A partner for development lending
Development loans are key components of a tailored financing solution. Arranging public-sector financial assistance at favorable interest rates is one of the core activities of DZ BANK. For many years, we have been supporting the cooperative banks with marketing solutions and specialist knowledge, particularly in relation to development loans in the areas of environmental protection and sustainability. Investing in improved energy efficiency is becoming increasingly important for retail and corporate customers alike. Another focus is on action plans for coping with demographic change, including socially oriented programs that encourage the adaptation of housing and other buildings for older people. These themes will continue to be a mainstay of our sales activities for development lending in 2017.
Business in 2016
In 2016, DZ BANK’s development lending amounted to €10.9 billion, which was above the 2015 level of €9.2 billion (of which €6.5 billion was attributable to the pre-merger DZ BANK and €2.7 billion to the former WGZ BANK). This was primarily due to strong demand for affordable finance for private house-building. The volume of new business generated by DZ BANK and the cooperative banks for development loans from Germany’s KfW development bank came to €7.9 billion (2015: €6.3 billion). With a share of 21.1 percent of all loans made by KfW, DZ BANK was again the development bank’s biggest single customer. Measured by volume with KfW, DZ BANK has a 14 percent market share of the commercial environmental sector and a 27 percent share of the retail sector. Above all, this performance was driven by public-sector programs for energy-efficient construction and renovation work. In the commercial sector, however, SMEs’ declining inclination to invest had an adverse effect on the lending business, including development lending. Moreover, the low oil price caused companies to rethink their plans to improve energy efficiency.
Compared with the country-wide development programs run by Germany's KfW development bank, the programs of the federal states' own development banks have become less important. These now account for only a quarter of DZ BANK's entire development lending volume. In the case of the largest state development bank, L-Bank in Baden-Württemberg, DZ BANK's market share reached 32.2 percent in 2016. The cooperative sector's market share at LfA Förderbank Bayern, the Bavarian development bank, was 31.8 percent.
Development lending prize for cooperative banks and customer advisors
In 2016, DZ BANK again awarded its annual development lending prize to a total of 64 cooperative banks. We hand out this accolade to institutions that – irrespective of their region and total assets – have achieved significant growth in their development lending and whose new business from development loans represents an extremely large share of their total assets. In 2016, we again worked with the development banks and the cooperative financial network's regional banking associations to identify and honor the cooperative banks' best development lending advisors in various categories.
Project finance is ideal for large-scale projects that require a lot of capital. DZ BANK has many years of experience in this field. Our extensive expertise enables us to assist the institutions in the Volksbanken Raiffeisenbanken cooperative financial network on all matters relating to this type of funding.
Project finance describes one-off, commercially and legally self-contained capital investment projects. The investors set up a project company specifically to implement the project. As a rule, this company is also the borrower. The income that the investment asset later generates is used to repay the loan. The asset itself is used as collateral for the project finance.
The focus at DZ BANK is in the following areas:
- Energy generation and distribution, including renewable energies
- Infrastructure and public-private partnerships (PPPs).
Renewable energies were once again the focus of project finance in Germany last year. At the end of 2016, the volume of project finance credit limits approved by DZ BANK for wind, solar, and biogas / biomass came to around €4.7 billion. Wind power continues to be the biggest renewable energy source and had a volume of approximately €3.1 billion at the end of 2016.
Partnerships between the public and private sector, known as public-private partnerships (PPP), have in recent years become one of the most successful ways to obtain funding for major public service projects in Europe. DZ BANK regularly works with partners in the cooperative financial network to facilitate, for example, the construction of roads and other transport infrastructure, schools, hospitals, and administrative buildings.
Sustainable standards for project finance
In 2013, DZ BANK officially recognized the Equator Principles, which were drawn up by international project finance institutions. In signing up to this voluntary undertaking, we have assumed responsibility for the environment and society and have publicly formalized our already long-established practice of taking sustainability standards into account in project finance transactions. At the same time, DZ BANK has created a framework for a proactive system of risk management, particularly in relation to high-volume project finance.
DZ BANK conducts a sustainability check, which includes ensuring human rights are respected, on its own investments and on the loans, finance, and products that it offers. This is also the case for all project finance applications, which we examine systematically with regard to relevant sustainability issues and human rights as part of our credit check process. Moreover, we do not lend to companies that contravene internationally accepted standards of human rights and labor law. Our supplier standards also contain human rights clauses.The Equator Principles introduced in 2003 comprise ten guidelines for all new project finance transactions involving a net investment of over US$ 10 million. The total volume of a project determines how it is categorized; the portion invested by DZ BANK itself may be lower. Ninety financial institutions from 37 countries, including some of the world’s leading project finance banks, have now signed up to the Equator Principles.
