NORD/LB made a 2017 pre-tax loss when one-offs are excluded. The bank’s pre-tax result was flattered by a net €528 million gain from one-off items. When these are stripped out, NORD/LB’s full year result was a €333 million pretax loss.
Earnings quality is deteriorating due to revenue erosion and high costs. NORD/LB’s core revenues – net interest income plus fee and commission income – are declining due to structural factors, including incremental costs and a shrinking loan book. Net interest income fell 18% year-on-year in 2017, driven mostly by a decline in lending volumes, with performing and higher-yielding ship finance loans particularly affected. Net fee and commission income fell by 49%, partly reflecting commission expenses related to securitisation transactions.
Net risk charges remained unaffordable in 2017. NORD/LB’s 2017 recurring pre-provision income (PPI) was insufficient to absorb its €986 million of net risk costs, even though these fell 67% year-on-year. Risk costs related almost entirely to the group’s ship finance exposure.
Lower ship finance exposure and risk transfer measures support solvency. During 2017, NORD/LB reinforced its capital, with its transitional Common Equity Tier 1 (CET1) ratio climbing to 12.2% as of year-end from 11.3% in 2016. The increase partly reflected a 28% decline in the bank’s ship finance exposure to €12.1 billion, achieved through reduced new lending and a workout of problem loans. The solvency improvement was also driven by securitisation deals whose costs will weigh on future profits.
Tasks ahead remain challenging. In the face of renewed global trade tensions, further de-risking and downsizing of the ship finance loan book without compromising regulatory capital ratios will not be easy. Rising capital requirements and a new round of stress testing for European banks in 2018 could add further pressure.