HSH with positive half-year result as Group pre-tax profit rises to € 173m

  • Core Bank with pre-tax profit of € 506 (prev. year 342) million
  • New business up 25% – legacy assets reduced by € 4.2 billion
  • CET1 ratio at 18.9% ─ at 15% even without guarantee
  • CEO Ermisch: “Targets met, well prepared for privatisation.”

Hamburg/Kiel, August 31, 2017 - Group-wide, HSH Nordbank increased its pre-tax profit slightly in the first six months, mainly driven by solid growth of new business in all its business areas and despite a massive further reduction of its legacy cluster risks.

The forward-looking activities of the Core Bank are in especially strong shape: the Bank’s corporate clients, which are mostly medium-sized enterprises, contributed to this encouraging performance, as did project finance in the infrastructure and renewable energy sectors, real estate finance and the shipping business, which had already been substantially trimmed.

Loan loss provisions – especially for pre-2009 legacy loans to the German shipping sector – of € -379 million were made almost entirely in the Non-Core Bank. The guarantee provided by the federal states of Hamburg and Schleswig-Holstein has been arithmetically utilised in total, no longer fully cushioning any additional loan loss provisions. Direct impact on income was nevertheless avoided, namely through sales of securities.

Operational strength, favourable capital ratios, stringent cost control and the accelerated reduction of legacy assets lead to a positive outlook for the full year and for the privatisation pending for 2018. HSH Nordbank expects to generate Group net income before taxes in the current financial year at the level of the previous year (2016: € 121 million).

“Our key ratios are at a good level even without the guarantee. It is therefore evident for all to see that HSH Nordbank is increasingly becoming a normal bank which employees have truly earned the prospects of its privatisation. Freed from current restrictions due to EU requirements, the new owners will fully exploit the Bank’s potential. They will enjoy excellent opportunities,” said Stefan Ermisch, Chief Executive Officer of HSH Nordbank AG.

The Group net income before taxes of € 173 (171) million was almost entirely due to the Core Bank's significantly improved pre-tax profit of € 506 (342) million. Alongside the income from the operating business, this also was driven by positive effects from the sale of promissory notes in the amount of € 307 million. These hidden reserves were realised in the course of proactive balance sheet management to compensate for the Non-Core Bank’s expected negative result, which came in at € -348 (-41) million, largely as a consequence of significant loan loss provisioning. Along with items for the entire bank and restructuring costs, the ‘Other & Consolidation’ item reflected income from liquidity and capital positions, resulting in an income contribution of € 15 (-130) million. In a market environment characterised by low interest rates and heavy competition, total income in the Group was up significantly to € 759 (541) million.

The reduced administrative expenses of € -246 (-277) million demonstrate the Bank’s success in cost savings. Along with the declining personnel expenses of € -113 (-129) million due to a reduction in the number of employees by 134 to 2,030, savings on items such as project and building costs lowered operating expenses to € -124 (-132) million. The result from restructuring which includes privatisation costs came to € -25 (-98) million and weighed on the Group net result, as did the payments for the bank levy and the deposit guarantee fund in the amount of € -41 (-63) million and guarantee expenses of € -80 (-126) million.

Thanks to the good performance of operating business in the Core Bank and the successful reduction of problematic or non-strategic legacy exposures, the capital position was significantly improved at the half-year mark. However, the CET1 ratio, phase in of 18.9 percent (31/12/2016: 14.1 percent) was temporarily exaggerated. This ratio should normalise at a high level in the second half of the year in the wake of lagging guarantee effects and the disposal of further non-performing portfolios. Disregarding the effects of the second loss guarantee, this worked out to an indicative, pro-forma CET1 ratio of about 15 percent on 30 June 2017. The leverage ratio, which puts core capital in relation to business volume, was at a very good level of 7.9 percent (31/12/2016: 7.0 percent) and continued to clearly exceed requirements.

The Group’s total assets were down to € 79 (84) billion due to accelerated disposals of legacy assets, while the encouraging level of new business and an increased cash reserve exerted a counter-effect.

Core Bank with high earning power – result above expectations

With pre-tax profit of € 506 (342) million, the Core Bank is well up on both the previous year and expectations. Total income improved to € 684 (571) million and benefited equally from the encouraging performance of the operating business and from the realisation of hidden reserves of € 307 (160) million. Including these favourable effects, net interest income improved to € 538 (392) million and net trading income was up to € 93 (77) million. Net income from financial investments came to € 15 (63) million and net commission income to € 38 (39) million.

Thanks to the Bank’s stable position among its clients and on the markets, new business rose by a substantial 25 percent to € 4.4 (3.5) billion in the first half. In a very competitive environment, the Bank signed nearly one billion euros worth of this business with newly gained clients. Positive cross-selling income from investment products, loan commissions and the derivatives business contributed to the Core Bank’s result.

New business up by a quarter – income growth in all segments

The Energy & Utilities, Logistics & Infrastructure, Trade & Food, Healthcare, Industry & Services and Wealth Management business areas, which are pooled in the Corporate Clients segment, generated new business of € 1.64 billion, up from € 1,42 billion in the previous year. Business was focused on project finance in the rail transport, data infrastructure and wind power sectors in Germany and Europe. The Corporate Clients division contributed an improved segment pre-tax result of € 52 (33) million to Group net income.

The Bank is firmly established in the commercial real estate finance market, as reflected in the new business of the Real Estate segment, which was up by nearly a quarter to € 2.34 (1.93) billion. The focus was on finance in northern Germany and the western German metropolitan regions while keeping a sharp eye on an appropriate risk/return profile. The segment provided an important contribution of € 77 (64) million to the Group’s net income before taxes.

