2005 an outstanding year for Van Lanschot

 

 

 

Van Lanschot's strategy focuses on reinforcing its position in private banking by differentiating itself even more strongly on the basis of its investment expertise. The number of investment categories has been increased substantially, opting for current topics such as energy and the emergence of China. We have worked hard, and very successfully, to integrate CenE Bankiers. Since 1 October, most of CenE Bankiers's activities have continued under the name F. van Lanschot Bankiers. Van Lanschot is now using the CenE Bankiers name exclusively for healthcare. Van Lanschot made further efforts to raise its profile as a business bank. The acquisition of CenE Bankiers enhanced its expertise in Structured & Leveraged Finance and Property.

 

Van Lanschot recorded many commercial successes in 2005. The cross-selling ratio rose, demonstrating that Van Lanschot has been able to offer more services to clients. A number of innovative investment products were introduced. In February 2005, Van Lanschot received an FD Morningstar award for its Global Bond Fund. In November 2005, Theo Kraan, director of Private Investments at Van Lanschot, won a Lifetime Achievement Award for investment advisers. Van Lanschot was recently named by Beleggers Belangen magazine as the bank giving the best advice on investing in Dutch equities in 2005.

 

 

Certain non-recurring factors will affect the result for 2006. Firstly, part of the healthcare provision for future retired staff formed in 2005 will be released as a result of the introduction of the new healthcare system. Secondly, amortisation of acquired surplus associated with the acquisition of CenE Bankiers will fall from € 15.7 million in 2005 to € 9.2 million in 2006. On balance, we expect these non-recurring items to have a positive effect of some € 25 million on the gross operating profit for 2006.

 

Private investors have greater confidence in the stock market and this was expressed in further growth in transaction volumes in the first couple of months of this year, continuing the trend of the final months of 2005. It is, however, still too early to talk of a lasting recovery. Transaction commission, which is directly linked to the number of securities orders, makes up 70% of our securities commission. The remainder relates to fees which are linked to the volume of securities portfolios. Demand for residential mortgages is holding up but could be tempered by rising interest rates. Demand for corporate lending is picking up thanks to the moderate improvement in the economy. 2006 started well and Van Lanschot is therefore looking forward to the year with confidence.

 

Net profit rose by 51.2% in 2005 from € 100.8 million to € 152.4 million and earnings per share were up by 36.8% from € 3.40 to € 4.65. The figures for 2005 are not, however, directly comparable with those for 2004. The result of CenE Bankiers, which was acquired by Van Lanschot on 30 September 2004, was included for a full year for the first time in 2005, while only the fourth quarter was included in 2004. The 2004 income statement has been restated to improve comparability by extrapolating CenE Bankiers's result for the fourth quarter of 2004 into a full-year result. After restatement, net profit rose by 30.2% from € 117.1 million in 2004 to € 152.4 million in 2005.

 

 

 

Income from operating activities rose during the year from € 465.2 million to € 485.8 million, an increase of 4.4%. Excluding amortisation of acquired surplus, the increase was 6.6% (from € 470.6 million to € 501.5 million).

 

Interest income was up 8.1% from € 279.5 million to € 302.1 million (excluding amortisation of acquired surplus). The increase in penalty interest from € 6.0 million in 2004 to € 16.5 million in 2005 made a substantial contribution to this. The lending portfolio also grew significantly. Continuing competition in the market for residential mortgages however caused a further reduction of 12 basis points in the interest margin from 1.78% to 1.66%. Including amortisation of acquired surplus, interest income rose by 4.5% from € 274.1 million to € 286.4 million. The amortisation of acquired surplus is a result of the acquisition of CenE Bankiers, whereby the difference between the fair value and net book value is being amortised over the fixed-interest term. The fair value of these assets was some € 36.0 million higher than the net book value. Amortisation of this resulted in a charge of € 15.7 million to the result for 2005, reported as interest; € 5.4 million had already been charged to the result in 2004. The amortisation of acquired surplus in the future is expected to be:

2006                                       € 9.2 million

2007                                       € 4.6 million

2008                                       € 0.9 million

 

Income from securities and associates rose from € 16.7 million to € 20.5 million during the year. This favourable development was due mainly to higher dividends on equities in the investment portfolio which, excluding Ducatus, amounted to € 9.5 million in 2005 (2004: € 6.4 million).

 

Commission income rose by 8.6% from € 153.2 million to € 166.3 million. This increase can be attributed mainly to securities commission, which increased 10.6% from € 101.2 million to € 111.9 million, in line with positive stock market performance and as a result of higher client numbers. Insurance commission rose from € 26.4 million to € 27.1 million, while commission on cash transactions and funds transfers remained more or less stable at € 18.4 million.

