Third quarter 2018: KfW places promotional focus on digitalisation and sustainability

• Total promotional business volume of EUR 51.3 billion
• Domestic promotion reaches EUR 34.7 billion
• High demand for promotion of innovation and digitalisation
• Very strong interest in “Baukindergeld” help-to-buy scheme
• EUR 15.8 billion increase in international financing
• Consolidated profit of EUR 1,252 million

KfW Group reduced its promotional business slightly in the first three quarters of 2018 and generated a promotional business volume of EUR 51.3 billion (prior-year period EUR 54.7 billion). In Germany, KfW reduced its promotion to EUR 34.7 billion (EUR 41.1 billion) due to strong economic growth and the sustained good financing environment for private and commercial investors. The programme for digitalisation and innovation created in 2017 was in particularly strong demand (EUR 3 billion, prior-year period EUR 1 billion). The newly introduced Baukindergeld programme, which helps families acquire residential property they live in, is also subject to very high demand (status 31 October 2018: around 30,000 applications amounting to nearly EUR 600 million). KfW’s international financing has increased to EUR 15.8 billion (EUR 12.9 billion). KfW IPEX-Bank played the primary role in this development, concluding large-scale financing to generate an increase in commitments to EUR 11.9 billion (EUR 8.8 billion). DEG also finished the third quarter on a positive note with EUR 0.8 billion (EUR 0.7 billion). At EUR 3.0 billion, the volume of commitments at KfW Development Bank was similar to the previous year's volume (EUR 3.3 billion). The share of SME financing and the share for the promotion of climate and environmental protection at KfW continue to show stable development (SME share 43%, environmental share 40%).

“Promotional year 2018 has gone well to date. KfW promotion adjusts to the economic conditions. In view of the good financing environment and the overall economic situation, KfW, in line with its promotional mandate, is focusing its promotion on fields relevant for the future like innovation, digitalisation and sustainability,” says Dr Günther Bräunig, Chief Executive Officer of KfW Group.

With a consolidated profit of EUR 1,252 million, the earnings position in the first three quarters came in above the previous year’s good level (EUR 1,099 million) due to a very good valuation result and thus developed significantly better than expected. The deciding factor here is the very low credit risk provisions, but also the fact that purely IFRS-related effects from the valuation of derivatives used for hedging purposes had a noticeably positive effect on the development of the earnings position of EUR 296 million (previous year: EUR 126 million). Consolidated profit before IFRS effects from hedging, relevant for managing KfW, came in at EUR 956 million and is thus at the previous year’s level (EUR 973 million).

“Earnings continued to develop positively in the third quarter, with very low risk provisions more than offsetting the margin-driven downturn in the operating profit. We expect above-average earnings for the year as a whole, exceeding the long-term earnings potential of KfW, even if the fourth quarter traditionally is somewhat weaker,” says Dr Bräunig, Chief Executive Officer of KfW Group.

The operating income before valuation (before promotional expense) came in at EUR 1,125 million (EUR 1,320 million). Net interest income (before promotional expense) amounting to EUR 1,797 million (EUR 1,993 million) continues to be the main source of income for KfW.

Promotional expense – mainly interest rate reductions for new business – totalled EUR 149 million and remains unchanged at a low level in the current interest environment (EUR 167 million).

At EUR 34 million, risk provisioning in the loan business had a very moderate negative impact on earnings contrary to the planning assumptions (previous year: EUR 140 million). In addition to the ongoing favourable economic situation, income from recoveries of loans previously written off had a positive effect on the risk provision result. The private equity and securities portfolio for the Group had an overall positive effect on earnings amounting to EUR 96 million (EUR 2 million) due to positive valuation results and sale proceeds from DEG’s private equity business and the Customised finance & Public clients business sector.

At EUR 481.8 billion, total assets are slightly above the level from 31 December 2017 (EUR 472.3 billion).

The Group's regulatory equity ratios are still at a good level. As of 30 September 2018, the total capital ratio amounted to 20.1% (30 June 2018: 19.9%). The slight increase in the third quarter was mainly due to the deduction of interim profit for the first half of 2018 while new business slightly decreased.

