Van Lanschot's 2006 first-half profit up 20%

 

 

 

 

DEVELOPMENTS IN FIRST HALF OF 2006

In the first six months of 2006, Van Lanschot realised a balanced growth against the backdrop of rising interest rates. Private investors were extremely active and this resulted in a strong rise in the number of share transactions, even though these investors demonstrated more restraint after the stock market correction in the second quarter. The number of both private and corporate clients showed solid growth.

 

Van Lanschot showed a healthy growth in all its private banking services in the first half of 2006, despite increased competition in this area. The number of target group clients was up by 2.7% and the mortgage portfolio increased 2.7% to € 7.5 billion. Savings accounts increased by 21.6% to € 3.1 billion. In the first half of 2006, the number of share transactions by private investors rocketed 25% compared with the same period in 2005, leading to a strong rise in securities commission. The activities in Belgium also showed firm growth again. The number of clients was up by 4.1% in the first half of 2006 and gross profit shot from € 1.6 million in the first half of 2005 to € 3.6 million. In addition, Van Lanschot is stepping up its focus on the higher client segments. The arrival of a team specialised in international wealth management in April 2006 reflects this strategy.

 

The net inflow of assets managed for private clients increased sharply by 11% to € 2.8 billion. The Manager of Funds concept, which was introduced last year, was continued with success. The amount invested in this concept more than doubled from € 170 million to € 390 million. The Index Guarantee Contracts also stayed very popular; the amount invested in them rose 15.7% to € 1.0 billion. Within the scope of its open architecture strategy, the bank decided to terminate its Far East Equity Fund and ICT Fund. This held back the growth of the total assets managed by the bank.

 

Business banking experienced a solid growth in volume; the corporate loans portfolio was up by 6.9%. This could be attributed in part to Van Lanschot's raised profile as a bank for family businesses, among other things through a successful and award-winning advertising campaign. The number of corporate target group clients climbed 2.7%.

 

In this segment, the number of target group clients among medical professionals and pharmacists showed a growth of nearly 10%. This resulted in an increase in loans and advances and savings accounts. However, loans and advances to large healthcare institutions stagnated.

 

In the first half of 2006, Van Lanschot again invested heavily in organisational quality and it will continue to do so. With this, the bank intends to raise the level of service to its clients even further. For this purpose, the IT environment is being upgraded drastically. In the first half of 2006, a total of 186 people (both employees and external specialists) worked on the preparations for the implementation of the first modules.

 

In addition, extensive efforts were made within the scope of the implementation of new laws and regulations such as Basel II and the Dutch Financial Services Act (WFD).

 

Wage costs rose due to the increasing shortage of financial specialists. Van Lanschot will have to stay competitive in the market by offering good employment conditions in order to attract and retain enough private bankers with the requisite expertise. Furthermore, the workforce grew by 5% and additional charges were incurred for stock option plans and pensions. Thanks to the release of the provision for healthcare costs of € 19.5 million, staff costs dropped on balance. This release has a distorting effect on the efficiency ratio.

 

As a medium-sized bank, Van Lanschot has the balance between profitability and financial solidity high on its list of priorities. The success of our strategy is emphasized by the upgrading of Standard & Poor's credit rating from A- (A minus) to A (Single A) in the second quarter of 2006. Fitch Rating already awarded Van Lanschot a single A rating previously. With Standard & Poor's upgrading we have achieved one of our main strategic objectives.

 

During the General Meeting of Shareholders on 10 May 2006, Van Lanschot presented the bank's refocused strategy. The growth target for earnings per share, for example, was increased from an average 10% per year to at least 10% per year. The targeted return on shareholders' funds was increased from an average of 15% to an average of 18%. In addition, a new target was introduced, i.e. a growth in income of at least 5% per year.

 

OUTLOOK FOR SECOND HALF OF 2006

Market trends

For the second half of 2006 we expect the yield curve to level off further. Owing to a rising long-term interest level, the market for refinancing existing mortgages will gradually dry up, leading to less penalty interest income. In addition, overcapacity in the market will mean further pressure on the interest margin. For the remainder of 2006, we expect a lower number of securities transactions than in the first months of 2006 in particular.