 

Profit on financial transactions fell from € 21.2 million in 2004 to € 12.6 million in 2005. This figure is not entirely comparable with that of 2004 as IAS 32 and IAS 39 were not yet applied in 2004. The profit on financial transactions includes realised and unrealised gains and losses on the trading portfolio, foreign exchange gains and losses, the result on the ineffective portion of hedging derivatives, and realised and unrealised results on derivatives for balance sheet management. An interest rate rise was anticipated in the autumn of 2005 but interest rates fell briefly at the end of the year and this had an adverse impact of € 6.9 million on the profit on financial transactions in 2005.

 

Total operating expenses fell by 4.3% in 2005 from € 290.8 million to € 278.4 million. Acquisition and integration costs of CenE Bankiers of € 23 million were charged to the result in 2004. Excluding this provision for 2004, operating expenses in 2005 would have risen by 3.7%. Much of this increase in operating expenses, € 7.7 million, was a result of applying IFRS, under which additional pension charges, future contributions to healthcare insurance and the cost of the share option plan are recorded as staff costs. A start was also made in 2005 on modernising the IT systems.

 

Depreciation and amortisation went up from € 18.7 million to € 20.1 million. This increase of 8% related mainly to the amortisation of intangible assets, € 1.8 million of which resulted from the acquisition of CenE Bankiers.

 

At € 16.9 million, the addition to the value adjustment to receivables was lower in 2005 than in 2004 (€ 21.1 million). As a percentage of average risk-weighted assets, the addition to the value adjustment to receivables fell from 0.20% in 2004 to 0.15% in 2005. Write-offs in 2005 amounted to € 15.8 million.

 

Tax on operating profit in 2005 was € 38.1 million, representing a tax burden of 20.0% (2004: 23.6%).

 

The efficiency ratio (operating expenses as a percentage of income from operating activities) improved from 62.5% to 57.3% as a result of the above developments and, therefore, returned to the target level of between 50% and 60%.

 

 

The integration of CenE Bankiers has progressed completely satisfactorily and more quickly than expected. This was also the case for the cost synergy from the integration: the expected synergy gains for 2005 were € 6.6 million (60% of the final savings), with the full amount of synergy gains of € 11.0 million not expected to be realised until 2007, but this figure was already almost fully achieved in 2005. Both technical and financial integration have been fully completed. Client turnover as a result of the integration was very limited even though the conversion of all the systems did cause some inconvenience to CenE's clients. Van Lanschot is doing everything possible to limit the effects on clients. The integration also affected our staff in terms of additional pressure of work and uncertainty about whether their positions would be retained or be relocated.

 

 

Van Lanschot Belgium again achieved progress in our second home market. Net profit rose from € 0.5 million in 2004 to € 3.4 million in 2005. The bank attained clear gains in market share: the number of clients increased by 10%, almost all of whom were Belgian private individuals. The higher end of the private banking market in Belgium is about the same size as in the Netherlands. Funds entrusted rose from € 0.6 billion to € 1.1 billion (+83%). As in the Netherlands, there was considerable demand for Index Guarantee Contracts. Off-balance-sheet assets in custody likewise saw a significant increase (+21%) from € 1.6 billion to € 1.9 billion. Van Lanschot differentiates itself in the Belgian market for higher-end mortgages and therefore the lending portfolio also rose sharply, by 45%, from € 263 million to € 381 million.

 

 

During the year, the profit on international private banking activities remained at € 10.4 million, the same level as in 2004. Van Lanschot Luxembourg's result was a little better than in 2004 thanks to a combination of higher securities income from improving stock markets and a limited rise in expenses. Van Lanschot Curaçao also reported a slight increase in profit as a result of higher interest income and lower staff costs. There was a slight drop in Van Lanschot Switzerland's profit as a result of an increase in costs.

 

 

Assets managed by the bank rose from € 5.3 billion to € 5.9 billion during the year. Of this, about 40% was generated by the net inflow from the growth in the number of clients and the successful introduction of new investment products and funds, while rising share prices also played a role. Total assets in custody for clients rose from € 16.1 billion to € 18.3 billion. Not only off-balance-sheet assets in custody and under management rose, but demand for the Index Guarantee Contracts, which are recorded on-balance-sheet continued to be very strong. This resulted in an increase in Index Guarantee Contracts from € 654 million in 2004 to € 870 million in 2005.

