HSH Nordbank achieves targets for 2006

  • Pre-tax return on equity reaches 15.0%
  • Net income up 15% to EUR 460 million
  • Net commission income increased by 35%

Hamburg/Kiel, February 27, 2007 - According to its preliminary figures for 2006, HSH Nordbank has once again exceeded the good result achieved in the previous year. The pre-tax return on equity reached 15.0% – an increase of 0.9 percentage points on the 2005 figure. Operating income improved by 2.5% to just under EUR 2.2 billion, with net commission income increasing by an impressive 35%. In spite of the expansion of business and a deliberately conservative risk provisioning policy, loan loss provisions remained at the previous year’s level. Net income rose 15% to EUR 460 million.

“HSH Nordbank is continuing to make positive headway. This is visible not least in the Group’s good business figures. With a pre-tax return on equity of 15%, we have achieved our ambitious target for 2006“, said Hans Berger, Chairman of the Management Board of HSH Nordbank, at the conference presenting the Group’s figures for 2006 in Hamburg.

Operating income: strong rise in net commission income

In 2006 operating income improved by EUR 53 million, or 2.5% year-on-year to just under EUR 2.2 billion.

Net interest income was strengthened further thanks to a pleasing volume of new business. The year-on-year decline of 4.5% to EUR 1,535 million can be attributed entirely to HSH Nordbank AG’s enlarged group of consolidated companies. As a result proceeds from the sale of equity holdings were reported under income from equity holdings (risk provisions/evaluation item) rather than under interest income. Net commission income was up strongly on the previous year by 35% to EUR 424 million. This increase resulted largely from the further growth of domestic and international lending business driven by capital market financing solutions. The share of operating income accounted for by net commission income was thus a third higher, up from 15% to just under 20%. Net trading income improved by 3.5% to EUR 141 million in a none-too-easy market environment characterized by a flat yield curve and low volatility in certain market segments.

Focus on operating expenses

Overall, at EUR 919 million, operating expenses were 5% higher than the year-earlier figure.

Personnel expenses rose by just under 15% year-on-year to EUR 469 million. This marked increase can be attributed to the recruitment of additional highly qualified employees, in particular at our foreign locations in Copenhagen, London and New York.

In addition, the Bank made targeted investments in the further qualification of its staff. HSH Nordbank also made higher non-recurring payments to employees, based on the good development of business.

Thanks to rigorous cost management, the Bank managed to achieve a 3% reduction in other operating expenses versus the previous year to EUR 450 million. The majority of these spending cuts were realized in the area of IT and related in particular to consultancy outlays.

Risks under control

At EUR 309 million, the net expense resulting from the item value adjustments/income from equity holdings was down by more than half (-51%) the level of the previous year. This was due largely to gains on disposals realized by group companies. In addition, allocations to reserves in the year under review were lower than in 2005.

In lending business, risk provision expenses remained at the previous year‘s level, in spite of the expansion of business and a conservative risk provisioning policy. The slight decline to EUR 212 million represented a fall of 3%, or EUR 8 million. In securities business the Bank achieved a positive result of EUR 29 million, thanks to realized price gains. In the previous year this figure came to EUR 43 million due to one-time effects. The Bank recorded income of EUR 75 million from equity holdings (previous year: EUR -38 million). The overall result therefore shows an improvement of EUR 113 million on the previous year, with income from the disposal of holdings set against a higher level of write-downs. The positive development of business enabled HSH Nordbank to make substantial allocations to reserves (of EUR 200 million), as planned, with a view to reinforcing its Tier 1 capital. In the previous year the corresponding figure was EUR 418 million, due to a one-time effect connected with the repayment of EU subsidies.

Marked increase in operating profit

HSH Nordbank was able to increase its operating profit after risk provisions strongly by 54% to EUR 945 million, thanks to the higher level of operating profit and improved income from equity holdings. Adjusted for the one-time effect of the high allocation to reserves in 2005, the rise in operating profit after risk provisions would have been around 11%.

“We have further improved on the good profit achieved in the previous year and are increasingly able to reap the rewards of our new business model“, Berger commented.

