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Business performance and earnings situation at the comdirect group

Overall assessment of the economic situation

We once again demonstrated the strength and stability of our business model in the inconsistent market environment in 2011. The comdirect group recorded growth in both business lines, gaining 334 thousand customers overall. Net fund inflows on the part of our customers largely offset the price-related decline in assets under management. With 1.68 million managed custody accounts in the group – 13.6 % more than in the previous year – and a 22.0% rise in securities transactions to 18.7 million, we have further strengthened our position as Germany’s leading online securities broker for modern investors.

This growth stems from the expansion of our range of products and services and attractive terms and conditions on the one hand, and from targeted marketing on the other. Despite a significant rise in growth-related expenses, the comdirect group achieved a new record result of €108.1m, surpassing the previous year's figure by 33.6%.

The comdirect group’s business performance and earnings situation is significantly influenced by the development of the market.

  • As a result of pronounced uncertainty, there were strong price fluctuations in the equity markets which also affected investment and leveraged products. This high level of volatility triggered a substantial rise in the number of orders in the first and third quarters in particular. The comdirect group’s net commission income increased accordingly and exceeded the forecast level.
  • On the other hand, the price-related decline in volume in the fourth quarter led to a drop in sales follow-up commission. However, many customers took advantage of these lower prices for new investments. Net investments in securities totalled €2.3bn, but were unable to fully make up for the price losses.
  • The framework conditions for the reinvestment of customer deposits were characterised by higher money market interest rates on average for the year and the uneven development of risk and liquidity premiums in the bond market. In our forecast we had assumed an even steeper rise in money market interest rates; as a result of the more expansive course adopted again by the ECB from mid-2011, which involved a cut in the key lending rate, the growth curve for net interest income at the comdirect group flattened significantly. In addition, low market interest rates lessen the appeal of financial investment products; however, the deposit volume increased slightly thanks to the large number of new customers.
  • The sovereign debt crisis put pressure on the situation in the bond market and equity market, which in turn adversely affected the result from financial investments. However, by comparison with the rise in net interest income, the impairments recognised on a Greek government bond and losses realised on the selective selling of securities were moderate. Moreover, credit spread widening led to a decline in the revaluation reserve, while higher credit spread volatilities contributed to the increase in market risk. We reduced the comdirect group’s exposure to the PIIGS nations during the reporting year from some €390m to around €70m.

comdirect’s strong market position coupled with its comfortable financial situation and assets, as well as its risk-bearing capability at all times, constitute a sound basis for the continuation of its growth course.

Target/actual comparison of selected key performance indicators in financial year 2011

      2010 Target 2011 Actual 2011
Net interest income before provisions € million   102.1 Increasing 150.8
Net commission income € million   172.8 Stable 182.6
Administrative expenses € million   210.0 Slight increase 232.1
Pre-tax result € million   80.9 Stable 108.1
Deposit volume € million 31.12. 10,338 Stable 10,705
Number of customers B2C   31.12. 1,559,021 Increasing 1,632,467
Multi-product use B2C % 31.12. 53.2 Increasing 59.1
Number of employees   31.12. 1,120 Slight increase 1,148

Business performance

We increased the number of customers by 334 thousand, or 14.6%, to 2,631 thousand in the reporting year, thereby exceeding growth in the previous year (145.5 thousand new customers).

The notable rise is due in part to the success of our product initiatives and marketing campaigns in the B2C business line. Here the number of customers was up the level at the end of 2010 (1,559.0 thousand customers) by 4.7% to 1,632.5 thousand. The total number of custody accounts, current accounts and Tagesgeld PLUS accounts in the B2C business line increased by 10.6%, a much bigger rise than the increase in the number of customers. Product penetration in the business line climbed from 53% to the present value of 59%; the figure indicates the share of customers with at least two comdirect bank products. At the end of 2011, 47.4% of B2C customers had a current account and 75.7% a Tagesgeld PLUS account.

Number of customers of comdirect group as of 31.12.
Total assets under custody of comdirect group as of 31.12.

