Annual Report 2018

Portfolio

EAA – the portfolio in 2018/2019

Significant advances have been made in winding up the assets of former WestLB AG. The volume of all securities and loans in the banking book transferred to the EAA has already been reduced by around 88%. The nominal volume of derivative products in the trading portfolio has been reduced by around 84% on a cumulative basis since its transfer to the EAA.

The volume of loans and securities decreased by around EUR 5 billion in 2018 alone while the nominal volume of mostly derivative financial products in the trading portfolio fell by some EUR 35 billion.

  • The portfolio is nominally smaller than we expected for this period; at the same time, its quality is better.
  • Despite declining income as a result of the reduction in the portfolio, the EAA has been able to avoid losses since 2012 and created higher reserves than expected.

The remaining banking book of around EUR 18 billion includes large portions which can basically be wound up over the short to medium term. Generally speaking, similar options exist in the trading portfolio.

Wind-up examples for formerly important clusters

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  • Project finance was predominant in the EAA’s loan portfolio at the end of 2018. A significant portion thereof is in the energy sector, with a focus on power plants on the basis of conventional and renewable energies in Europe. Infrastructure projects constitute another focus.
  • The securities portfolio mostly includes European government bonds, the biggest exposures in this sector are in Italy and Portugal.
  • The portfolio structured products mainly includes the “Phoenix portfolio”, which is based on loans in the US housing market and was affected by huge losses in value during the financial crisis. The Phoenix volume has since been reduced from EUR 22.9 billion to EUR 4.9 billion. US student loans or educational loans constitute a further focus.

In the past fiscal year 2018 the EAA has systematically reduced the complexity and risks of the banking book portfolio through individual measures such as restructurings, early repayments and liquidations. The range of product categories, regions, quality and currencies of the remaining portfolio does, however, remain interesting to investors with differing investment focus.

Most of the financial products in the portfolio enjoy very good to average ratings, although individual subportfolios record higher ratios of non-performing (and, as a result, impaired) exposures. A good half half of the portfolio is denominated in EUR, with a further 40% in USD.

At present, the banking book portfolio of the EAA includes 52 direct and 44 indirect participations. The EAA’s winding-up process has focused primarily on exposures whose business operations may give rise to operational risks. In 2018, the EAA focused particularly on participations with a high book value of participations, high hidden reserves and complex structures. In this context 14 direct participations were sold or liquidated.

  • Material operating participations have been sold, as a result of which additional financial and operational risks have been eliminated.

Since 2010, a total of around 300 participations have been transferred to the EAA, of which 96 (direct and indirect) are still on the EAA’s books today. In addition to participations, the EAA took over around 1,400 special-purpose vehicles; by the end of 2018 their number had fallen to 264.

The liquidation of participations and special-purpose vehicles frequently takes a considerable amount of legal time and effort. As a result, the liquidation of a single company can extend over years because it might be subject to foreign legislation or because it requires the approval of the supervisory authorities.

  • The EAA has realised considerable value through the restructuring of participations and loan exposures.