Details on the business sectors' promotional activities

The SME Bank & Private Clients business sector achieved commitments of EUR 28.4 billion (EUR 33.9 billion) by the end of the third quarter. The SME Bank segment contributed a promotional business volume of EUR 13.2 billion EUR (EUR 16.8 billion)

With a commitment volume of EUR 3 billion, the innovation development area was higher than the previous year’s level of nearly EUR 1 billion. Most of the demand was focused on the ERP Digitalisation and Innovation Loan, which was introduced in the second half of 2017. In an effort to cover the high demand and continue offering this important financing offer, the funding conditions have been focused more strongly in the meantime.

Start-ups and general corporate finance recorded an overall promotional business volume of EUR 4.7 billion (EUR 7.7 billion). While the KfW Entrepreneur Loan contracted (EUR 1.6 billion; prior-year period: EUR 4.5 billion) due to the generally good financing environment, financing for business start-ups at EUR 2.6 billion mirrored last year's strong performance (EUR 2.7 billion).

The priority area energy efficiency & renewables for commercial customers achieved a total commitment volume of EUR 5.4 billion (EUR 8.1 billion). The fall is mainly due to weakening demand in the renewable energy sector. As expected, the Renewable Energies Standard KfW programme experienced lower demand than the prior-year period, which is due to changes in the Renewable Energy Sources Act (EEG) in particular. (EUR 1.1 billion, last year’s figure EUR 3.5 billion).

The private clients segment generated a promotional business volume of EUR 15.3 billion (EUR 17.1. billion) as of 30 September 2018.

The Baukindergeld help-to-buy scheme that started on 18 September 2018 is in high demand. In the first two weeks to the end of the quarter, applications amounting to around EUR 320 million had already been submitted. This corresponds to a promotion of around 15,000 applicants. As of 31 October 2018, applications amounting to nearly EUR 600 million from around 30,000 applicants had been submitted.

The priority area of energy efficiency & renewables for private customers achieved a promotional business volume of EUR 10.4 billion (EUR 11.7 billion). The majority of this sum was generated by the energy-efficient construction and rehabilitation programmes, while energy-efficient construction came in just under the very high level from the previous year. However, there was more demand for the energy-efficient refurbishment programmes for existing property (EUR 3.3 billion; prior-year period EUR 2.8 billion).

There was a slight decline in demand in the education and housing & living priority areas, which also include the Age-appropriate Conversion programme. This area generated a total promotional business volume of EUR 4.8 billion (EUR 5.4 billion).

The Customised Finance & Public Clients business sector generated a commitment volume of EUR 6.2 billion by the end of the third quarter, which is lower than the respective prior-year period (EUR 7.2 billion).

At EUR 2.3 billion, the commitment volume for municipal & social infrastructure was below last year's level (EUR 2.9 billion). This development is primarily the result of improvements to municipalities' financial situations and the coinciding shortage of capacity in administration and the construction industry. In addition to basic funding for general municipal infrastructure investments with a commitment volume of EUR 1.6 billion, promotion of energy-efficient construction and refurbishment at municipal level accounted for a significant share at EUR 0.6 billion.

With a contract volume of EUR 3.8 billion, individual financing for banks achieved last year's figure of EUR 3.8 billion. This was largely due to brisk demand for global loans for leasing investments and refinancing packages for export credits with federal backing. With a contract volume of EUR 1.7 billion, general funding of promotional institutions of the federal states is lower than the previous year’s figure of EUR 3.0 billion.

The commitment volume for customised corporate finance amounted to EUR 98 million and is thus significantly lower than last year's figure (EUR 469 million). Two large-scale commitments in the offshore wind power sector led to the much higher figure in 2017. The newly launched KfW Loan for Growth is a follow-up programme for the KfW syndicated loan and is still in the launch phase.

At EUR 94.7 million, the promotional business volume for equity finance in the first three quarters of 2018 nearly doubled when compared with the previous year (EUR 49 million + 93%). The reason for the increase is higher ERP venture capital fund investments (from EUR 18.4 million to EUR 79.2 million). KfW Capital was founded in August 2018 as a wholly owned subsidiary of KfW; the financial institution began operational activities on 15 October 2018. KfW Capital will substantially expand venture capital and equity finance with support of ERP Special Fund: in the next ten years, around EUR 2 billion will be invested in venture capital funds to improve their financial capacities and thus access to capital for young, innovative technology companies in the growth stage in Germany.

