Letter of the Board of Managing Directors
Ladies and Gentlemen,We have made it – we left the depths of the crisis behind, yet we are still facing some of the consequences of this major disruption. 2010 was a year of two conflicting themes.
On the one hand, 2010 saw a strong recovery in world trade, accompanied by economic growth – albeit with significant regional differences, whereby Asia's exposed position and momentum were strengthened further. Equity markets around the world developed favourably, also fuelled by a glut of liquidity that benefited individual markets to differing extents.
The values of transport assets – ships, aircraft, rail rolling stocks – recovered, reflecting higher charter and leasing rates, amongst other factors. Orders for new assets were placed again in some transport segments, with a return of speculative buying being seen in a few cases.
Everything appears to be back to normal.
On the other hand, there is massive speculation against the integrity of the euro zone: the markets are targeting countries one by one, whilst the media are fuelling the problem and European politicians appear to be unclear in their communications, lacking leadership. There is too much talk in public, instead of taking courageous action. Some investors are losing an essential factor: trust.
It is precisely this trust regarding the stability of financial institutions that is still missing on the money and capital markets. In the aftermath of the Lehman Brothers collapse, banks' funding costs are still at very high levels, with interbank funding still being subject only partially functional. Assuming that additional measures resolved by governments and regulators will be implemented as planned, the situation will be further exacerbated for wholesale banks, i.e. those institutions without access to material retail liquidity.
A shortage of certain commodities and consequent price rises form a threat to continued recovery, and also pose a threat of new bubbles. There is excessive liquidity on the market, on a global scale. We have quite some way to go until we reach a “new normal” – which still needs to be defined, following the major financial markets and economic crisis.
Yet DVB reports record results, exceeding the previous record levels seen in 2007. How does that fit?
Let us look at the numbers first.
At €131.1 million, consolidated net income before taxes was up 51.4% over the previous year, exceeding the previous record for 2007 by 10.4%. Return on equity (ROE) before taxes – which we use as a management indicator – stood at 13.9% and thus well within the target corridor of 12–15% which we have defined in relation to the present interest rate levels. Net interest income before allowance for credit losses showed a decrease of just 0.7%; this was due to a certain extent to the somewhat sluggish growth in new business originated during 2009 and the first months of 2010. The key factor, however, was a strong decline in income generated by our Investment Management division; in addition, asset values needed to be written down.
Interest margins generated on new business continue to reflect a balanced risk/reward ratio. Looking at the prevailing volatility of transport markets going forward, and the high funding costs that continue to affect all finance providers, we consider these margins to be appropriate and necessary. At €52.0 million, allowance for credit losses was lower than in the previous year.
Net fee and commission income developed very favourably indeed, driven by higher new business (up by €4.9 billion or +63.3%) and significant additional income generated on advisory as well as asset management services. At €124.4 million, net fee and commission income was up 27.2% year-on-year. Total income was up by 26.4% for 2010.
The 12.6% increase in general and administrative expense, which we had not budgeted for, requires some explanation. Two factors contributing to this increase were provisions – recognised for the first time after several years – for the DVB Long-Term Incentive Plan for staff, and the higher share of variable remuneration. As both cost components were triggered by soaring income, we consider them to be justified. Constantly growing regulatory requirements, together with new accounting standards, have necessitated higher staffing levels in service units. This increase is unfortunately unavoidable. The requirements and related costs for operating a bank keep rising – whether this will in fact make the financial services sector safer is something that only the future will show. As we already pointed out last year, rules and regulations cannot compensate for the lack of a sustainable business model. Commerce thrives and develops on entrepreneurial activity – not on controls. The increase in other general administrative expense is mainly due to higher contributions to our deposit insurance scheme (reflecting our higher business volume), and to higher advisory fees and other expenses incurred in connection with disposing of high-risk exposures.
Let us return to the question as to why DVB has outperformed many of its directly comparable competitors:
- a very clearly-defined business model as a niche provider operating on a broad-based, global platform;
- a conservative business policy, oriented upon providing value to clients and a balanced risk profile;
- a consistent risk management approach that anticipates risks;
- a strongly focused service offer, including complementary products that are unusual for the sector, such as asset management services;
- a flat hierarchy, supported by a manageable company size – which in turn facilitates transparency as well as fast information flows and swift decisions; and
- the expertise of our award-winning asset and market research experts, which is integrated into all decision-making processes, together with the best experts for Shipping Finance, Aviation Finance, and Land Transport Finance.
It is the aggregate of all these factors that makes a difference, and makes DVB unique.
Yet praising ourselves would be dangerous, and might lead to negligence. We must fight to defend our special position with each individual transaction or advisory mandate, and make the winning of our clients' approval in competition the benchmark for all our actions.
We will propose to the Annual General Meeting to pay an unchanged dividend of €0.60 per share. We believe that further boosting our own funds should still take precedence over a higher distribution. The year 2010 and all our achievements will be history – at the latest – once the dividend has been distributed, and we will once again have to prove ourselves to our clients.
We would like to express our thanks to all DVB employees, across all functions and levels, for their great commitment, enthusiasm for their work, and their creativity.
Let us now take a look at 2011.
The summary is rather simple, in fact: volatility will prevail – in the economy, on financial markets, in demand for transport services, and especially in the supply of additional transport capacity. The high volumes of newbuild capacity will be pushed on the markets during 2011 and 2012. As we said in the previous year: there is no reason to relax. At the very least, the risk of setbacks is higher than the chances of particularly positive news. This outlook is characterised by the scenario on the European and North American markets, the non-emerging markets. These regions account for three-quarters of our business. This geographical structure must and will change over time.
We are looking ahead to another challenging year. Our goals remain unchanged: we want to offer the best solutions to our clients and provide an adequate return on equity to our shareholders. Whether this will lead to another record year for DVB remains to be seen; we believe that – first and foremost – our performance must be sustainable.
We will work hard to achieve this.
Frankfurt/Main, March 2011
DVB Bank SE
DVB Bank SE