Nominal value of the portfolio reduced by a total of EUR 8.3 billion in 2018
Result from ordinary activities at EUR 114 million
Another value lever used in winding up the DEPFA Group
FMS Wertmanagement (FMS-WM), the German federal government’s winding-up institution, concluded fiscal year 2018 with a result from ordinary activities of EUR 114 million (previous year: EUR 429 million), which, as expected, was well below the exceptionally high prior-year figure. The portfolio was reduced by EUR 8.3 billion (previous year: EUR 14.0 billion) in fiscal year 2018. The remaining portfolio of EUR 69.0 billion at the end of 2018 includes assets acquired from the DEPFA Group with a nominal volume of EUR 5.8 billion (originally EUR 7.7 billion). FMS-WM’s total assets decreased by around 8 percent to EUR 144.7 billion as at 31 December 2018.
“We forged ahead with the winding up of our portfolio in fiscal year 2018 and generated a positive result for the seventh successive year, despite the expected smaller one-off effects,” said Spokesman of the Executive Board Stephan Winkelmeier. “Despite implementing measures designed specifically to scale back concentrations of risk within the portfolio, this remains one of the key challenges for FMS-WM.”
Net interest income fell by 33.1 percent year-on-year to EUR 348 million in fiscal year 2018 (previous year: EUR 520 million). This decline is attributable to the reduced portfolio and significantly lower one-off effects associated with compensation payments received for contract adjustments to credit support annexes for derivatives amounting to EUR 32 million (previous year: EUR 154 million).
Net additions to risk provisions and net income from investments amounted to EUR 105 million in fiscal year 2018 (previous year: EUR 202 million). This figure includes income from successful wind-up efforts and profits realised from the sale of one of the DEPFA hybrid capital bonds acquired in 2015. Set against this income were expenses to reduce complexity and scale back concentrations of risk in the portfolio. FMS-WM maintained its conservative approach to assessing risks in the portfolio in fiscal year 2018.
General and administrative expenses fell by 5.9 percent to EUR 144 million in fiscal year 2018 (previous year: EUR 153 million) and are thus well below total net interest and net commission income as in previous years. This decline is the result of the strict cost management to which FMS-WM has been committed since it was established. However, further cost cuts are severely limited due primarily to regulatory requirements and expenses largely independent of the volume of the portfolio. Expenses will therefore exceed income over the medium term as the portfolio is progressively unwound. "With this in mind, FMS-WM is developing a medium-term set of targets in its NEXT project, which is intended to ensure operational stability and sustainable cost structures," says CEO Winkelmeier.
FMS-WM used the still-favourable market environment in fiscal year 2018 and obtained EUR 5.7 billion in funding on the capital markets (previous year: EUR 19.3 billion). The maturity profile of the new issues was chosen such that the Federal Government can take over EUR-denominated capital market funding via Bundesrepublik Deutschland - Finanzagentur starting in 2019 as planned.
Another value lever was used in fiscal year 2018 when a hybrid capital bond acquired by FMS-WM in fiscal year 2015 was sold to the DEPFA Group. At FMS-WM, this transaction made a positive contribution to earnings of EUR 144 million. With the help of the transaction, the DEPFA Group’s total assets fell by a further EUR 3.2 billion to EUR 15.4 billion as at 31 December 2018, with the Tier 1 capital (CET1) ratio rising accordingly to 109.2 percent at the end of 2018. “Since 2014, most of the value levers identified at the DEPFA Group have been used or preparations have been made for them to be used soon. The measures planned for 2019 are primarily intended to transfer or distribute capital to FMS-WM bearing in mind regulatory minimums,” said CFO Christoph Müller. “At the same time, FMS-WM is examining the possibility of selling the DEPFA Group.”
Due to the progressive unwinding of the portfolio and a reduction in one-off effects, FMS-WM expects a further decline in net interest and commission income in fiscal year 2019. Despite this foreseeable development, FMS-WM expects to at least break even again in 2019, provided that there are no unanticipated macroeconomic headwinds.
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. The Financial Market Stabilisation Fund 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.