The new business in the Shipping segment with international shipping companies that have a good credit rating was deliberately very selectively managed and came to € 312 million, up from € 180 million in the previous year. The reduced total income of € 47 (67) million reflected a smaller amount of interest-bearing receivables. Even so, net income before taxes improved to € 18 (12) million because of an overall positive result from loan loss provisioning and reduced administrative expenses.

In the Treasury & Markets segment, the client business continued to perform well and matched the previous year’s level. Including the benefit from the sale of securities, the segment generated net income before taxes of € 359 (233) million. The derivatives and treasury businesses contributed to the segment’s good operating performance; it furthermore maintained the deposit-taking business with clients at a high level.

The Core Bank's total assets as at 30 June 2017 were up slightly to € 50 (31/12/2016: 48) billion. This was largely due to maturing securities as well as payments received from portfolio divestments and loss accounting, which led to an increase in the cash reserve.

Loan loss provisions for legacy assets still high

Again in the first half of 2017, the Bank made substantial loan loss provisions for legacy loans because of the persistently difficult situation in the shipping business and for individual exposures in the energy sector. Loan loss provisions of € -381 (-488) million were allocated in the Non-Core Bank alone. For the Core Bank and ‘Other and Consolidations’ there was in each case a positive sum of loan loss provisioning of € 1 million due to reversals, meaning that the Group reported loan loss provisions before guarantee of € -379 (-520) million.

Due to the full utilisation of the second loss guarantee on the balance sheet in the first quarter, loan loss provisions were now offset only in part, in the amount of € 138 million (incl. forex result, hedging effect of the credit derivative and loss settlement effects). After the guarantee, loan loss provisions in the lending business of the Group thus came to € -241 (151) million in the first half.

The non-performing or non-strategic legacy exposures held for disposal and pooled in the Non-Core Bank were reduced by € 4.2 billion to € 17.2 billion. This means 75 percent of the full-year target has already been reached. The resulting downtrend in receivables as well as adverse loan loss provisioning and guarantee expenses are reflected in a structurally-induced and expected negative pre-tax result of the Non-Core Bank amounting to € -348 (-41) million.

Stringent wind-down strategy – NPE reduced ─ solid coverage ratios

The Bank continued to forge ahead with its consistent strategy of significantly and sustainably reducing its non-performing exposures (NPE). On 30 June, the NPE amount in the Group stood at € 11.9 (14.6) billion, of which the Non-Core Bank accounted for € 11 billion and the Core Bank for € 0.9 billion. The NPE ratio consequently fell significantly to 14.6 percent, down from 17.5 percent on 31 December 2016.

This amount of non-performing loans was covered by extensive loan loss provisions, once again resulting in a clearly improved coverage ratio (calculated from loan loss provisions in relation to NPE) in Group of 56 (31/12/2016: 48) percent. The coverage ratio for the non-performing shipping exposure alone of € 8.5 billion (of which € 7.7 billion in the Non-Core Bank and € 0.8 billion in the Core Bank) worked out to 61 (31/12/2016: 60) percent.

The Core Bank once again reported a good portfolio quality with a reduced non-performing exposure of € 0.9 (31 December 2016: 1.0) billion and a resultant improvement in the NPE ratio to 1.6 (31 December 2016: 1.9) percent, with the risk coverage ratio of at 58 (31/12/2016: 56) percent.

Outlook: Group profit at pre-year level

“In particular, the new deals demonstrate HSH Nordbank's good position on the fiercely contested German banking market and the ability of our Bank to perform ahead of the upcoming change in ownership. They demonstrate not only of the loyalty of our long-standing clients, but also the confidence of new clients who opted for our Bank for the first time and contributed nearly € 1 billion to new business,” said Stefan Ermisch, Chief Executive Officer of HSH Nordbank. “Based on our good six-month figures, we still expect to generate full-year Group profit at the previous year’s level.”

Income Statement (€ m) Jan-Jun 2017 Jan-Jun 2016 Change in

Interest income 1,786 1,846 -3
Negative interest on investments and derivatives -147 -79 86
Interest expense -1,175 -1,399 -16
Positive interest on borrowings and derivatives 149 69 >100
Net income from hybrid financial instruments -56 -63 11
Net interest income
Net commission income 32 50 -36
Result from hedging -9 2 >-100
Net trading income 151 40 >100
Net income from financial investments 26 74 -65
Net income from investments accounted for under the equity method 2 1 100
Total income
Loan loss provisions in the lending business after guarantee/credit derivative -241 151 >-100
Administrative expenses -246 -277 -11
Other operating income 47 43 9
Expenses for bank levy and deposit guarantee fund -41 -63 -35
Net income before restructuring and privatisation
Net income from restructuring and privatisation -25 -98 74
Expenditure for public-sector guarantees -80 -126 -37
Net income before tax
Income tax expenses -15 -11 36
Group net result
Group net result attributable to non-controlling interests - - -
Group net result attributable to HSH Nordbank shareholders 158 160 -1

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Additional key figures of HSH Nordbank Group 30/06/2017 31/12/2016
Total assets (in EUR bn) 79.3 84.4
RWAs post-guarantee (in EUR bn) 25.7 28.6
Common Equity Tier 1 (CET1) capital ratio, phase in, in %) 18.9 14.1
Pro forma CET1 ratio (in %) without guarantee 15.0 12.6
Tier 1 capital ratio (in %) 23.2 18.7
Total capital ratio (in %) 30.4 24.8
Full-time employees (FTEs) 2,030 2,164
Cost/income ratio (in %) 30.5 64.8

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The information contained in this press release does not constitute an offer for the sale of any type of Hamburg Commercial Bank AG securities. Securities of Hamburg Commercial Bank AG may not be sold in the United States without registration pursuant to US securities legislation, unless such a sale takes place on the basis of relevant exceptional provisions.

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