-efficient headquarters for all employees in Berlin.
Improved other operating result
The balance of other operating earnings and expenditure amounted to -€0.5 million and was thus €3.1 million higher than the comparable figure for the previous year.
Increased risk provisioning for COVID-19-related risks
Lending risk provisioning of €65.5 million (comparable figure for the previous year: €11.0 million) was formed to take account of future market risks and to compensate for possible lending risks arising from the COVID-19 pandemic. This includes mainly provision reserves. So far, no significant effects of the pandemic have materialised. The valuation result for securities in the liquidity reserve amounted to €15.1 million (comparable figure for the previous year: €4.0 million). Net risk provisioning amounted to €50.4 million (comparable figure for the previous year: €7.0 million).
Further additions to the fund for general banking risks
During the reporting period, the Bank added €52.5 million (comparable figure for the previous year: €67.5 million) to the special item for general banking risks pursuant to Section 340g of the German Commercial Code (HGB). This fund now amounts to €471.0 million.
The Tier 1 capital ratio was 12.8 per cent (as at 31/12/ 2019: 13.3 per cent after approval of the annual financial statements). The total capital ratio was 15.2 per cent (as at 31/12/ 2019: 16.0 per cent after approval of the annual financial statements).