In the B2B business line the number of customers rose from 737.1 thousand to 998.1 thousand. The increase of 35.4% is essentially due to the first-time inclusion of around 195 thousand Commerzbank custody account customers and the takeover of 30 thousand custody accounts from investment company KanAm Grund as well as further customers of another institutional partner. ebase recorded further gains from the expansion of the fund portfolios of institutional partners and attracted insurance companies here in particular. On the other hand, there were some cancellations of custody accounts for capital-building payments following expiry of the corresponding VL contracts. Nevertheless, unlike the previous year, the effect was moderate since it was possible to transfer some of the contracts into attractive follow-on products. Moreover as a result of the turmoil in the capital markets, some custody accounts at ebase were closed. However, these disposals were of minor importance compared with the additions.

Assets under management declined by 2.2% to €41.59bn (previous year: €42.54bn), reflecting the negative movement in prices in the reporting year. The portfolio volume totalled €30.88bn versus €32.20bn in the previous year. Price-related losses of around €4.9bn were countered by net investments by customers of €2.3bn; our focus remains on keeping net investments at a high level through the expansion of our product offering and attractive fees. The number of custody accounts climbed by 13.6% to 1.68 million.

The modest increase in the deposit volume to €10.70bn (end 2010: €10.34bn) stems from higher customer numbers in the B2C business line.

Marketing, brand awareness and reach

We continued to support our product sales through extensive marketing campaigns and special offers. These again centred on our current account with satisfaction guarantee. As in previous years, online advertising on heavily frequented content portals, above all keyword advertising on search engines, played an important role. In addition, a significant proportion of the marketing budget went on printed advertising placed primarily in general interest media such as TV listings magazines. We also used TV spots.

In addition, there were campaigns for the extended ETF offering in the second quarter and the newly launched CFD trading in the fourth quarter, both of which focused on investor media and portals.

We pooled the advertising measures for our extended brokerage offering in the “Germany’s performance broker” umbrella campaign. This positions us as a quality provider of high-performance trading and investment products with a wide product selection, expert customer services and fair pricing. In addition to our presence in the internet and on German Investor TV (DAF), we took our marketing campaign to the Invest investor trade fair in Stuttgart. comdirect bank experts explained the extended ETF offering among others to a large number of interested visitors.

As Germany’s performance broker we also acknowledge the excellent services provided by other investor information portals. With the financial blog award, presented for the first time in 2011, comdirect bank is recognising weblog operators and authors who provide private investors with a critical appraisal of financial topics together with comprehensible and expert information. An independent jury evaluated 49 weblogs based on journalistic quality, financial expertise and creativity. In 2011, first place went to the editorial team of “Die Börsenblogger” (the stock exchange bloggers).

Our website is particularly important for the level of awareness of the comdirect brand. With around 200 million page impressions on a monthly average, it was once again one of Germany’s most frequently visited financial websites. In the fourth quarter of 2011 we carried out a comprehensive relaunch of our website. As a result of the improved page structure and search function, it is now even easier to find all of the information on products and services. The text content and design was completely revised and the frequent use of tables and lists helps provide a better overview. We also increased the number of our web tutorials, which feature short videos explaining the various content offerings in a descriptive format. Articles on the home page provide information on relevant market and investment related topics at regular intervals.

Our monthly publications relating to the Brokerage Index calculated since May 2010 and the Building Finance Sentiment Index launched in 2009 met with even stronger media interest in the reporting year. This also applied to our advice relating to investment and property finance matters, as well as the “Customer Motives” survey that we publish every year.

comdirect bank’s aided brand awareness remains comparatively high. However, as is the case throughout our industry, this was down slightly on the previous year. In contrast, the loyalty of comdirect customers increased substantially, while the values for likeability and willingness to open an account remained largely constant. The comdirect brand is primarily associated with simplicity, transparent and credible offerings, a good price/performance ratio as well as fast and readily accessible Customer Services.

ebase received a great deal of positive feedback for its “Connecting professionals” roadshow. The knowledge platform for financial intermediaries and other institutional partners was held in cooperation with renowned investment companies in five German cities in 2011. In addition, ebase presented the wide-ranging advantages of its interlinked custody account and deposit account business at the Funds Congress in Mannheim. ebase offers its partners a platform they can use to present themselves in its B2B Journal which is aimed at financial advisers, insurance companies and other partners. At the end of the year, ebase promoted its fixed-term deposit accounts with an interest rate campaign for three-month fixed-term deposits. The offer was only available to a limited number of investors and those who were quick off the mark received a rate of 2.5%.

