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Market environment

At a glance

The risks for the global economy increased significantly in 2011. The widening of the sovereign debt crisis in Europe and the USA, growing inflation risks in the emerging countries and external shocks, such as the tsunami and nuclear disaster in Japan as well as political unrest in the Middle East, weakened economic growth as the year progressed and made the capital markets very nervous. At the end of 2011, the sovereign debt crisis in the eurozone remained unsolved and represented the biggest risk to global growth and the stability of the financial system.

The economic and political situation had a major influence on the development of the money and capital markets as well as on investor behaviour. This also affected the comdirect group (see Business performance and earnings situation at the comdirect group).

The European sovereign debt crisis

The sovereign debt crisis deepened considerably in summer 2011. Alongside Greece, Ireland and Portugal, the second half of the year saw Italy, Spain, Cyprus and Belgium hit by rating downgrades and having to pay substantially higher credit spreads on their government bonds. In January 2012, Standard & Poor’s downgraded other countries including France, one of the guarantors for the European Financial Stability Facility (EFSF), which consequently lost its top rating as well. At the same time, Italy, Spain, Portugal and Cyprus were downgraded by a further two notches each, while ratings for Austria, the Slovak Republic, Slovenia and Malta were lowered by one notch each.

Following in the footsteps of Greece and Ireland which had already received loans and credit default guarantees through the EFSF in 2010, Portugal too had to seek financial aid from the European Union and the IMF in April 2011. Meanwhile the situation in Greece worsened. In July, the euro countries and IMF agreed new assistance measures, and then another aid package was approved in October. This was supposed to be linked to a cut in the debt level, but a decision had not been made on this by the time the present management report went to press. Private bond investors are also supposed to participate voluntarily in this rescue package.

In view of the drawdown on the euro bailout fund by Greece, Ireland and Portugal, as well as the increasingly negative assessment for Spain and Italy, there was tough wrangling at political level over the level of funds for the EFSF and the establishment of other financial mechanisms. In accordance with the resolution of the EU summit in January 2012, the EFSF will be transferred to the European Stability Mechanism by the middle of the year. This has funds of €500bn and is allowed to expand its available capacity using financial levers; at the same time, the EU states undertook to comply with tighter budget discipline. The controversial debate surrounding the issue of joint euro government bonds (euro bonds) also continued. The measures are aimed at strengthening the support mechanisms so that they can prevent the debt crisis infecting other euro countries.

The European Central Bank (ECB) also helped here by buying government bonds of stricken euro countries as it had in 2010. At the end of 2011, the volume of government bonds purchased since May 2010 totalled €195bn. This was the only way for the “PIIGS” nations (Portugal, Ireland, Italy, Greece and Spain) to borrow money in the capital market at acceptable interest rates. Nevertheless, this measure is contentious as there are fears that buying up bonds with a poor credit rating will endanger both the ECB’s independence and monetary stability.

As a result of the large burdens in some cases on European banks due to the sovereign debt crisis and the associated fall in value of government bonds, the European Banking Authority (EBA) set a target for the core Tier 1 ratio of 9% for system-relevant banks by mid-2012. During a snapshot stress test carried out by the EBA in November 2011, a capital gap was ascertained for 27 European banks, including six in Germany. The credit institutions reacted mainly by reducing their risk-weighted assets, for example by restricting lending or buying back hybrid capital. Consideration was even given to a renewed recapitalisation of banks by the state. However, experts believed that this would be too much for the already strained budgets of some countries. The big German banks tested had all passed the regular EBA stress test at the start of the year.

Economic environment

After a promising start, global economic growth slowed during the reporting year due to the effects of the sovereign debt crises in Europe and the USA. The unresolved situation unsettled companies and consumers and curbed investments and consumption as a result. Moreover, the euro countries receiving support from the EFSF and IMF had to agree to tough austerity measures. In addition, the earthquake and tsunami disaster in Japan as well as unrest in the North African and Arab oil states led to a downturn in global output.

In the United States, the economy stabilised at a low level (1.7 %) despite talk of the US federal government being insolvent. Strong investments and the recent renewed easing in commodity prices helped here.

With growth totalling around 6.2%, the developing and emerging countries were once again the main growth driver for the global economy. However, the momentum slowed as a result of increasingly restrictive fiscal and monetary policy. China’s response to the increased risk of inflation, for example, included more cautious lending.

In the eurozone, the gap between stronger and weaker countries widened. According to preliminary figures, gross domestic product increased by 1.6% on average, but economic output in Greece, Portugal, Spain and Italy was already contracting in the second half of the year.

