Despite the effects of the continued turbulence on the capital markets, Deutsche Postbank AG is reporting positive results and further growth in its operating business in the first three months of 2008. The Bonn-based bank increased sales of checking account and savings products and generated a record high number of new private loans in the first quarter, as well as improving its core operating figures – net interest income and net fee and commission income – as against the same period of the previous year. By contrast, net trading income and net income from investment securities declined due to the effects of the capital market crisis.

In the first three months of 2008, profit before tax fell by 25.2% year-on-year to €166 million as a result of the turbulent market environment. Accordingly, the return on equity before taxes also declined from 17.0% at March 31, 2007 to 13.2% at March 31, 2008. The cost-income ratio improved from 69.4% to 73.9% in the same period, while the figure for Postbank’s traditional banking business (excluding Transaction Banking) rose from 67.3% to 71.8%. Adjusted for the financial effects of the capital market crisis, profit before tax, return on equity and the cost-income ratio all improved significantly year-on-year.

Customer business enjoys solid Q1

Once again, Postbank successfully demonstrated its sales strength and its ability to record growth in the face of intense competition. This was due in part to the implementation of the “Next Step” strategic program, which began in the first quarter of 2008.

In the first three months, Postbank increased the number of free checking accounts sold by 133,000 or 13.7%. At the end of the quarter, the Bank managed a total of 4.9 million private checking accounts for its customers. The strategic focus on value-oriented volume growth in Postbank’s savings business, which was announced in late 2007, also started to bear fruit: the volume of traditional savings deposits increased by around €0.5 billion as against year-end 2007 to total €44.4 billion. The home savings volume also developed positively despite the downturn in the market as a whole, with a new contract volume of €2.81 billion in the first three months of 2008 – up 2.4% on the same period of the previous year.

Postbank recorded the highest volume of new private loans since the launch of its Privatkredit product, with a year-on-year increase of almost 73% to €380 million. At €2.46 billion, the total private lending volume at March 31, 2008 was 7.4% higher than at the end of 2007.

Income statement

Despite the challenges posed by the flat-to-inverted yield curve, net interest income increased by 2.6% to €557 million in the first three months of 2008. Thanks to its strong deposit base, the sharp rises in refinancing rates as a result of the crisis on the financial markets had a comparatively minimal impact on Postbank’s interest expense.

Net income from investment securities decreased from €70 million in the first three months of the previous year to €1 million. Net income from investment securities includes an impairment loss of €48 million that was recognized in accordance with prudent accounting policy for items affected by the capital market crisis. This comparatively moderate level of impairment again underlines the strength of Postbank’s investment structure.

Net trading income declined from €61 million in the first three months of 2008 to €9 million in the period under review. This was due to the effects of the valuation of embedded derivatives from credit substitution transactions, some of which are temporary in nature, which totaled €126 million. Adjusted for these effects, which are not attributable to Postbank’s primary trading activities, net trading income would have increased by €74 million to €135 million.

In the first three months of 2008, net fee and commission income increased slightly year-on-year to €359 million (previous year: €357 million).

Total income fell by 10.2% to €926 million in the first three months of 2008. Balance sheet income, which consists of net interest income, net trading income and net income from investment securities, decreased by 15.9% to €567 million. These developments were due almost exclusively to the turbulent capital market environment. Adjusted for these effects, both of the aforementioned items would have increased substantially year-on-year, not least due to the high level of primary net trading income.

At €75 million, the allowance for losses on loans and advances for the first quarter of 2008 was down 16.7% or €15 million on the same period of the previous year, while the customer credit volume increased by a substantial 7.8%.

The development of administrative expenses was extremely encouraging. In the first three months of 2008, total administrative expenses fell by €31 million or 4.3% to €684 million, thus again demonstrating Postbank’s ability to maintain a highly disciplined approach to cost management while implementing the steady growth in its customer business.

Net other income and expenses amounted to € 1 million, compared with € 4 million in the previous year.

Based on a tax rate of just under 30%, Postbank recorded a net profit for the period of €116 million, down 19.4% on the previous year (€144 million). This corresponds to earnings per share of €0.71, compared with €0.88 in the first three months of 2007.

Balance sheet

Total assets increased from €203.0 billion at year-end 2007 to €221.9 billion at March 31, 2008. On the asset side, this was primarily due to the sharp increase in loans and advances to customers and the higher level of investment securities, while the main developments on the liability side were an increase in deposits from other banks and a slight rise in amounts due to customers.

Loans and advances to customers increased by an impressive €1.9 billion year-on-year to €94 billion, while loans and advances to other banks were up around €6.5 billion on year-end 2007 (€24.6 billion).

On the liability side, amounts due to customers increased by €1.9 billion to €112.6 billion, while deposits from other banks rose by €15.5 billion to €76.7 billion.

Shareholders’ equity amounted to €4.8 billion at March 31, 2008, down €0.5 billion on the end of 2007. This was due in part to the revaluation reserve in equity, which fell from € 523 million at year-end 2007 to € 1.15 billion at March 31, 2008. The crisis on the financial markets, which intensified considerably during the period under review, and the effects of the crisis on various asset classes resulted in significantly increased spreads in some cases, and hence in a temporary reduction in the present values of investment securities. Speculative exaggeration even affected some first-class European government bonds and mortgage bonds, the value of which is not expected to be impaired in the longer term.

At March 31, 2008, Postbank had a tier I capital ratio in accordance with Basel II of 6.7%, compared with 6.5% at the end of 2007.
 
Postbank believes that it is well on the way to achieving its forecast profit before tax of between €1.1 billion and €1.2 billion for the current financial year. Assuming no further deterioration in the market environment, the Bank expects to have a tier I capital ratio of 7.5% by 2009.

Postbank is also reiterating its target of significantly increasing profit before tax to €1.40-1.45 billion and profit from ordinary activities after tax to between €980 million and €1.015 billion by 2010. The Bank also aims to improve its cost-income ratio (excluding Transaction Banking) to below 58% by 2010.