 

The IT project will substantially improve the automated systems of both the front office and back office. At the end of the year, the improved internet site, including an enhanced online banking system and a personalised home page for each client, will be launched. Furthermore, we will start the implementation of the first part of the Customer Relationship Management (CRM) system Siebel. Even though the first modules will be implemented shortly, this project has a long-term nature and will call for major efforts from our organisation.

 

The bank's capital expenditure on the organisational quality placed an upward spiral on costs in the first six months of the year. In order to avoid too much pressure on profitability, the bank has taken measures in the meantime to curb the cost increase in the second half of the year. The use of external employees will be critically examined, new priorities have been set for current and planned projects and targeted cost savings will be introduced in each business line. The enhancement of the quality of the organisation will however continue unabated.

 

In the course of the second quarter, a further decline in the interest margin and the stock market correction gradually dampened market conditions. Van Lanschot now reckons with a continuation of this trend in the second half of the year. The bank remains determined to keep investing heavily in the further enhancement of the quality of the organisation. Consequently, Van Lanschot now believes that a rise in earnings per share of at least 10% in 2006 will be difficult to achieve.

 

In the first half of 2006, profit reached € 92.8 million, a 20.0% boost compared with the first half of 2005 (€ 77.3 million). Earnings per share were up 17.9% from € 2.35 to € 2.77 and the amount available to shareholders rose 13.9% from € 2.52 to € 2.87.

 

Operating expenses for the first half of 2006 were positively impacted by € 9.0 million on balance by a number of exceptional items recognised under staff costs:

costs of stock option plan                                                              €    5.8 million

release of provision for healthcare costs (non-recurring)                 €   -/- 19.5 million

higher pension charges                                                                  €    4.3 million

other expenses                                                                             €    0.4 million

                                                                                                                €   -/- 9.0 million

 

Income from operating activities rose by 10.2% from € 243.7 million for the first half of 2005 to € 268.4 million for the first half of 2006. Exclusive of the line item 'amortisation of acquired surplus', income from operating activities was up 8.5% from € 251.6 million to € 273.0 million.

 

Net interest income, exclusive of amortisation of acquired surplus, declined by 5.0 % from € 147.8 million to € 140.4 million mainly as a result of the continued squeeze on the interest margin. This squeeze can be explained by the ever continuing competitive pressure on the mortgage market and by the levelling off of the yield curve. The interest margin, which already showed a slide in 2005 from 1.78% to 1.61%, further fell to 1.48% in the first half of 2006.

 

There was a healthy growth in the loans portfolio in the first half of 2006 from € 13.5 billion to € 14.3 billion, i.e. a 5.7% increase. Compared with the first half of 2005, penalty interest dipped from € 7.4 million to € 6.7 million. Until 2006, gains and losses on the sale of available-for-sale interest-earning securities were recognised under net interest income. These gains and losses are now included under the line item 'profit on financial transactions'. The comparative figures for 2005 have been adjusted accordingly. For the first six months of 2006, this involved an amount of € 1.4 million. In the comparable period in 2005, gains and losses on available-for-sale interest-earning securities were nil, for the second half of 2005 this amounted to € 7.8 million.

 

Net interest income, inclusive of amortisation of acquired surplus, declined 2.9% from € 139.9 million to € 135.8 million. The amortisation of acquired surplus arose from the acquisition of CenE Bankiers and relates to the difference between the fair value and the carrying amount of the assets and liabilities which is being amortised over the fixed-interest term. The fair value of those assets exceeded the carrying amount by approximately € 36 million. Amortisation of this difference led to a charge to profit for the first half of 2006 of € 4.6 million. In 2004 and 2005, € 5.4 million and € 15.7 million respectively were already charged to profit. Future amounts to be recognised as amortisation of acquired surplus are expected to be as follows:

 

Income from securities and associates jumped from € 8.7 million to € 14.7 million, a € 6.0 million rise, thanks to the sale of shares from the investment portfolio. This item also comprises dividend distributions on shares in the investment portfolio. This income (excluding Ducatus) totalled € 5.8 million (first half-year 2005: € 4.8 million).

 

Commission income went up from € 83.1 million to € 91.1 million, i.e. a 9.6% rise, which can mainly be attributed to securities commission. This commission was up 13.2% from € 55.7 million to € 63.0 million thanks, in part, to the positive trend on the stock markets, which led to a 25% rise in the number of share transactions by private investors compared with the same period last year. Insurance commission climbed from € 13.8 million to € 14.5 million. Other commission, including commission on fund transfers, remained stable at a level of € 13.6 million.

