Postbank remains on track in first half-year

In the first half-year of 2008, Deutsche Postbank AG asserted its position well in an environment characterized by the capital market crisis and an inverse yield curve. In key product categories, new business was expanded and market gains achieved. There was a positive trend in operating results while charges on the income statement resulting from the trend on capital markets were again relatively moderate.

In comparison to the first half-year of 2007 – the last before the capital market crisis started – Postbank improved its core operating figures – net interest income and net fee and commission income. Due to market turbulence, net trading income and net income from investment securities declined. As a result of enhanced efficiency and rigorous cost control, administrative expenses moved down considerably. Allowances for losses on loans and advances was appreciably below the level of the previous year.

In the first six months of 2008, profit before tax fell by 26.1pct to EUR337 million. Adjusted for the impact of the financial market crisis, the result increased by 43.4pct to EUR654 million. Return on equity before tax declined to 13.9pct (previous year: 17.5pct). The cost-income ratio of the whole bank increased to 73.7pct (68.7pct ), while in the classical banking business (without Transaction Banking) this figure rose to 71.8pct (66.6pct ). Adjusted for the financial impact of the market jitters, there was a year-on-year improvement of profit before tax, return on equity and the cost-income ratio in the first six months.

In view of the positive development of the operating business after the first half year of 2008, Postbank sees itself as well on track for achieving an operating result before tax (without positive and negative non-recurring effects) of between EUR1.1 billion and EUR1.2 billion for the current fiscal year. This guidance is given despite the inverse yield curve and high volatility on capital markets. In the first half-year of 2008, Deutsche Postbank AG asserted its position well in an environment characterized by the capital market crisis and an inverse yield curve. In key product categories, new business was expanded and market gains achieved. There was a positive trend in operating results while charges on the income statement resulting from the trend on capital markets were again relatively moderate.

In comparison to the first half-year of 2007 – the last before the capital market crisis started – Postbank improved its core operating figures – net interest income and net fee and commission income. Due to market turbulence, net trading income and net income from investment securities declined. As a result of enhanced efficiency and rigorous cost control, administrative expenses moved down considerably. Allowances for losses on loans and advances was appreciably below the level of the previous year.

In the first six months of 2008, profit before tax fell by 26.1pct to EUR337 million. Adjusted for the impact of the financial market crisis, the result increased by 43.4pct to EUR654 million. Return on equity before tax declined to 13.9pct (previous year: 17.5pct). The cost-income ratio of the whole bank increased to 73.7pct (68.7pct ), while in the classical banking business (without Transaction Banking) this figure rose to 71.8pct (66.6pct ). Adjusted for the financial impact of the market jitters, there was a year-on-year improvement of profit before tax, return on equity and the cost-income ratio in the first six months.

New core customer concept with initial successes

The forward-looking Next Step core customer concept introduced by Postbank at the end of 2007 generated initial successes in the first half-year of 2008. The Bank increased the number of its core customers from 4.6 million at the end of 2007 to its current level of 4.7 million. It sees itself well on track to achieve its target of 5.2 million core customers by the end of 2010.

With 250,000 checking accounts, Postbank increased the number of checking accounts sold by 14.5pct against the figure for the equivalent period of the previous year. Once again the utilization of overdrafts on checking accounts increased, to EUR1.0 billion, 8.1pct more than to the end of 2007. As of June 30, 2008, Postbank managed 4.9 million private checking accounts, a market share of 6.7pct .

The strategy formulated at the end of 2007 of acquiring new deposits by offering attractive products and conditions is impacting. In the declining market for savings deposits, Postbank increased its market share to 8.8pct in the first half-year of 2008. Since the end of 2007, total savings volume including home saving deposits increased by 3.3pct to EUR62.7 billion.

Postbank installment loans developed in a particularly positive fashion. In the first half-year, the Bank pushed sales by 71.8pct to EUR821 million. Here the car loan introduced only in March is making an increasingly important contribution. In a slumping market, Postbank considerably expanded its market share.

Further market gains in home financing

In the difficult market environment, new business in home financing declined by 12.1pct in the first six months of 2008, totaling EUR5.0 billion after EUR5.8 billion in the previous year. The business with small-volume loans for modernization or ecological renovations under the BHW brand developed very successfully. Against the first quarter, there was an increase of 31.1pct to EUR987 million. At the end of June 2008, Postbank had a portfolio of private home loans totaling EUR70.2 billion, representing an increase of EUR2.2 billion or 3.2pct against the end of 2007. In this area the market share is 8.9pct , 0.3 percentage points higher than on December 31, 2007.

At BHW Bausparkasse, applications for a total of savings amount of EUR5.9 billion were made in the first half of 2008, 5.4pct more than in the corresponding period of the previous year As at June 30, 2008, the portfolio of home saving deposits was steady at EUR16.5 billion, representing a market share of 13.4pct after 13.7pct at the end of the previous quarter. The positive trend for home savings loans paid out also continued, reaching a volume of EUR629 million, 21.4pct more than in the previous year.

