A commitment to innovation

Sponsor statements: DZ BANK

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Europe’s financial regulators are usually wary of giving the thumbs up to initiatives pioneered by banks. This wasn’t the case when Deutsche Zentral-Genossenschaftsbank AG (DZ BANK) presented its RisCaServ tool to the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin). In fact, the German regulator accepted DZ BANK’s work and, in the meantime, has approved its use, for example, by banks as a system to meas-ure risk for the purpose of section 3.1 of MaH (Minimum Requirements for the Trading Activities of Financial Institutions).

And judging from the bank’s commitment to innovation, not to mention its continued financial strength (see A glance at DZ BANK, below), the fact that a regulator has recognised the bank’s work should hardly come as a shock. It’s also unsurprising that the bank was recently named as Bank of the Year by The Banker magazine.

“RisCaServ is an internet-based platform that enables its growing user base (currently standing at about 1000) to evaluate and analyse structured financial products of high complexity in a straightforward and transpar-ent manner,” explains Peter-Paul Wuenscher, managing director, Head of Institutional Sales, at DZ BANK in Frankfurt. “Besides its analytic tools, RisCaServ also offers extensive information on the functionality, equipment and sensitivities of innovative classes of bonds. It essentially gives you assistance for fully complying with the legal framework and you can also use it to clearly pinpoint the chances and risks associated with the various structured (and plain) bonds through interactive simulation.”

Users of the tool say they are impressed that it is now possible to evalu-ate a portfolio of bonds with the same market parameters and interest rate scenarios with just one click. They also say that definitions of more complex products provided by RisCaServ are extremely useful. Those employing the service include some well-known insurance companies, alongside fund managers and cooperative banks in the country. The number of users is rising and DZ BANK is constantly looking at ways to improve its service, taking into their feedback.

“RisCaServ helps you to come to a balanced investment decision and it facilitates the ongoing monitoring of your position,” says Joerg Peters, managing director and Head of Product Management, the group that runs RisCaServ. “It accommodates a transparent profile of risk and return for structured interest rate and credit products, and the simulation of the reac-tions in market value that can be expected in response to changes in yield curves and volatilities.”

Peters also stresses that RisCaServ, which has been operational since 2001, has a unique selling point in its BaFin approval and points out that DZ BANK realised the need for external auditing of the risk simulations.

Accordingly, DZ BANK employs professional services firm Pricewater-houseCoopers to undertake the ongoing auditing duties. “It’s all part of our commitment to providing our clients with ways to mitigate their reputational risk, as well as financial risk, issues,” Wuenscher notes, adding that RisCaServ allows users to service their marketing, execution and post-trade needs. “Competitors offer similar services but no other institution can match the fact that DZ BANK has official approval, a user friendly interface and in depth descriptions of the product.”

As a case in point, Wuenscher highlights the description of structured floaters on the website, which reads: “Structured floaters have a variable coupon payment, which is newly fixed at each period. The coupon is linked to the respective Euribor reference interest rate, such that the Euribor rate corresponds to the fixing periods of the coupon (for example, six months’

Euribor for floaters with semi-annual coupons).” But descriptions of the products alone are not enough to ensure success. Rather, DZ BANK ensures continued strength by constantly gauging the needs of its exhaustive client base. As a result, the bank will be rolling out new services for equity products in the near future, Peters says, adding that total issuance size of structured interest rate products in 2005 was €17 billion compared to €13.5 billion in 2004.

And DZ BANK’s efforts have been recognised by the industry as a whole. Structured Products’ sister magazine, Risk, published the findings of its industry-leading German derivatives poll in 2004. The results were encouraging for DZ BANK, which took no less than 17 top-three places out of a possible 23.

Perhaps even more tellingly, the credit rating agencies are looking favourably on DZ BANK. In July 2005, Standard & Poor’s (S&P) announced one-notch upgrades of both its long-term and short-term ratings of DZ BANK AG. One positive factor emphasised by the S&P analysts, among many, was that the number of local cooperative banks needing rescue or rehabilitation by the network’s guarantee fund, and the total cost of these exercises, are both much smaller than in previous years. This is a clear indi-cation, S&P said, that the Cooperative Financial Services Network has now reduced its risk significantly.

What’s more, other official bodies are also realising the merits and robustness of DZ BANK’s business. Recently the bank once again stole the limelight from its competitors. Not only has it scooped The Banker’s award, and received BaFin approval, but it has now also secured approval for its certificate design from the Technischer Überwachungsverein (TÜV).

Although the TÜV is perhaps best known for its role of supplying the annual roadworthiness certificate for Germany’s motor cars, its southern office in Munich also carries out technical checks on many other things, including banks. It inspected DZ BANK’s process for designing certificate products from the point of view of customer protection and concluded that it was excellent.

Wuenscher also points out that it’s not just that DZ BANK takes pride in its own achievements. Rather it is striving to help grow and promote transparency for the wider German market.

In fact, DZ BANK is a member institution (and founder) of Derivate Fo-rum, the only European body that has come close to issuing anything like an industry standard when it comes to rating structured products. Whereas bond investors have the likes of S&P and Moody’s to provide ratings, structured products investors have, to date, been deprived of risk ratings. Derivate Forum changed this with its risk-calculation tool, which rates war-rants and certificates according to five risk classes.

It seems fitting that DZ BANK should be part of something so pioneer-ing. After all, innovation could very well be DZ BANK’s middle name.

Peter-Paul Wuenscher, managing director, Head of Institutional Sales

A glance at DZ BANK

Deutsche Zentral-Genossenschaftsbank AG (DZ BANK) is the product of a merger in September 2001 of Germany’s two largest cooperative central banks, DG Bank and GZ Bank.

DZ BANK offers products and services to more than 1,000 local cooperative banks, which have between them more than 30 million customers and collective assets of €848 billion.

In September 2003, DZ BANK bought Norisbank from HVB Group and by the end of 2005, more than 880 local banks had signed partner agreements with Norisbank to distribute its ‘easyCredit’ product.

In 2004, DZ BANK almost doubled its operating profits after provi-sions for risk, from €147 million to €284 million.

What’s more, net profit rose by 65% to €52 million. 2005 looks to be an impressive year, too – DZ BANK Group’s operating result after provisions for risk increased by 22% to €643 million in the first half of 2005, with the group’s parent, DZ BANK AG, almost doubling its operat-ing result.

Rating agencies Moody’s, Fitch and Standard & Poor’s (S&P) have all noted DZ BANK’s continued success, with S&P upgrading its rating to ‘A’ in July 2005.

“The rating actions mainly reflect ongoing progress at DZ BANK and the local cooperative banks in achieving sustainable improve-ments in profitability, asset quality, and capitalisation,” the S&P analysts said in their rationale for the upgrade.

In October 2005, Fitch rated the entire cooperative financial sector which also led to an A+ rating for DZ BANK, as well as a B financial strength rating.

Contact
Peter-Paul Wuenscher, Head of Institutional Sales
T: +49 (0)69 7447 6370
E: [email protected]

Dr Joerg Peters, Head of Product Management
T: +49 (0)69 7447 7856
E: [email protected]

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