Bundesbank posts distributable profit of €0.4 billion in 2016
The Bundesbank posted a profit of €1 billion for the 2016 financial year, representing a year-on-year fall of €2.2 billion. Speaking at the press conference on the annual accounts, Bundesbank President Jens Weidmann attributed this to higher risk provisioning.
However, the Bundesbank is unable to distribute its entire annual profit this year due to preparing its balance sheets in accordance with an amendment to the German Commercial Code (Handelsgesetzbuch). Pursuant to the amended provision, post-employment benefit obligations must now be discounted at the average market rate from the preceding ten financial years – previously it was the average of the preceding seven financial years. This amendment resulted in a higher discount rate for the Bundesbank, which led to a book profit of €0.6 billion for 2016. However, as this profit cannot be distributed, it was necessary to transfer it to a reserve. Distributable profit in 2016 therefore amounted to €0.4 billion and was transferred to the Federal Ministry of Finance in full on Thursday.
Significant increase in risk provisioning
"What is reflected, above all, in our balance sheet this year are the decisions to purchase bonds on a large scale and to charge a negative rate of interest on banks’ deposits with the Eurosystem," Dr Weidmann said of the annual accounts. He noted that the interest rate risk to which the Bundesbank is exposed has soared owing to its growing stocks of assets.
These risks have arisen because the Bundesbank stands to earn only a very low rate of interest on the securities acquired under the Eurosystem’s purchase programmes, he explained, while the rate that it pays on banks’ deposits could rapidly rebound in the future if key interest rates are raised. In view of this, the Bundesbank has increased its risk provisioning and raised its provisions for general risks from €13.6 billion in 2015 to €15.4 billion last year. Dr Weidmann indicated that the Bundesbank is likely to further increase its risk provisioning for interest rate risk in 2017, too.
Net interest income growth
Once again, interest income made the biggest contribution to profit for the 2016 financial year, accounting for €3.7 billion. This equates to a year-on-year rise of €0.4 billion. Interest income climbed mainly on the back of the negative interest imposed on credit institutions’ deposits, which had risen by €1.1 billion to €1.4 billion, commented Bundesbank Executive Board member Carl-Ludwig Thiele, whose responsibilities include overseeing accounting and controlling. Accordingly, net interest income rose by €1 billion to €3.3 billion.
The item "Revaluation accounts", which also includes gold and foreign currency holdings, rose by a considerable €13.9 billion on the year to €119.7 billion, mainly on account of the significantly higher market price for gold. However, this item has no impact on profit for the financial year as it is subject to market price movements.
The Eurosystem’s asset purchase programmes pushed up total assets by €381 billion to €1,400 billion in 2016.
"This means that total assets have now well and truly passed the €1,000 billion mark," commented Mr Thiele. He added that, besides asset purchases, inflows of liquidity from other European countries were another factor driving growth in total assets, raising the Bundesbank's TARGET2 claims on the European Central Bank (ECB) by €170.1 billion to a new record high of €754.3 billion.
Far removed from the threat of deflation
Turning his attention to the economic situation, Bundesbank President Dr Weidmann commented that the upturn in the euro area is firming and the latest economic indicators point to a continuation of the economic recovery. Overall euro-area growth amounted to 1.7% in 2016 and, according to the Eurosystem projection from December, it will increase by the same amount this year. The German economy also remains in good shape, said Dr Weidmann, with the Bundesbank’s economists expecting growth to come to 1.8% in 2017.
Dr Weidmann noted that, as a result of the upswing, inflation has also risen more strongly than expected, recently hitting 1.8% in the euro area. However, he pointed out that this increase is attributable mainly to higher oil prices, and domestic price pressures are currently still comparatively low. That said, he continued, this development shows that the euro area is far removed from the threat of deflation.
"In this state of affairs, an accommodative monetary policy certainly continues to be appropriate, though opinions differ over the right degree of monetary accommodation," the Bundesbank President explained, before going on to say that he would personally be prepared to accept a lower degree of monetary accommodation.