Group restructuring increasingly taking shape

Hamburg/Kiel, April 15, 2010 - The restructuring of the HSH Nordbank Group is increasingly taking shape. This is evidenced by the Bank’s annual financial statements for the year 2009 which have now been presented. Thus, HSH Nordbank closed out fiscal 2009 with better results than it had planned.

The consolidated net loss pursuant to IFRS amounted to EUR -679 million (previous year: EUR -2,844 million). This included EUR -607 million (previous year: EUR -177 million) broken down into expenditure for government guarantees amounting to EUR -483 million (previous year: EUR -5 million, reported under net interest income) as well as EUR -124 million (previous year: EUR -172 million) for restructuring expenses. For the second-loss guarantee of the states of Hamburg and Schleswig-Holstein the Bank paid around EUR 305 million for 2009 (previous year: EUR 0 million).

In fiscal 2009 the guarantee and restructuring expenditure was offset by an income tax benefit of EUR 423 million, as well as income from the share in losses amounting to EUR 159 million of the silent participations and the holders of profit participation certificates. The Bank thus limited the loss before taxes, guarantee and restructuring expenses and income from the assumption of losses to EUR -654 million (previous year: EUR -2,796 million).

"The realignment is increasingly taking shape, and the change processes we have initiated are taking hold. We will continue to adhere to our resolute planning and systematic implementation of the Bank’s restructuring,” said Dirk Jens Nonnenmacher, CEO of HSH Nordbank

Substantial recovery of total income
The result was supported by a sharp recovery in income. In spite of the much reduced total assets, the Bank succeeded in increasing total income across all segments of the Core Bank. Whereas valuation effects in the wake of the crisis on the financial markets weighed heavily on the income situation in the previous year, reversals of impairments in fiscal 2009 contributed to a strong performance in terms of income. In the past year the Bank’s total income rose to EUR 2,940 million (previous year: EUR 157 million). At EUR 2,332 million (previous year: EUR 2,321 million), net interest and commission income was on a par with the previous year’s level. Whereas the severely curbed new business weighed on commission income, in particular, net interest income was boosted by successes in business with existing clients. Here, higher lending on the basis of previous loan commitments and higher margins helped to improve the result. The net interest income also includes net income from hybrid financial instruments amounting to EUR 375 million. Not counting this non-recurring benefit, the percentage decline in net interest and commission income corresponds to the percentage decrease in total assets.

The Bank generated a significant year-on-year earnings improvement in trading and financial investments, which made a positive earnings contribution of EUR 462 million (previous year: EUR -2,149 million). In fiscal 2008 earnings from trading and financial investments had been weighed down heavily by impairments on the Credit Investment Portfolio (CIP), in particular, whereas the continuing stabilisation on the international financial and credit markets led to a vigorous recovery in 2009. In the course of the year the CIP was further wound down, as announced. As of 31 December 2009, it amounted to approx. EUR 17 billion (previous year: EUR 22 billion).

The good income situation contrasted with considerably increased loan loss provisions of EUR -2,794 million (previous year: EUR -1,888 million). All in all, however, risk provisioning in the financial market and loan loss provisions were in line with the Bank’s budget. The provisioning measures had to be increased substantially on account of the macroeconomic downturn. In this connection, the Management Board formed additional provisions regarding portfolio value allowances.

Around 70 percent of risk provisioning was accounted for by portfolios and business areas which have been managed within the newly established Restructuring Unit since December.

Cost cuts above budget
In fiscal 2009 the Bank realised impressive savings, as a result of which administrative expenses recorded a higher than budgeted drop of approximately 8 percent to EUR -830 million (previous year: EUR -899 million). This decrease was the result of progress made in reduction of staff and savings in material expenses. HSH Nordbank plans to reduce the number of staff by around 1,100 full-time employees (FTEs) in and outside Germany by the end of 2012. As at December 31, 2009 the number of FTEs at HSH Nordbank had, recognizing the subsidiaries deconsolidated in 2009, already fallen by 715 to 3,610,.

Total assets substantially reduced / Tier 1 ratio at 10.5%
In the past year HSH Nordbank made substantial progress in reducing its total assets. All in all, total assets were down approx. EUR 33 billion to some EUR 175 billion (previous year: EUR 208 billion) at the end of the year. The Tier 1 capital ratio, including market risk positions, stood at 10.5 percent when the 2009 financial statements were approved and is thus at a competitive level internationally.

Irrespective of the final decision in the EU state aid proceedings, which is still outstanding, the Bank will continue to forge ahead resolutely with the restructuring of the Group and its strategic realignment.

“The spin-off and pooling of non-strategic areas of business and portfolios is taking significant pressure off the remaining units in the Core Bank. In conjunction with the substantial improvements in the credit and risk processes in 2009, the focussed core activities form a good starting position for stronger concentration on profitable client business in 2010. In addition to the existing business, which in 2009 was successful in terms of income, in 2010 new lendings will move further to the forefront again as demand for loans increases. Our approach will be marked by risk awareness and sensitivity", said Dirk Jens Nonnenmacher, CEO of HSH Nordbank.

Total assets are to be reduced mainly by means of a continuing reduction in non-strategic portfolios and risk positions within the Restructuring Unit, which was established in late 2009. By contrast, the Core Bank’s business volume is to remain roughly constant.

“In future, HSH Nordbank's business policy will take a more conservative line. The objective will not be maximising income, but achieving a balance between earnings and risk. HSH Nordbank will be smaller, but it will also be better to manage, more flexible and more efficient", concluded the CEO.