Customer satisfaction and performance comparisons

The customer satisfaction and loyalty values in the B2C business line, which are calculated once a year by an independent market research organisation, showed an improvement in customer loyalty versus the previous year, especially among current account users. The most loyal sub-group overall were our building finance customers.

The share of customers using comdirect as the main bank for their daily payment transactions rose from 21% to 26%. For a total of 22% of customers with a comdirect current account, we are not just their main bank, we are their only bank.

Customers are particularly satisfied with the customer services provided by comdirect. This includes the fast and expert response to calls and e-mails as well as our user-friendly website.

Performance comparisons conducted by independent media and experts in 2011 also confirm that comdirect bank scores well in terms of its offering and terms and conditions in all fields of competence.

comdirect was the overall winner in the banking test conducted by financial magazine “€uro”, which together with S.W.I. Finance Institut carefully examined a total of 50 banks. Using hundreds of different criteria, the test analysed the banks in various product areas such as current accounts, interest-bearing investments, brokerage and loans, as well as in complaint-handling, customer services and online security. The results were then weighted with the findings of the large-scale customer survey carried out by “€uro”. comdirect impressed with an above-average offering in all areas and was named both “Deutschlands Beste Direktbank” (Germany’s best direct bank) and “Deutschlands Beste Bank” (Germany’s best bank) ahead of all the branch banks tested.

In the 2011 Brokerwahl award ( comdirect won the title of Online Broker of the Year for the third time in a row. Our success was rounded off by our second place ranking in the Fund and ETF Broker category. The readers of “Börse am Sonntag” newspaper also voted comdirect the best Online Broker in 2011. At the EXtra-ETF Awards presented by EXtra Magazin, Börse Stuttgart and n-tv, we came first as the best ETF Direct Bank. “€uro” named comdirect the Best Certificate Provider out of the 16 biggest certificate houses active in Germany. In the online broker test conducted by “€uro am Sonntag”, comdirect achieved first place in the customer services category.

Our performance in advice was also impressive: for the fourth time in a row, the Deutsche Institut für Service Qualität (German Institute for Service Quality – DISQ) named comdirect the best direct building finance intermediary out of the banks. comdirect also came top with the best terms and conditions in the 2011 comparison test.

In the Fox Awards, which recognise particularly efficient corporate publishing solutions, our customer magazine “compass” and newsletter “compact” won the gold medal in the corresponding categories.

Earnings situation

Pre-tax profit rose by 33.6% compared with the previous year (€80.9m) to €108.1m, reaching three figures for the first time in the bank’s history. The record result is primarily due to the increase in net interest and commission income, which is largely based on the growth achieved in the last few years as well as the development of the capital and money markets. By comparison, the opposite trend in the result from financial investments resulting from lower carrying values and losses on disposals played a lesser role.

Pre-tax profit of comdirect group
Earnings per share

In addition, the result was affected by interest payments of €9.2m on a tax refund. The refund stemmed from write-downs to the going concern value relating to the discontinuation of foreign activities in financial years 2001 to 2004. Since these write-downs could not be deducted for tax purposes at the time, comdirect launched tax appeal proceedings. In November 2011, the competent financial authorities ruled in the bank’s favour in the appeal proceedings, as pursuant to rulings by the European Court of Justice (ECJ) and the Federal Fiscal Court (BFH) the non-recognition of the write-downs to going concern value in respect of foreign equity investments in 2001 was against Community Law. The subsequent tax refund boosted after-tax profit totalling €32.4m, while the interest payments are included in other operating result.

The increase in total income of 17.3% was countered by a disproportionately lower rise in administrative expenses of 10.5%. This was mainly due to higher expenses for external services and intensified marketing. The cost/income ratio improved from 72.1% in the previous year to 68.0%. The return on equity (before tax) rose to a very pleasing 21.2% (previous year: 16.8%) and therefore also reached its highest level in the comdirect group’s history.