 

Profit on financial transactions shot from € 12.0 million to € 26.8 million thanks to the unwinding of the interest rate derivatives, the revaluation of interest rate derivatives for which no hedge accounting may be applied and the profit on the sale of bonds from the investment portfolio. In the first quarter of 2006, the interest rate derivatives were terminated, resulting in a profit of € 6.9 million. At year-end 2005, these interest rate derivatives caused an unrealised loss of € 6.9 million.

 

Total operating expenses rose by 6.2% from € 138.5 million to € 147.0 million. On balance, staff costs fell by € 3.2 million to € 87.2 million. Exceptional items had a positive impact on staff costs for an amount of € 9.0 million on balance. When ignoring this impact, staff costs were up € 5.8 million, i.e. 6.4%. This rise can be attributed to our investments in staff quality and retaining staff and the 5% increase in the workforce from 2,195 to 2,303. Other administrative expenses amounted to € 50.7, a rise of € 12.4 million. The increase is not only attributable to several projects resulting from compliance with laws and regulations, but also to capital expenditure for enhanced client services and transaction processing.

 

Depreciation and amortisation fell to € 9.1 million (H1 2005: € 9.8 million) as a result of a number of assets being fully depreciated or amortised. In view of the major capital expenditure, depreciation and amortisation charges will rise in due course.

 

Value adjustments to receivables were down by € 5.1 million because a number of major provisions in the loans portfolio were released. This means that it is at present unlikely that the addition to the item 'value adjustments to receivables' as a percentage of average risk-weighted assets will reach the level of 15 basis points on an annual basis. The full amount of doubtful debtors is covered by provisions and security. Loans written off totalled € 3.1 million in the first six months of 2006.

 

The tax charge increased from 21.2% to 22.3%, which can be attributed in part to the satisfactory increase in the operating profit of Van Lanschot Belgium.

 

The efficiency ratio, i.e. the ratio of operating expenses to income from operating activities, improved from 56.8% to 54.8%.

 

A breakdown of profit by business line is included on page 8 of this press release.

 

Total assets as at 30 June 2006 came to € 18.7 billion, compared with € 18.0 billion at 31 December 2005, i.e. a 4.3% rise. The mortgage portfolio climbed 2.7% from € 7.3 billion to € 7.5 billion. Total loans and advances to corporate clients were up by 6.9% from € 5.0 billion to € 5.3 billion thanks to Van Lanschot's successfully raised profile in the area of business banking. The growth in total loans and advances was 5.7%, from € 13.5 billion to € 14.3 billion.

 

Amounts due to the public and private sectors dropped by 3.1% in the first half of 2006 from € 11.5 billion to € 11.1 billion. A 21.6% rise in savings accounts from € 2.5 billion to € 3.1 billion was achieved as a result of the additional focus on these accounts. In April 2006, a new issue of Floating Rate Notes for an amount of € 600 million took place under the Euro Medium Term Note programme, as arranged by the bank in 2003. The issued notes subsequently increased from € 3.2 billion to € 3.5 billion.

 

Shareholders' funds at 30 June 2006 remained nearly unchanged at € 1,283 million compared with year-end 2005. For the movements in shareholders' funds, reference is made to page 18 of the Appendix.

 

The return on average shareholders' funds for the first half of 2006, adjusted for the interest on the perpetual loan, was 18.2%. This means that the raised target of an average 18% per year has been achieved. For the full year 2005, the return on average shareholders' funds totalled 16.3%, compared with 17.2% for the first half of 2005. The bank's risk-weighted assets rose by 3.4% in the first half of 2006 from € 11.6 billion to € 12.0 billion.

 

The BIS core Tier 1 ratio reached 6.8% (target: 7.5%). The BIS Tier 1 ratio as at 30 June 2006 was 9.4% (target: 9.5%) and thus was well above the 4% minimum requirement. The BIS ratio was 13.2% (target: 12.5%), likewise comfortably above the 8% minimum requirement.

 

Van Lanschot intends to securitise part of its commercial property loans portfolio for an amount of approximately € 500 million in the second half of 2006.