Further growth in the segment for sustainable bonds
DZ BANK has been active in the green bonds market segment since 2013. Issuers can use these green bonds to raise capital for socially responsible, environmentally friendly, or sustainability-oriented projects and markets. Issuance activity is focused on investment projects in the areas of renewable energies and climate change. The umbrella term sustainable bonds now also encompasses other types of sustainable investment. Projects in which funding is being used for education, integration, and the construction of social housing, for example, are gradually beginning to find their way into the market. The overriding principle remains the same, however: Proof is required that the use of issue proceeds for such purposes is kept separate from applications of funds that do not meet these criteria.
Against this backdrop, the number and breadth of issuers is continuing to grow steadily. The new issuers come from all categories and nearly all parts of the globe. Growth rates are particularly strong among banks and corporate issuers, with the latter being particularly well represented in the promissory note segment. And at the beginning of 2017, Poland and France became the first two countries to issue green government bonds. In Germany, too, sections of the federal government are talking about strengthening the aspect of sustainability in the financial services industry as part of a wider transformation of the economy toward a more sustainable model. This trend is being supported by continually growing demand for assets that meet sustainable criteria.
DZ BANK remains one of the ten leading syndicate banks operating in this segment. The fact that sustainability has been a major aspect of the cooperative principle and culture from the outset is proving to be an advantage. It is no accident that Crédit Agricole and Rabobank, two other European syndicate banks with cooperative roots, join DZ BANK in the list of market-leading banks in this segment. Many cooperative banks, including church banks, ethical banks, and social banks, as well as Union Investment, also invest in the market for green bonds. Union Investment, which is part of the DZ BANK Group, has more assets managed in accordance with sustainability criteria than any other fund management company in Germany.
To provide guidance for customers, the issuers, investors, and environmental associations have drawn up guidelines that set out a model issuance process for sustainable bonds. These include the Green Bond Principles (GBP), which contain voluntary procedural rules for issuers and underwriters that recommend transparency and are designed to ensure the integrity of the market. At the same time, the Climate Bond Initiative (CBI) is championing the development of credible standards for green bonds. The starting point for the work of this not-for-profit organization is the target agreed at the UN Climate Conference in Paris in 2015 of limiting global warming to a maximum of two degrees.
Investors with an interest in sustainability can also look at issuers’ internal and external sustainability ratings and green bond certification when deciding where to invest. DZ BANK, via its Sustainable Investment Research arm, has launched its own sustainability certificate for both bond and equity issuers that incorporates aspects in the categories Environment, Social, Governance, and Economic. This approach, which is still in its infancy, has been very positively received by issuers and investors.
Liquidity reserve based on sustainability criteria
DZ BANK holds ample liquidity reserves so that it can protect its liquidity against any potential crisis-related threats. These special-purpose investments have to satisfy certain regulatory and economic conditions. But we also ensure that our investments fulfill sustainability criteria. DZ BANK therefore uses investment products that can generally be assigned a sustainability rating in accordance with an analysis of liquidity reserves from 2013 or that meet sustainability requirements. When deciding on the loan facilities for investments in our liquidity reserve, we rigorously apply our internal sustainability checklist and our rejection criteria in the same way as we would for any other loan.
No more products based on agricultural commodities
The entire DZ BANK Group stopped offering products based on agricultural commodities in spring 2013. However, DZ BANK, with its long tradition of serving the agriculture sector, continues to help its corporate customers to hedge prices through the use of standardized products.
Quality and security of sustainable investment products
DZ BANK attaches great importance to the quality and security of its sustainable investment products, and we have therefore put a range of internal precautions in place. These processes are subject to a quality management system that is based on the ISO 9001:2015 industry standard and has been certified by DQS GmbH (Deutsche Gesellschaft zur Zertifizierung von Managementsystemen) [German society for the certification of quality assurance systems] (registry no. 052775 QM15).
DZ BANK is a member of the protection scheme operated by the Bundesverband der Deutschen Volksbanken und Raiffeisenbanken (BVR) [National Association of Local Cooperative Banks], which is obliged by its statutes to ensure customer deposits are fully protected. The investment-grade creditworthiness of DZ BANK is also reflected in the credit ratings.
Adherence to the DDV’s fairness code
DZ BANK is a founding member of the Deutscher Derivate Verband (DDV) [German Derivatives Association] and actively works with other issuers to promote greater transparency in the retail banking market. In 2013, the members of the DDV published a fairness code, a voluntary commitment regarding business activities in relation to the structuring, issuance, marketing, and trading of structured securities such as investment certificates and warrants. The code lays down guidelines for the responsible handling of investors' capital and trust that go beyond the legal requirements. As a result of the fairness code, the investment certificates sector now leads the way in Europe in terms of the transparency of its products and how understandable they are. The voluntary commitment should also help to ensure proper and targeted regulation that actually offers retail investors genuine added value.