As a result of the tax refund, the income taxes line item in the previous year (expense of €21.2m) was countered this time by income of €3.7m. The resultant net profit of €111.8m (previous year: €59.6m) corresponds to earnings per share of €0.79 (previous year: €0.42).

Net interest income before provisions
Net interest income on a quarterly comparison 2011

Of the total income, €143.8m (previous year: €112.0m), or 42.1% (previous year: 38.5%), was attributable to the income relating to deposit business and Treasury portfolio management: net interest income, the result from financial investments, trading result and the result from hedge accounting. These earnings components are viewed on a holistic basis also because developments in market interest rates can sometimes trigger opposing movements. The comprehensive income of the comdirect group of €92.4m (previous year: €38.8m) also includes the change in the revaluation reserve. This reflects changes in the value of securities in the “available for sale” category held in the Treasury portfolio, which are attributable to market value fluctuations.

Proposal for appropriation of profits

The Board of Managing Directors and the Supervisory Board will propose to the annual general meeting in Hamburg on 9 May 2012 that the distributable profit of comdirect bank AG calculated in accordance with the German Commercial Code (HGB) of €79.1m be used for a dividend of €0.56 per share (previous year: €0.42). This means a distribution in full of the contributions from the comdirect group’s operating result including the interest payments on the tax refund. The tax refund itself will be partially retained and will therefore be available as additional equity for future growth.

Net interest income and provisions

Higher money market interest rates and bond yields on average for the year had a positive impact on the interest margin in the deposit business and thus on net interest income before provisions. Compared with the previous year (€102.1m), this climbed 47.8% to €150.8m. However, the growth curve weakened in the second half of the year as the ECB’s interest rate cut pushed money market interest rates back down and in addition, yields on bonds with good ratings declined.

Consequently, the rise in interest income of 27.4% to €269.1m (previous year: €211.3m) primarily reflects the higher interest rate level. This is particularly evident in income from lending and money market transactions which rose from €96.7m to the present level of €152.6m. This corresponded to 56.7% (previous year: 45.8%) of interest income. At €115.2m, the income generated by fixed-income and variable yield securities was on a par with the high level in the previous year (€113.5m), although bond holdings reduced over the course of the year.

Compared with interest income, the rise in interest expenses, which totalled €118.2m (previous year: €109.2m), was disproportionately low. The increase of 8.3% particularly reflects the higher deposit interest rate on investments up to €50 thousand in Tagesgeld PLUS accounts. In light of the market and competitive environment, we largely refrained from carrying out interest rate campaigns.

At €–1.3m, provisions for possible loan losses were up on the previous year (€–0.3m) which was dominated by extraordinary effects resulting from the reversal of risk provisioning components. Nevertheless, they remained low. After provisions, net interest income stood at €149.5m (previous year: €101.8m).

Result from financial investments

The negative result from financial investments amounting to €–6.0m includes losses from the selective selling of securities before final maturity. The sales primarily affect bank bonds and are also related to the reduction of our exposure in the PIIGS nations (see Financial situation and assets of the comdirect group). Furthermore, we also wrote down a Greek government bond – our only exposure in Greece – in line with the movement in its market value to 28.2% of its nominal value of €2.3m. This was because of decisions at a political level that private bond investors should voluntarily participate in cutting the debt burden for Greece.

To a lesser extent (€1.2m), the figure also reflected lower carrying values for equities that were necessary because of the movement in prices. Equities are used as an addition to the portfolio mix and are held exclusively via a special fund. The previous year’s result from financial investments (€9.9m) was dominated by the profits realised on the sale of selected bank bonds and other bonds in the market environment at the time.

Trading result and result from hedge accounting

Treasury uses derivative financial instruments to hedge interest rate risks. In the main, interest rate swaps serve to hedge specific bond positions. In addition, forward rate agreements (FRA) are utilised for general interest book management. In light of the market situation, we made greater use of derivatives in financial year 2011 than in the previous year; the nominal volume of interest rate swaps totalled €123m (end 2010: €20m) at the year-end.