 

Assets managed by the bank increased from € 5.9 billion to € 6.0 billion in the first half of this reporting year. This increase is the balance of, on the one hand, a growth in assets managed for private clients and, on the other hand, an outflow due to the restructuring of the bank's own investment funds.

 

The assets managed for private clients showed an 11% increase in the first half year, i.e. a rise by € 0.3 billion to € 2.8 billion, in part thanks to the continued success of the Manager of Funds concept. This concept was introduced in 2005 and the amount invested in the Manager of Funds already totals over € 390 million (year-end 2005: € 170 million).

 

In the first half of 2006, the assets held in custody for private clients increased from € 14.0 billion to € 14.3 billion. The total assets held in custody for clients remained practically unchanged in the first half of the year at € 18.3 billion.

 

The Index Guarantee Contracts (which are recognised on balance sheet) were still very popular. This resulted in a jump in the item Index Guarantee Contracts from € 870 million at year-end 2005 to € 1,007 million at the end of June 2006.

 

 

The 2006 first-half income from operating activities rose by 2% compared with both the first half of 2005 and the second half of 2005. Compared with the first half of 2005, interest income lagged behind by about 10%. This can be attributed among other things to the levelling off of the yield curve. However, securities commission rocketed thanks to the advantageous stock market climate and this boosted the number of share transactions (+25% compared with the same period in 2005). The assets managed for private clients increased by 11% to € 2.8 billion. In the first half of 2006, assets held in custody for private clients rose from € 14.0 billion to € 14.3 billion. The item 'savings accounts' climbed 21.6% from € 2.5 billion to € 3.1 billion.

 

Total expenses increased 4% compared with the first half of 2005 and by 1% compared with the second half. Other administrative expenses rose approximately 28% compared with the first half of 2005. An operating profit of € 37.3 million was achieved by Private Banking (i.e. 31.2% of Van Lanschot's total operating profit for the first half of 2006).

 

In April 2006, Van Lanschot reinforced its services to the higher client segment with the arrival of a new International Wealth Management team.

 

Van Lanschot wishes to be the best Private Bank for its clients. It therefore focuses on high-quality and distinctive investment advice and asset management. In order to realise this, the strategic choice was made to have the own investment funds offered by Van Lanschot reflect the bank's expertise and profile as a long-term investor. Van Lanschot will operate its own investment funds only insofar as they have added value for a wide range of investment portfolios. These are the fixed-interest Van Lanschot investment funds, as well as the Van Lanschot European Equity Fund and the Van Lanschot Global Equity Fund. The Van Lanschot Far East Equity Fund and Van Lanschot ICT Fund will be terminated. The Van Lanschot Dutch Equity Fund will be merged into the Van Lanschot European Equity Fund.

 

In the bank's second home market, Van Lanschot Belgium distinguishes itself in its market and thus posted solid growth in the first six months of 2006. Gross profit more than doubled, jumping from € 1.6 million in the first half of 2005 to € 3.6 million. Net profit rose from € 1.6 million in the first half of 2005 to € 2.4 million. The higher profit was achieved as a result of an ongoing favourable commercial performance. The client base grew 4.1% and these new clients were nearly all Belgian nationals. Total income-generating assets climbed 6% from € 3.0 billion to € 3.2 billion. Funds entrusted declined from € 1.1 billion to € 958 million, in part due to a shift to off-balance sheet investments. The off-balance sheet assets held in custody went up from € 1.9 billion to € 2.2 billion. The Index Guarantee Contracts were again in high demand, similar to last year.

 

Thanks to higher net interest income, Van Lanschot Luxembourg's gross profit climbed from € 2.6 million in the first half of 2005 to € 2.7 million. Van Lanschot Switzerland saw its gross profit decline from € 0.8 million to € 0.6 million due to a higher cost level. Higher commission income increased the gross profit of Van Lanschot Curacao from € 2.8 million to € 3.2 million.

 

 

 

Business Banking achieved a 13% rise in income from operating activities for the first half of 2006 compared with the first half of 2005. Compared with the second half of 2005, this income dropped slightly by 7%, as a result of the stagnant interest income. Business Banking experienced an increasing growth in volume in the first half of 2006. Commission remained at the same level of both the first and second half of 2005. Total expenses fell compared with last year, thanks to the lower value adjustments to receivables. Staff costs and other administrative expenses, however, rose compared with the first half of 2005. Total operating profit allocated to Business Banking jumped by approximately 10% compared with the second half of 2005 and contributed 16% to Van Lanschot's total operating profit.