 

 

 

Total assets rose by 8.4% in 2005 from € 16.6 billion to € 18.0 billion. Lending grew by 6.7% from € 12.7 billion to € 13.5 billion. This was mainly the result of an increase in the residential mortgage portfolio which rose by 7.4% from € 6.8 billion to € 7.3 billion, partly because of a continuing strong mortgage refinancing market. Total corporate lending also performed well, rising by 13.6% from € 4.4 billion to € 5.0 billion thanks to the greater willingness of businesses to invest and Van Lanschot's higher profile as a business bank. The bank's risk-weighted assets grew by 9.4% from € 10.6 billion to € 11.6 billion.

 

Private and public sector liabilities rose by 3.7% from € 11.0 billion to € 11.5 billion, chiefly as a result of the increase in current account balances (part of other funds entrusted). Savings remained at the same level. Van Lanschot was able to maintain this level as a result of calmer conditions on the savings market. Growth in the balance sheet was financed chiefly by the issue of Floating Rate Notes as part of the Euro Medium Term Note programme arranged by the bank in 2003 and therefore debt securities in issue rose by € 0.7 billion from € 2.5 billion to € 3.2 billion.

 

Shareholders' funds were € 1,279 million at 31 December 2005. The increase of € 269 million can be attributed mainly to the issue of a perpetual loan of € 150 million in 2005 and retained profits.

 

Adjusted for the interest on the perpetual loans, the return on average shareholders' funds during the year was 16.3%, compared with 13.1% for 2004. The BIS Tier 1 capital ratio rose from 9.2% to 9.4% and was, accordingly, well above the minimum 4% requirement. BIS total capital ratio rose from 11.8% to 13.5%, against a minimum of 8%. Credit rating agency S&P reconfirmed its rating on Van Lanschot (A- with a positive outlook) in 2005.

 

 

During the year, we announced an extensive upgrading of our IT systems. This long-term project is proceeding according to plan although we are allowing for the fact that hourly rates for IT services will rise faster than originally expected and this will have the effect of raising overall spending on the IT project. This will have only a limited impact on results, however.

 

 

The 2005 dividend has been computed on the basis of the net profit of € 152.4 million. After deduction of € 4.2 million for interest on the perpetual loans and a net adjustment of € 10.8 million for amortisation of acquired surplus, the profit available to shareholders for 2005 was € 159.0 million. The average number of shares in issue was higher in 2005 than the previous year owing to a new issue in November 2004 and was 31.9 million compared with 28.7 million in 2004. This resulted in an amount available to shareholders of € 4.99 (2004: € 4.22), based on the average number of shares in issue. As in previous years, it is proposed to pay out 50% to shareholders as dividend. Subject to the approval by the General Meeting of Shareholders, the dividend for 2005 will therefore amount to € 2.50. The dividend will be distributed in cash.

 

 

 

Van Lanschot further refocused its investment policy for the private market in 2005. The number of investment categories was expanded, ensuring better diversification. A number of new and innovative products, such as the Bond Opportunity Fund (€ 137 million subscribed), the Egeria Private Equity Note (€ 44 million subscribed) and the Eurozone Trigger Note (€ 36 million subscribed) were launched. Clients also continued to show a lot of interest in Index Guarantee Contracts: funds invested in these rose by € 216 million. The number of private target-group clients grew by 3.5% in 2005.

 

A new dimension has been added to Van Lanschot's private banking policy with the acquisition of CenE Bankiers. We are now focusing on specific professional target groups, such as business professionals (accountants, tax advisers, civil-law notaries and advocates), executives of listed companies, leading sportsmen and women.

 

Van Lanschot uses an 'open architecture' distribution system, applying the 'best in class' principle when offering products to clients from the broad range of investment funds available. The introduction of the Van Lanschot Manager of Funds concept in February 2005 closely dovetails with this principle: a portfolio of investment funds is set up and managed actively according to the client's risk profile. At the end of the year, clients had already invested € 170 million in Van Lanschot Manager of Funds.

 

We give great attention to our duty of care to clients. Regulation in this area, including the Client Due Diligence regulation, the Financial Services Act and the Act on Market Abuse, is developing significantly. Much attention is given to properly implementing these regulations through internal rules and procedures and staff training and information.

 

Pressure on margins in the residential mortgages market increased further. There was also a considerable market for mortgage refinancing as a result of historically low money and capital market interest rates. Van Lanschot differentiates itself in this market by providing personal, proactive advice. Van Lanschot Rente Advies was introduced, in which we advise clients on the effect of interest rate changes on their gross monthly expenditure on financing, based on their financial situation and risk profile. A number of new countries were added to Kroonwonen Buitenland, the concept that focuses on purchases of principal residences and second homes abroad. Total gross new mortgages rose by almost € 1.2 billion. The net increase was € 0.5 billion, raising the total residential mortgage portfolio to € 7.3 billion.