In the Export and project finance business sector, for which KfW IPEX-Bank is responsible, commitments amounting to EUR 11.9 billion were made for new business. The volume of new commitments is thus significantly higher than the level of the prior-year period (EUR 8.8 billion). In particular, high individual commitments such as those for an LNG propulsion cruise ship being built at Meyer Werft for Carnival and a series of medium-sized financing projects in the renewable energy sector like the Triton Knoll wind farm off of the British coast play a significant role here. Priority areas of total commitments are the sector departments of Power, Renewables and Water with EUR 2.3 billion (EUR 1.6 billion), Basic Industries with EUR 2.1 billion (EUR 1.3 billion) and Maritime Industries with EUR 1.6 billion (EUR 1.2 billion).

The commitment volume for the Promotion of developing countries and emerging economies business sector amounted to EUR 3.8 billion (EUR 4.0 billion). KfW Development Bank commitments increased significantly in the third quarter and reached EUR 3.0 billion as of the reporting date 30 September 2018. They have thus nearly reached the previous year’s level (EUR 3.3 billion). The predominant share of budget funds (69%) and nearly half of all commitments went to countries in Africa and the Middle East. A commitment volume similar to that of the previous year (approximately EUR 8.2 billion) is expected for 2018 as a whole. New business also increased significantly in the third quarter for DEG. As of 30 September 2018, it had committed EUR 809 million (EUR 732 million) for investments in private companies in developing countries and emerging economies. EUR 314 million of this amount are earmarked for Africa (EUR 168 million). It will be used to finance entrepreneurial projects, particularly in the infrastructure and financial services sectors. We are also pleased with developments in German business: DEG provided EUR 218 million for investments in German companies and with German holdings (EUR 157 million).

In the Financial markets business sector, the promotional business volume for the third quarter of 2018 amounted to EUR 1,023 million (EUR 1,056 million). Of this figure, EUR 739 million (EUR 799 million) was invested in securitisation transactions for capital market-oriented promotion of SMEs. For its green bond portfolio, KfW invested a total volume of EUR 284 million (EUR 257 million) in eight securities to promote climate and environmental protection projects.

To fund its promotional business, KfW raised long-term funds on the international capital markets amounting to EUR 61.7 billion (EUR 67.1 billion) as of 30 September 2018. Around 61% of the funds were raised in euros; around 28% were raised in US dollars. In addition to both of the main currencies of euros and US-dollars, bonds in ten other currencies were issued, including the British pound, the third-strongest currency (as of 30 September, share: 6%). Thus far, EUR 0.6 billion of the funding was raised through the issue of green bonds. By maintaining its presence in the green bond market and steadily expanding its own green bond curve, KfW wishes to continue to support the issue of sustainable finance over the long term. Funding requirements for 2018 as a whole are EUR 75 to 80 billion.

Key figures of the income statement (EUR in millions)	01/01/2018 – 30/09/2018	01/01/2017 – 30/09/2017
Operating result before valuation (before promotional expense)	1,125	1,320
Promotional expense	149	167
Consolidated profit	1,252	1,1099
Consolidated profit before IFRS effects from hedging	956	973

Key figures of the statement of financial position (EUR in billions)	30/09/2018	31/12/2017
Total assets	481.8	472.3
Equity	29.8	28.7
Volume of business	584.5	572.2

Key regulatory figures (in %) 1)	30/09/2018	30/06/2018
(Core) tier 1 capital ratio	20.0 %	19.9 %
Total capital ratio	20.1 %	19.9 %

^{1) The capital ratios stated for 30 September 2018 consider the interim results of the first half of 2018 (as opposed to 30 June 2018). KfW reports no significant tier 2 capital in its equity, meaning that the (core) tier 1 capital ratio and the total capital ratio are virtually the same.}

Service:
An overview of the business and promotional figures in table form is available for download at: www.kfw.de/geschaeftszahlen.