 

In addition to the private market, the corporate market forms an important target group, where Van Lanschot concentrates on medium-sized family-owned and other businesses. In particular the owner-director forms the linking pin between Business Banking segment and the Private Banking segment. The successful positioning of Van Lanschot as a business bank, in line with the bank's strategy, is starting to pay off. The Real Estate Finance department again performed a number of prestigious transactions in the past six months. Furthermore, the portfolio of the Structured & Leveraged Finance department was also extended substantially.

 

 

The income earned by the healthcare segment lagged behind in the first half of 2006. This can mainly be attributed to the lower interest income. The medical professionals and pharmacists target group showed a satisfactory trend; the number of target group clients rising nearly 10%. This meant an increase both in loans and advances and in savings accounts. However, loans and advances to large healthcare institutions stagnated.

 

Healthcare's total operating profit before tax was down on both the first and second half of 2005 and represents 4% of Van Lanschot's total operating profit.

 

Since healthcare institutions increasingly use the Guarantee Fund [Waarborgfonds], the volume of loans and advances in this sector has stagnated. Since the start of the Guarantee Fund in 1999, secured loans increased to over € 6 billion and these loans were no longer negotiated with commercial banks. At year-end 2005, 1,138 institutions participated in the Guarantee Fund, among them 77 of the 102 hospitals. Expectations are that the growth of the Guarantee Fund will continue for several years, but that the introduction of the market mechanism in healthcare will eventually reduce the role of the Guarantee Fund.

 

 

Van Lanschot Insurance can look back on a good six months. Insurance commission was up by 5%, from € 13.6 million to € 14.3 million. The rise in insurance commission was mainly thanks to the growing number of private and corporate clients, besides a one-off prior-year income item. A large number of collective health insurance contracts were concluded with corporate clients.

 

With an operating profit before tax of € 4.8 million, Van Lanschot Insurance contributed 4% to Van Lanschot NV's total operating profit before tax.

 

 

The result reported in the segment Other comprises not only the results achieved by Institutional asset management and Institutional brokerage, but also the results of the Treasury activities and results that cannot be directly attributed to a specific business line.

 

The income from operating activities of this segment rocketed by 36% compared with the first half year of 2005 and 72% compared with the second half year of 2005. This was caused in particular by the rise in profit on financial transactions, of which about 90% falls in the segment Other. Income from securities and associates, which is allocated in full to the segment Other, increased from € 8.7 million to € 14.5 million, thanks to the sale of shares from the investment portfolio. This also comprises dividend distributions of € 5.8 million (exclusive of Ducatus) on shares in the investment portfolio.

 

Total expenses in the segment Other were up compared with both the first and the second six months of 2005.

 

Within institutional asset management, the customer base experienced a shift towards congregations, orders, associations and foundations. These clients were very interested in our customised services for this target group. The total number of clients stabilised and the total assets managed for these clients dropped slightly.

 

The European Securities Network (ESN), in which Van Lanschot is a participant, forms an important pillar of Institutional Brokerage. Van Lanschot's team of analysts again received international recognition in the first half of this year. The British research agency AQ Research named our team number one for 2005 for their recommendations for Dutch midcap shares. In various other categories of best analysts, too, Van Lanschot's analysts occupied top positions.

 

Announcement of 2006 full-year results                23 March 2007

Announcement of 2007 half-year results               17 August 2007

 

 

 

 

 

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Van Lanschot press contacts: Arno J.J. Barens, Corporate Communications Director.

Telephone +31 (0)73 548 3096; mobile phone +31 (0) 6 22 935 302;

E-mail A.Barens@vanlanschot.com; fax +31 (0)73 548 33 49.

 

Van Lanschot Investor Relations: Geraldine A.M. Bakker-Grier, Investor Relations Manager.

Telephone +31 (0)73 548 33 50; mobile phone +31 (0)6 13 976 401

E-mail G.A.M.Bakker@vanlanschot.com; fax +31 (0)73 548 33 49.