KfW's capital market activities stand for liquidity, flexibility and responsibility

• 2018: euro is the funding currency of the year
• 2019: reliable bond supply of around EUR 80 billion
• KfW intensifies commitment to Green Bond Standards

KfW had a very successful year with its capital market activities. 140 bonds with a volume of EUR 75.5 billion (2017: EUR 78.2 billion) were issued as of 3 December 2018. These included some prominent issues. Good timing and a quick response to investor interest were the keys to this success.

The euro accounted for a record 61% of the total funding volume (2017: 53%). KfW was thus the largest non-governmental issuer on the euro market in 2018. The US dollar accounted for 27% (2017: 34%). The promotional bank raised a large part of the funds under its “benchmark programmes” (73%), more than ever before. The trend in recent years towards investors preferring large-volume, liquid bonds in core currencies continued in 2018. KfW took advantage of the favourable funding conditions and strong investor demand in euros to refinance its promotional business cost-effectively. The market was supported by the Eurosystem's Public Sector Purchase Programme (“PSPP”) for bonds, while investor demand for euro-denominated bonds was particularly high overall. KfW also placed significant benchmark bonds in the strategically important US dollar market, which met with very good demand from investors. With its US dollar issues, KfW underscores the significance of this market access for its funding strategy because in 2018 KfW only occasionally benefited from a refinancing advantage of the US dollar market over the euro market.

Good timing is crucial for successful transactions: it is always important to serve the interest of international investors in KfW products in the most stable market environment possible. Uncertainties about Brexit, the trade dispute between the USA and China and the political situation in Italy have caused high volatility in the markets. Nevertheless, KfW has proven on several occasions that it is adept at choosing the right time for transactions and can thus place large-volume, liquid bonds very successfully. It will continue to meet these challenges in 2019.

Market conditions shaped by monetary policy influence

The Eurosystem generated strong demand with the PSPP, meaning KfW bonds are sometimes difficult to acquire in the secondary market. By increasing the volume of outstanding bonds in the past year, KfW raised its outstanding volume and thus counteracted the liquidity shortage. Five increases were made under the euro benchmark programme. Although KfW benefited from the demand as a result of the PSPP purchases to fund its promotional business, the number of investors in KfW's order books, at around 130, is so high on a regular basis that it is not dependent on any single investor, even a large one.

Outlook for 2019

The coming year will show more specifically how the phase-out of the PSPP will affect the markets. “The activities of the Eurosystem have had a significant impact on the market. A slight correction in market prices began already in the second half of 2018 with the announcement by the ECB that the programme would be phased out. We therefore only expect to see a gradual adjustment in bond prices next year, and in the medium term we expect it to normalise,” explains Dr Frank Czichowski, Treasurer of KfW Group. In addition, the markets in 2019 will continue to be dominated by political events, which could affect KfW's funding activities.

For 2019, KfW's expects to raise around EUR 80 billion in long-term funding in the capital markets. The funding requirement is mainly determined by planned new lending business, maturities of KfW bonds, and early repayments of loans.

Sustainability in the financial sector

Sustainability is a core value in KfW's mission statement, which is why KfW has been committed to sustainability on the financial markets for many years. “The aim is to raise awareness about sustainability and climate change across a broad range of market participants. We also want to make clear that market instruments can effectively support political goals and that capital must be made available for the transformation to a more sustainable economy,” comments Czichowski. Fortunately, the number of issuers and investors is steadily growing and suitable infrastructure (e.g. specialised rating agencies, indices) is developing at the same time.

Since entering the green bond market a few years ago, KfW has also pursued the goal of acting as a catalyst to support this development in the financial industry. It has established itself as the largest German provider of bonds that are directly linked with positive environmental and social impacts. With issues of EUR 1.6 billion in 2018, the outstanding volume rose to a total of EUR 14.5 billion. In addition to the largest green bond issued to date in Swedish krona, KfW offered an 8-year euro green bond in 2018. Thanks to the annual issue of new KfW Green Bonds, investors can now choose green bonds with different maturities. KfW will continue its issue activities in this segment in 2019.

As part of the sustainable financial community, the green bond market exceeded the USD 500 billion mark in November 2018, some eleven years after its birth. The coming year will show how much further growth potential there is for the market. Many of the major issuers have already refinanced a significant portion of their green financing through green bonds; new issues require growth in credit programmes or new projects.

KfW expanding its commitment

KfW further intensified its involvement in national and international initiatives to develop market standards and guidelines this year. One particular focus is cooperation in the Technical Expert Group set up by the European Commission as part of the EU's Action Plan on Sustainable Finance. It is actively involved in developing a proposal for a European Green Bond Standard. This is intended to contribute to the growth of the market segment while at the same time safeguarding the integrity of the green bond market. The aim is also to increase the impact of green bonds by aligning them with an EU taxonomy (uniform classification system for sustainability). Finally, the new European Green Bond Standard is intended to contribute to the environmental goals of the EU.

New green bond issuers in the promotion portfolio

For its promotional business via the capital market, KfW was active with investments in green bonds (EUR 365 million) and securitisations of small and medium-sized enterprises (EUR 967 million) in 2018.

This year, the projects financed in the green bond portfolio focused on energy efficiency, renewable energy and environmentally friendly transport. The development in Germany is encouraging: the total number of German green bond issuers has risen to eleven. KfW participated in two transactions of German issuers, which were launched on the market for the first time in 2018. New investments of EUR 300 million are planned for the promotion portfolio in 2019.

In 2018 KfW successfully continued its cooperation with other promotional institutions under the “ENSI” initiative as part of its capital market-based SME financing and invested in a securitisation transaction from Greece for the first time. This was the first car leasing transaction of a Greek company. The investment of the promotional banks KfW, EIB, EIF and EBRD contributed to the financing of SMEs and market opening in Greece. In addition to investments in established markets, investments in less-established markets will continue to be made in 2019 to contribute to the sustainable development of the European securitisation market. For the coming year, KfW plans to invest a total of around EUR 1 billion in SME securitisations.

Service: More detailed information may be retrieved in the handout and here:

www.kfw.de/KfW-Konzern/Investor-Relations/

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