Originally transferred portfolio now reduced by more than EUR 100 billion overall
Result from ordinary activities rises to EUR 429 million
Total assets of the DEPFA Group more than halved since its acquisition by FMS-WM; Tier 1 capital ratio up to 78.9%
FMS Wertmanagement (FMS-WM), the German federal government’s winding-up institution, achieved a positive result from ordinary activities of EUR 429 million (previous year: EUR 391 million) and reduced the portfolio by EUR 14.0 billion (previous year: EUR 11.1 billion) in fiscal year 2017. For the first time, therefore, the cumulative wind-up of the portfolio taken over from the HRE Group in 2010 has surpassed the EUR 100 billion-mark. The remaining wind-up portfolio, to which a nominal EUR 7.2 billion of assets acquired from the DEPFA Group were added in 2016 and 2017, stood at EUR 76.8 billion at the end of 2017. FMS-WM’s total assets declined by around 11% in fiscal year 2017 to EUR 157.3 billion.
“We achieved a substantial reduction in our portfolio again in 2017 and a further improvement on the good prior-year result,” said Spokesman of the Executive Board Stephan Winkelmeier. “The positive market environment, favourable funding terms and strict cost discipline helped us to reduce the portfolio of both FMS-WM and the DEPFA Group significantly and post a positive result for the year for the sixth time in succession.”
Net interest income decreased by 22.0% to EUR 520 million in the past fiscal year (previous year: EUR 667 million) due, among other factors, to the reduced portfolio. The decline is also attributable to a one-off effect in connection with compensation payments received for contractual adjustments to credit support annexes for derivatives, which at EUR 154 million was considerably lower than in the previous year (EUR 271 million).
In combination with the progress made on its wind-up, the pre-tax profit of EUR 93 million at the DEPFA Group resulted in the write-up of the book value of the equity investment by EUR 83 million. In addition, FMS-WM received a payment from an American subsidiary that had been able to successfully unwind and sell a portfolio of US real estate loans in past years.
The net addition to risk provisions (including net income from investments) came to EUR 202 million in 2017 (previous year: EUR 140 million). It is the result of a still-conservative assessment of the remaining risks in the portfolio and mostly was not driven by specific cases.
General and administrative expenses fell by 12.6% to EUR 153 million in 2017 (previous year: EUR 175 million). The decline in administrative expenses reflects FMS-WM’s efforts to keep these in line with the shrinking volume of the portfolio while the quality of the portfolio servicing provided by FMS Wertmanagement Service GmbH remains at a consistently high level. However, further cost cuts are severely limited due primarily to regulatory requirements and expenses largely independent of the volume of the portfolio. “Given that the securities and receivables in our portfolio have very long terms to maturity and are partly illiquid, we continue to gear all our efforts to simplifying the portfolio and are running a project to look in detail at the future focus of the entire Group. By 2025 at the latest, we want to create the framework enabling us to continue the efficient management of what then will be a much smaller portfolio and to transfer it more easily where necessary,” said Spokesman of the Executive Board Stephan Winkelmeier.
In 2017, FMS-WM took advantage of the still-favourable market environment to raise EUR 19.3 billion of funds on the capital market (previous year: EUR 15.8 billion). A large portion of the euro-denominated funding required over the medium term has therefore already been raised on favourable terms before FMS-WM starts to obtain longer-term euro-denominated funding through Bundesrepublik Deutschland - Finanzagentur GmbH via the Financial Market Stabilisation Fund (FMS) as of 2019.
Over the past two fiscal years, FMS-WM has acquired DEPFA Group assets with a total nominal value of some EUR 7.2 billion in connection with the wind-up task for the DEPFA Group. In return, FMS-WM has sold DEPFA liabilities bought previously on the market to the DEPFA Group. Those transactions and the acquisition of derivative positions have enabled the total assets of the DEPFA Group to be reduced by more than 60% since DEPFA’s acquisition at the end of 2014, from EUR 48.5 billion to EUR 18.6 billion as at 31 December 2017, and the regulatory ratios to be improved significantly. At the end of 2017, the DEPFA Group had a Tier 1 capital (CET1) ratio of 78.9%. “By swiftly reducing total assets and improving all regulatory ratios, we have paved the way to realise the DEPFA Group’s potential value faster than originally planned,” says Spokesman Stephan Winkelmeier. “Besides pursuing the successful wind-up strategy, selling the DEPFA Group or parts of it is also a possible option.”
Due to the shrinking portfolio and absent significant one-off income, FMS-WM expects a significant decline in earnings in 2018. Barring any unexpected strains, however, it will be able to achieve a break-even to slightly positive result again in 2018.
FMS-WM was founded in 2010 with the aim of winding up the risk positions and operations that were transferred to the company from the Hypo Real Estate Group (HRE Group) effective 1 October 2010. It is supervised by the Federal Agency for Financial Market Stabilisation (FMSA). The Financial Market Stabilisation Fund (FMS) is obligated without limitation to provide additional funds under Section 8a of the German Law Establishing a Financial Market Stabilisation Fund (Gesetz zur Errichtung eines Finanzmarktstabilisierungsfonds - FMStFG) for losses incurred in winding up the portfolio.