 

Overall, net interest income rose by 9.6% during the year, while commission income rose by 24.9%. The operating profit before tax of the Private Banking segment grew by 12.6% from € 82.3 million in 2004 to € 92.7 million in 2005.

 

 

A feature of our approach to the business market is co-entrepreneurship: we do not work 'for the client' but 'with the client'. The Van Lanschot Zakenplan, based on the interdependence of entrepreneurs' private and business interests, was launched as part of this. The acquisition of CenE Bankiers enhanced Van Lanschot's profile by further raising its expertise in various areas, such as Structured & Leveraged Finance and Property. These specialities also increased the number of interfaces between business and private banking. The new departments concluded numerous attractive deals during the year, such as transactions involving Koning & Hartman and Holland Railconsult.

 

During the year, Van Lanschot made a specific effort to raise its business banking profile with TV commercials, full-page newspaper adverts and local activities. This higher profile led to a 5.0% increase in the number of corporate clients, while the total corporate lending portfolio grew by 13.6% from € 4.4 billion to € 5.0 billion. This segment recorded an operating profit before tax of € 30.8 million in 2004 which grew to € 39.0 million in 2005 (up 26.6%).

 

 

For the Healthcare segment in particular, the figures for 2005 are not comparable with the 2004 figures. The results of CenE Bankiers, which Van Lanschot acquired on 30 September 2004, are included for the full year for the first time in 2005. Moreover, the composition of the segments was changed in 2005 and it was not possible to apply this new segmentation with retroactive effect to the figures for 2004. The new segmentation would involve a reallocation from Private and Business Banking to Healthcare in 2004.

 

Van Lanschot has decided to retain the CenE Bankiers name for this market segment, as a result of the profile, solid reputation and strong market position that CenE Bankiers has had in the healthcare sector for a long time. CenE Bankiers focuses on care institutions, medical practitioners and pharmacists and holds substantial shares in these markets. As CenE Bankiers is now part of Van Lanschot, our clients in the healthcare sector can benefit from our branch network and they now have a complete range of investment and insurance products available.

 

The ageing of the population and medical technology, which offers more and more opportunities, are leading to greater demand and higher expenditure. The Dutch healthcare system is anticipating this with a transformation from centralised supply management to a regulated but more market-driven approach, with increasing entrepreneurial scope. We expect these developments will be beneficial to us in the coming years.

 

 

Institutional asset management

There was keener competition in this market, partly from foreign players, and this put volumes under pressure. The competition is most noticeable among large institutions and so our institutional asset management department is focusing increasingly on smaller institutions, associations and foundations as well. Pension fund managers, and increasingly also congregations, religious orders, associations and foundations, have a growing need for support from expert partners. Van Lanschot recognised this demand some years ago and offers these institutions expertise and additional services under the name Van Lanschot Charitas. There was again considerable interest for this during the year.

 

Institutional brokerage

Increasingly, this department is focusing on professional investors and in that context our activities for professional market parties have been reconsidered and now largely phased out. Despite serious pressure on margins, the international brokerage department managed to keep its result for the year up to the mark.

 

Participation in the European Securities Network (ESN) continues to be a significant cornerstone of the institutional securities business, allowing a 'multi-local' European product to be offered. Our position as a specialist investment bank was further underlined by a number of awards for our team of analysts. Beleggers Belangen magazine named Van Lanschot as the bank offering the best investment advice on Dutch equities in 2005.

 

Insurance

Van Lanschot Assurantiën is one of the larger Dutch insurance brokers. Van Lanschot sees clear added value in both private banking and business banking from offering insurance products. Van Lanschot Assurantiën, therefore, works closely with our branches. In 2005, about two-thirds of Van Lanschot Assurantiën's income came from the corporate market and one-third from the private segment. New concepts, such as the Commissarissen Plus Polis (for supervisory directors) and a policy for pharmacists, were developed for both groups. In the private market, the Kapitaalverzekering Eigen Woning (home owners' endowment insurance) and the Lijfrentemonitor (annuity monitor) were much in demand. The introduction of basic healthcare insurance and the replacement of the Occupational Disability (Insurance) Act (WAO) by the Work and Income (Fitness for Work) Act (WIA) led to additional growth in clients in the corporate market.

 

Annual General Meeting of Shareholders: 10 May 2006

Ex-dividend date: 12 May 2006

2005 dividend available for payment: 17 May 2006

Publication of half-year figures: 22 August 2006

 

Publication of 2006 figures: 23 March 2007

Annual General Meeting of Shareholders: 10 May 2007

 

 

's-Hertogenbosch, 16 March 2006