Where the hedging derivatives qualify as effective fair value hedges, the results of the valuation of the underlying and hedging transaction are shown in the result from hedge accounting. In the reporting year, this amounted to €49 thousand (previous year: €–22 thousand).

If hedging derivatives cannot be allocated to hedge accounting, we report the results from the valuation of these derivatives in the trading result, which in 2011 stood at €–1.1m (previous year: €0m). As in the previous year, we did not carry out any own trading transactions that were not related to interest book management.

Net commission income

Net commission income totalled €182.6m and outstripped the previous year’s figure (€172.8m) by 5.7%. The rise was especially due to strong price fluctuations in the first and third quarter and the resultant high number of trades in the B2C business line. Overall, net commission income from the securities business was up by 5.0% to €166.0m (previous year: €158.1m). Sales follow-up commission in the funds business were essentially unchanged on the figure for 2010; these are primarily influenced by the level of fund assets, which barely changed on average for the year despite the turmoil in the market. Custody account fees were slightly down on the previous year. This was mainly because of discounted terms and conditions in the B2C business line.

Net commission income
Net commission income on a quarterly comparison 2011

As in the previous year, net commission income from payment transactions reported strong growth, rising by 20.6% to €9.6m (previous year: €8.0m). This was due to the increased number of current accounts and the fees associated with payment transactions as well as card income.

Other commission climbed by 4.5% to €7.0m (previous year: €6.7m) and stemmed primarily from the increased volume of financing placed as part of Baufinanzierung PLUS.

Other operating result

Other operating result was dominated by the interest income relating to the tax refund in the reporting year. The balance of other operating income and expenses of €15.1m (previous year: €6.4m) includes income from interest on the refund amounting to €9.2m. As in previous years, the income side reflects the administrative services carried out by comdirect bank AG and ebase GmbH for other companies in the Commerzbank Group, especially Commerz Direktservice GmbH which acts as the service centre for private and business customers of Commerzbank AG. However, the earnings contribution from these service level agreements was down on the previous year. The reversal of provisions and accruals no longer required also had less of an impact on income than in the previous year, which included the reversal of a provision for contingent losses and restructuring provisions.

At around €2m, other operating expenses were lower than in the previous year, primarily because in contrast to the previous year expenses from services supplied were reported in the administrative expenses.

Administrative expenses

The increase in administrative expenses to €232.1m (previous year: €210.0m) reflects the focus on growth in the comdirect group. We invested a significant portion of our additional income in marketing campaigns. In the second half of the year and the fourth quarter in particular, we stepped up the printed advertisement campaign for our current account; moreover, in October we launched a campaign for CFD trading focusing on media aimed at investors.

Administrative expenses
Structure of other administrative expenses

Higher marketing expenses were the main reason for the rise in other administrative expenses of 10.8% to €147.9m (previous year: €133.4m). Expenses for external services also significantly exceeded the previous year’s figure as a result of the various product initiatives. Higher settlement costs in the securities business also added to the increase as a result of the rise in the number of trades. Communications expenses were up marginally on the figure for 2010. Here non-recurring expenses of €1.0m were incurred in relation to the purchase of price data for the information offering on comdirect’s website.

At €67.5m, personnel expenses were up by 7.8% on the previous year’s figure (€62.6m). In addition to higher deferrals for performance-related compensation components required as a result of the positive development in earnings, expenses increased as a result of lower cost capitalisation for internally generated intangible assets compared with the previous year. Moreover, the figure also comprises the annual salary adjustments, including the non-recurring adjustment effects from implementing the further-developed compensation systems in the B2C business line.

Depreciation rose to €16.7m (previous year: €14.1m). As usual, scheduled depreciation remained low at €14.7m. The increase in depreciation was due to unexpected write-downs on intangible assets amounting to €2.1m required in the financial year. Migration to comdirect products has been faster than originally forecast, and as a result, the Amex customer base acquired in 2006 was written down by a further €0.9m in addition to the scheduled depreciation. The remaining extraordinary depreciation related to internally generated intangible asses used in the B2C segment as part of portfolio optimisation. Intangible assets therefore accounted for €12.7m in total compared with €9.4m in the previous year.

Depreciation of €4.0m related to office furniture and equipment (previous year: €4.7m) (see note (33)).