Core bank units raise income in difficult times
Those segments geared to the lending business were able to increase their operating income in spite of the noticeable effects of the economic and financial crisis. Here the business performance in the Regional Bank segment, which comprises the primarily regional core areas of the Bank’s business, viz. Corporate Clients, Real Estate Clients, Private Banking and Savings Banks, was particularly gratifying. In the Sector Specialist Bank segment with the Shipping, Transport and Energy units much higher risk provisioning requirements in the wake of an increase in default risks had a negative impact. As expected, the larger overall risk provision item was accounted for by the segment Restructuring Unit, where activities not forming part of the Bank’s core business are being wound up.

In the Regional Bank segment the Bank’s earnings before restructuring increased to EUR 181 million (previous year: EUR 41 million). The focus lay on loan renewals for existing clients. New business was considerably down on the previous year due to the drop in demand resulting from the economic situation. Nevertheless, in spite of a year-on-year drop in new business, combined net interest and commission income increased to EUR 559 million (previous year: EUR 521 million). Whereas risk provisioning in the real estate business comparatively was kept within limits, in the corporate clients business the Bank was forced by the economic situation to make higher provisions. In spite of this, at EUR -135 million, net allocations to risk provisioning in the segment Regional Bank fell short of the previous year’s figure (EUR -246 million).

Sector Specialist Bank
In a generally difficult global economic setting HSH Nordbank generated a considerable net interest and commission income of EUR 625 million (previous year: EUR 514 million) in the Sector Specialist Bank segment. This is mainly attributable to successes in the finance business with existing clients and meant that the impact of a significant year-on-year drop in new business could be offset. Support was also provided by the successful sale of solutions for hedging against fluctuations in interest rates, exchange rates and commodity prices. The strong income performance was offset by increased risk provisions to EUR -713 Mio (previous year: EUR -290 million) necessitated by the difficult situation of many companies in the shipping and transportation sectors, and existing market uncertainties. Of this amount, EUR -627 million was accounted for by the shipping operations pooled in the Core Bank, where, at EUR 21 billion, the size of these operations makes up around three quarters of the previous portfolio. Due to the high level of risk provisioning measures, the Sector Specialist Bank unit posted a loss before restructuring of EUR -279 million (previous year: EUR 152 million).

Segment Other
The segment Other comprises principally the financial-markets business with the central funding function for the Group and overall bank positions with the Corporate Investments and Corporate Services units. The realigned business areas in the financial-markets business concentrate on their core areas of expertise in risk management for clients in the Bank’s core units. Here one focus is on reduction of interest rate, exchange rate and commodity price risks. In addition to this, all the Bank’s funding activities are covered and institutional clients and investors served. Various factors were responsible for the segment’s earnings performance in 2009. The financial-markets business went well in a brighter setting. The Bank was thus able to do successful client business in sales and in trading in financial-market products. Moreover, decreasing income in business with clients in the credit units were partially offset by above-budget income from business with institutional clients. Moreover, contributions from hybrid financial instruments amounting to EUR 375 million were booked. This meant that the segment Other significantly increased net income before restructuring to a total of EUR 507 million (previous year: EUR 18 million).

Restructuring Unit
The Restructuring Unit (RU) started work on 1 December 2009 as a newly created segment with its own Management Board desk. As a key element in HSH Nordbank’s realignment programme, the RU pools the portfolios that were separated from the Bank’s core business and selected for windup. At year’s end the total assets of the RU came to around EUR 77 billion including, in addition to parts of the capital-markets business and the Credit Investment Portfolio, loan portfolios and non-strategic areas of business from the Real Estate, Shipping, Corporate Clients, Transport and Energy units. According to the recapitalisation concept drawn up at the beginning of 2009, at EUR -271 million (previous year: EUR -49 million) the RU accounted for a substantial part of the restructuring and guarantee costs. The same applies for risk provisions, which, at EUR -1,941 million, were up considerably on the previous year’s EUR -1.298 million. This stands against total income in the Restructuring Unit segment from portfolio liquidations, management of portfolios as well as interest and commission income totalling EUR 1,194 million (previous year: EUR -1,454 million). On the bottom line, the Restructuring Unit segment contributed a net income before restructuring of EUR -998 million (previous year: EUR -3.243 million).

Income statement (EUR mn) 2009 2008 Change
Net interest income 2,121 2,051 +3.4
Loan loss provisions -2,794 -1,888 +48.0
Net interest income after loan loss provisions -673 163 >-100
Net commission income 211 270 -21.9
Result from hedging 146 -15 >+100
Net trading income 568 -1,127 >+100
Net income from financial investments -106 -1,022 +89.6
Administrative expenses -830 -899 -7.7
Other operating result 30 -166 >+100
Result before restructuring -654 -2,796 +76.6
Restructuring result -124 -172 -27.9
Expenses for government guarantees -483 0 -
Income tax 423 -227 >+100
Income from assumption of losses 159 351 -54.7
Consolidated loss -679 -2,844 +76.1
Group net loss attributable to non-controlling interests -9 -35 +74.3
Group net loss attributable to HSH Nordbank shareholders -670 -2,809 +76.1
Key balance-sheet ratios of HSH Nordbank Group 31.12.2009 31.12.2008
Total assets (EUR bn) 174.5 208.4
Tier 1 capital ratio* (%) 10.5 5.1
Regulatory capital ratio* (%) 16.1 8.3
Employees** 3,610 4,167

* including market-risk items after approval of the annual financial statements

** full-time employees, excluding subsidiaries deconsolidated in 2009

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