Position as core bank for SMEs strengthened in a targeted fashion In the first half of the year, Postbank as core bank for SMEs in German corporate customer business, both in the financing and the investment areas, continued its growth story. To June 30, 2008, the volume of SME loans increased by EUR0.4 billion against the end of the year to EUR4.0 billion. As of the reporting date, the total credit volume in corporate customer business was EUR20.8 billion. In commercial real estate financing, the Bank considerably increased its new business in the first half-year. At the same time, the conservative risk policy was strictly adhered to.

Income statement

Despite the increasingly difficult situation resulting from the inverse yield curve, in the first half-year net interest income improved year-on-year by 7.4pct to EUR1.18 billion.

Against the first six months of last year, both net income from trading securities and net trading income declined as a result of the repercussions of the events on the capital markets. Net income from investment securities declined by EUR187 million to EUR -79 million. Overall in the first half-year – on the basis of a prudent accounting policy – an impairment of EUR120 million was taken on the parts of the structured credit portfolios of the bank impacted by the market jitters. This comparatively moderate level of impairment again underlines the strength of PostbankEURs investment structure. Here the sharp interest rate upturn in the second quarter and the decline on equity markets restricted possibilities for generating positive earnings contributions.

Charges from the valuation of embedded derivatives from credit substitution transactions of EUR197 million which do not relate to primary trading activities at Postbank squeezed net trading income from a total of EUR169 million in the previous year to EUR67 million in the first half-year of 2008. Adjusted for these effects, there was an upturn in net trading income. In this second quarter, charges from these embedded derivatives totaled EUR71 million.

In the first six months of 2008, net fee and commission income totaled EUR709 million, up 1.9pct year-on-year (EUR696 million). Looking at the second quarter in isolation, there was even a year-on-year improvement of 3.2pct .
Total income in the first six months declined by 9.4pct against the equivalent period of the previous year to EUR1.88 billion. Balance-sheet income which consists of net interest income, net trading income and net income from investment securities declined by 15.1pct to EUR1.17 billion. These developments are due almost exclusively to the turbulent capital market environment. Adjusted for these effects, there would have been a tangible increase in the income position against the first half-year of 2007.

At EUR161 million, the allowance for losses on loans and advances in the first six months of 2008 was EUR15 million or down 8.5pct year-on-year. In the same period, customer credit volume improved considerably by 11.3pct . This underscores our conservative risk profile and the ongoing cautious credit policy at Postbank and the robust overall economic trend in Germany.

Administrative expenses developed in a very pleasing fashion. In the first six months, total costs declined considerably, by EUR40 million or 2.8pct to EUR1.38 billion. According to its own assessments, this demonstrates PostbankEURs ability to maintain highly disciplined cost management on the back of steady growth in its customer business.

Net other income and expenses amounted to EUR4 million after EUR-17 million in the previous year.

Based on a tax rate of just under 30.0pct , Postbank generated net profit for the period of EUR235 million, 20.3pct less than in the previous year (EUR295 million). This corresponds to earnings per share of EUR1.43 after EUR1.80 in the first half-year of 2007.

Balance sheet

Total assets increased from EUR203.0 billion at year-end 2007 to EUR228.6 billion on June 30, 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 and trading assets, while on the liabilities side the key factors were the upturn in deposits from other banks and an expansion of amounts due to customers combined with higher securitized and trading liabilities. At the same time, more expensive older securitized liabilities were further reduced as scheduled. With the reduction of its historical deposits overhang, Postbank now has a balanced, diversified balance sheet structure.

Loans and advances to customers improved against the year-end 2007 by a pleasing EUR7.9 billion to EUR100.0 billion. Loans and advances from other banks declined by EUR4.2 billion against the figure at the end of 2007 (EUR24.6 billion).

On the liabilities side, amounts due to customers rose by EUR2.2 billion to EUR112.9 billion. As a precautionary measure to strengthen its liquidity position further, Postbank increased deposits from other banks by EUR15.9 billion to EUR77.1 billion.

At June 30, 2008, shareholdersEUR equity at EUR4.3 billion was EUR1.0 billion lower than the figure at the end of 2007. This was due to the decline in the revaluation reserve from EUR-523 million at the end of 2007 to EUR-1.57 billion to the end of the current reporting period. The core capital ratio in accordance with Basel II was 6.3pct as of June 30, 2008 after 6.9pct to the year-end 2007. However, it should be taken into account here that Postbank – in contrast to many other banks – subtracts its revaluation reserves from the core capital when calculating its Tier 1 ratio. Overall the decline in the revaluation reserve this year is due predominantly to fluctuation of the present values of government bonds and other first-class securities. In the second quarter, the charges from the structured credit portfolio were considerably less than in the first quarter. Providing that there is no market-driven reduction of its revaluation reserve, Postbank anticipates that the core capital ratio will increase further as a result of pull-to-par effects and retaining profits.

Outlook

In view of the positive development of the operating business after the first half year of 2008, Postbank sees itself as well on track for achieving an operating result before tax (without positive and negative non-recurring effects) of between EUR1.1 billion and EUR1.2 billion for the current fiscal year. This guidance is given despite the inverse yield curve and high volatility on capital markets.