Growth in GDP
European key lending rate 2009 – 2011

Germany bucked the negative trend with economic growth of 3.0%. However, although exports were still very strong in the first half of the year, they were increasingly affected by the downturn in demand from neighbouring European countries and China. Thanks to higher disposable incomes and the ongoing stability in the labour market, domestic demand proved to be relatively robust.

The central banks’ main response to the growing risks to the economy was renewed easing of monetary policy. For instance, the US central bank, the Fed, kept its key lending rate close to 0% and exchanged government bonds for securities with longer maturities. The ECB stepped up its liquidity allotment and funding activities in the second half of the year to improve financing terms and conditions for the banks. Furthermore, in two rate cuts totalling 50 basis points, it lowered the interest rate for main refinancing operations back down to 1%, having raised it by 50 basis points in the first half of the year.

Securities investment

The development of the capital market environment is a material factor influencing the business performance and earnings situation of the comdirect group. In the B2C business line, the level of commission income in brokerage is mainly affected by trading activity on the stock markets and OTC trading, which in turn is partly dependent on price movements. With regard to long-term securities investments and investment and provisioning advice, the general trends in asset accumulation for private households are of particular importance. In the B2B business line, the number of custody accounts and the portfolio volume are also largely determined by the investment behaviour of the end customers serviced by the institutional partners.

In the reporting year, the equity markets clearly reflected the nervousness of investors. After a good start, the DAX fell by more than 10% in March as a result of events in Japan. Following a recovery phase in spring, increased economic and financial market risks led to pronounced price slides in the third quarter from which the index was unable to recover for the rest of the year. As doubts grew regarding a swift solution for Greece, sentiment indicators also worsened notably, having sent out positive signals right up until the middle of the year.

Number of orders Deutsche Börse*
DAX development from 30.12.2010 to 30.12.2011

Investor uncertainty led to severe volatility in the equity markets in the first and third quarters in particular, which boosted trading activity considerably. In terms of value, the trading volume in the German spot market (XETRA and Frankfurt) increased by 12.4% over the course of the year despite lower prices. The number of orders for equities increased by 14.1%, while the trading volume was up by 11.7%. The rise in trading volumes for exchange traded funds (ETF), exchange traded commodities (ETC) and exchange traded notes (ETN) was as high as 24.8%. Order numbers for this product category increased by 14.6%.

In derivatives trading, the volume also exceeded the figure for 2010, although trading was much quieter in the fourth quarter. Stock exchange turnover increased by 12.1% overall on the Stuttgart (Euwax) and Frankfurt (Scoach) stock exchanges. Leveraged certificates recorded a stronger rise (15.1%) than investment certificates (9.6%).

The turmoil in the markets put a strain on the sale of public funds in the second half of the year especially. According to statistics from the Bundesverband Investment und Asset Management e.V. (BVI), nearly all fund groups posted significant fund outflows in 2011. Investors pulled out of fixed income funds in particular. Equity and mixed funds, which as of the end of July were still showing strong inflows, also slipped into negative territory by the end of the year. Significant declines were also recorded by guaranteed funds, hybrid funds and alternative investment funds. Open-ended property funds as well as lifecycle funds bucked the trend with moderate net inflows, although these failed to match the level of 2010. Overall, the net fund outflow in public funds amounted to €–16.6bn, compared with a net inflow of €19.4bn in the previous year which stemmed primarily from fixed income funds and mixed funds. On the whole, the framework conditions for the funds business were thus considerably less favourable than in the previous year.

According to the Deutsches Aktieninstitut, the number of shareholders and unit-holders rose in 2011 to 8.7m (2010: 8.2m). At the end of 2011, 4.1m investors were investing directly in equities. This is a rise of 0.7m on the previous year. The number of fund investors climbed by 0.2m to 6.2m.

Investments, financing and provisioning

The terms and conditions in the deposit and lending business as well as the interest margin are primarily affected by the movements in the money market and capital market interest rates and spreads in addition to the terms and conditions of competitors. Changes in the ratings of banks and companies and their bond issues are another important influencing factor for Treasury.

On average, money market interest rates were higher in 2011 than in the previous year: despite adjustments to terms and conditions during the year, this generally had a positive impact on interest income. Three-month EURIBOR, which is the decisive rate for some of our investments, essentially tracked the movement in the key lending rate and successively declined following increases in the first half of the year. Nevertheless, at 1.39% on average in the reporting year, it was still higher than in 2010 (0.81%).

EURIBOR 2009 – 2011

In the bond markets, the movement in prices and yields depended heavily on the credit rating of the respective issuer. The current yield to maturity for government bonds with the top rating (AAA) and a ten-year residual term dropped from 3.36% to 2.65% during the course of the year, but rose from 3.99% to 4.15% for all the ratings overall. Borrowers without the best rating were therefore hit by a steep jump in interest rates; however spreads for government bonds from the periphery countries tightened again towards the end of the year, partly because of the ECB’s comprehensive liquidity measures.

