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BayernLB sees mid-term profits stabilize as domestic competition remains tough

Germany-based Bayerische Landesbank expects "stable" profitability at lower levels over the next few years as it faces tough domestic competition in all its main business segments and sees the cost of risk likely to offset revenue growth, CFO Markus Wiegelmann said March 22.

BayernLB, which in 2017 repaid to the state of Bavaria the last €1 billion tranche of state aid it received during the global financial crisis, is looking for a fresh start in the next few years and aims to consolidate its position as a leading regional bank in Europe. The group booked full-year consolidated profit of €677 million in 2017, up 24.4% from a year prior. However, the bank does not expect "huge growth" in the next few years, Wiegelmann told analysts during a presentation of the group's preliminary results for 2017.

"My expectations for the future [are] basically what we see now. We will see some growth in our top line, but on the other hand, we will have the normalization of risk costs and overall I would expect stable development [and] normalized profitability which for us means something between €40 million and €50 million a month before tax," he said.

BayernLB guided for pretax profit in the "mid-triple-digit range" in millions of euro for 2018 and a similar performance in the medium term. Although the bank expects stable economic growth in Germany over the next few years, it also foresees continued pressure on interest margins in all its key areas of operation. "I would say the speed of margin pressure is not increasing any longer, but there is no relief," Wiegelmann said.

BayernLB also expects its loan loss provisions to nearly double from the €94 million booked for 2017. "That is what we have in our multiyear planning," the CFO said.

The group's medium-term target on capital is "slightly below" that achieved in 2017 as BayernLB would have to take into account the final Basel III requirements, which are likely to result in an increase of the bank's risk-weighted assets, or RWAs. The Basel III rules require banks to stick to a 72.5% output floor, which is the percentage at which internal risk modeling has to match the regulator's standardized risk assessment approach. The level of RWAs is a key metric in determining the common equity Tier 1 capital ratio, which is the main gauge for a bank's capital strength.

At 15.3%, BayernLB's fully loaded CET1 ratio at the end of 2017 was well above the group's minimum regulatory target of 9.04% for 2018 and 10% for 2019. Even though the CET1 ratio is expected to "go down a little bit" as a result of the adjustments to the Basel III rules announced in December 2017, BayernLB will remain "well capitalized" in the future, Wiegelmann said.