Competition between banks for customer deposits went hand in hand with higher interest rates, particularly on demand deposits. These were significantly higher than at the end of 2010. Fixed-term deposits were also up slightly, while there was a marginal drop in the volume of savings deposits.

There was a small rise in the volume of loans to private households. This was due to the upturn in loans for residential property construction. Loans with long-term fixed rates continued to dominate and were somewhat cheaper than in the previous year. As a result of the favourable framework conditions, the number of Germans interested in purchasing property increased again. comdirect's Building Finance Sentiment Index, which is calculated in conjunction with opinion research institute Forsa, rose year-on-year from 106.8 points (January 2011) to 111.1 points (January 2012). A value greater than 100 indicates a high level of willingness to take out building finance loans. Around 57% of those surveyed believe that it is a favourable time to purchase property. 42% of the respondents believe they would be able to finance the construction or purchase of a property.

Building Finance Sentiment Index (January 2011 – January 2012)
Ten-year mortgage interest rates (December 2010 – December 2011)

Industry trend

Dynamic growth continued in the market for online banking and brokerage. The number of users increased year-on-year by 9% to over 27 million (as of: April 2011). According to the Association of German Banks, this growth is primarily due to increased confidence in security. 43% of German consider it safe to run their bank account online as against 35% in 2010. At the same time, online banking still offers a great deal of growth potential: with only 44% online banking users, the figure for Germany is at best still only average for Europe. In the Scandinavian countries and the Netherlands, the level is much higher at over 70% according to industry association Bitkom.

The intensity of online banking use remains on a par with the previous year: more than one in two users carry out banking transactions online several times a week and 9% of these use online banking as much as several times a day.

While the number of internet users overall increased only slightly, the quality of infrastructure improved. As in the previous year, the number of broadband connections rose by 9%. In total, almost 63 million Germans use the internet – that is 77% of the population. A quarter of all internet users regularly look online for information on financial and money matters.

The websites of direct banks recorded a total of 7.3 million visitors per quarter, which is down on the previous year. While branch banks clearly dominate in day-to-day online payment transactions, direct banks score well in short-term financial investments and securities trading (as of: July 2011).

A growing number of customers also do their banking on their smartphones. In 2011, this was true of 12.1% of online banking users compared with 7.4% in the previous year (as of: July 2011).

The environment for transaction and service banks continues to be dominated by fierce competition in a challenging market environment. Sluggish demand for investment funds and tighter regulatory requirements (see Regulatory environment) put a strain on ebase’s partners and increased consolidation pressure in the target segments. IFAs are increasingly joining forces to form “liability umbrellas” and are looking for standardised products to reduce their liability risk.

According to preliminary figures from the German Insurance Association (GDV), insurance companies, which are another key target group for ebase, recorded a decline in contributions in life insurance of 5.7%. Benefits paid out increased by around 11%. At the same time, demand for state-subsidised old-age provisioning products increased.

Regulatory environment

With our range of products and services, we are active in tightly regulated markets. The Federal Financial Supervisory Authority (BaFin) and Deutsche Bundesbank are presently responsible for banking supervision in Germany. The core issues under supervisory regulations comprise the solvency, liquidity and lending activities of banks. In our advice business, we are also operating in market segments governed by dense regulation. Implementing new legal and regulatory requirements involves additional cost, for example for the extended documentation requirements for advisory services.

Measures to increase protection for investors continued in reporting year 2011. For instance, IFAs will be governed by the same liability regulations and documentation requirements as bank advisers in future.

The resultant rise in costs has prompted many financial advisers to join the liability umbrella of a group of intermediaries and make greater use of standardised products.

Since April 2011, open-ended property funds have been subject to new capital requirements under the German Investor Protection and Capital Markets Improvement Act. The capital ratio was raised from 30% to 50%. To guarantee the fund’s stability, the minimum holding period was extended to two years. However, small investors can redeem units in the open-ended property funds up to a value of €30,000 per six months at any time and regardless of the twelve-month notice period. Previously the amount was €5,000 a month. The new regulations place additional technical and documentation requirements on the comdirect group.

In addition, the requirements for advice were substantially increased. Since July 2011, as part of their investment advice, investment service providers have had to provide customers with a product information sheet containing all the relevant information on financial instruments in a condensed and readily comprehensible form. To ensure that the staff providing advice are suitably qualified, in future they will be registered with and monitored by BaFin.