Profit after taxes improved by 15% to EUR 460 million, in spite of an almost threefold increase in tax expense. This also underlines the continued improvement in the quality of the Bank’s figures.

RoE target for 2006 achieved

The pre-tax return on equity reached 15.0% – a further increase by 0.9 percentage points. HSH Nordbank therefore succeeded in achieving its ambitious target. Since the merger in 2003, the Bank has managed to increase its pre-tax RoE continuously, by a total of 4 percentage points.

In spite of higher operating expenses, the cost/income ratio, at 42.3%, was only slightly (1.1 percentage points) above the figure as at December 31, 2005.

Tier 1 capital as prescribed by the German Banking Act amounted to EUR 7.4 billion – up EUR 0.6 billion from the previous year. The Tier 1 capital ratio as prescribed by the German Banking Act improved from 6.7% to 7.0%.

Segmentbericht per 31. Dezember 2006

Shipping Clients

In the area of shipping finance, HSH Nordbank achieved an operating profit after risk provisions amounting to EUR 248 million (previous year: EUR 261 million). As the need for shipping finance remained high, albeit with fierce competition among the financing banks, we recorded new business of EUR 10 billion (previous year: EUR 7.3 billion). In spite of the continued pressure on margins, net interest income only amounted to EUR 296 million (previous year: EUR 290 million). At EUR 98 million, net commission income matched the previous year’s level, thanks to a large number of transactions. Risk provisions were increased, but nevertheless remained at a low level. The pre-tax return on equity came to 17.5% (previous year: 20.1%).

Real Estate Clients

The Real Estate Clients segment increased its operating profit after risk provisions significantly to EUR 260 million (previous year: EUR 232 million). Net interest income was up slightly from EUR 337 million to EUR 340 million. This was due most notably to an increase in the volume of new financing commitments from EUR 10.1 billion to EUR 16.1 billion. In addition, it was possible to stabilize the margins in new lending business, despite the ongoing stiff competition. Net commission income went up to EUR 138 million (previous year: EUR 133 million). This resulted primarily from the structuring and consultancy work which HSH Nordbank performed on many of the transactions managed. Risk provisioning/evaluation expense was significantly lower, down from EUR 78 million to EUR 38 million, due to income from the disposal of a holding. The pre-tax return on equity reached 19.6% (previous year: 21.3%).

Corporate Clients

In the Corporate Clients business, operating profit after risk provisions showed a significant improvement to EUR 399 million (previous year: EUR 261 million). Net interest income rose to EUR 365 million (previous year: EUR 357 million) on the back of a sharp rise in the demand for credit. In addition to traditional bank loans, clients were also looking for innovative forms of financing such as mezzanine capital and structured financing. Commission income increased to EUR 181 million (previous year: EUR 127 million). This resulted principally from the Bank’s activities in arranging complex financing transactions, particularly acquisition finance. The sale of a holding led to a positive risk provisioning/evaluation result. The pre-tax return on equity increased from 24.4% to 32.5%.

Special Corporate and Institutional Clients

The Special Corporate and Institutional Clients segment is composed of the Transport, Leasing and Savings Banks/Financial Institutions divisions. Its operating profit after risk provisions came to EUR 234 million (previous year: EUR 237 million). The return on equity came to 22.1% (previous year: 24.5%).

Private Clients

In the Private Clients segment, the operating profit after risk provisions rose to EUR 47 million (previous year: EUR 38 million), with the major contribution to this positive development coming from net commission income, which rose from EUR 30 million to EUR 37 million. The successful placement of new structured investment products and innovative investments accounted for a significant share of this trend. Securities business also benefited from the favorable stock market environment. Net interest income improved from EUR 64 million to EUR 68 million, reflecting a higher volume of deposits in conjunction with higher interest rates. Risk provisioning requirements rose slightly. The pre-tax return on equity improved from 20.3% to 25.5%.

Financial Markets

In 2006, the Capital Markets sector reported an operating profit after risk provisions of EUR 296 million (previous year: EUR 457 million). A flat yield curve, low credit spreads and low volatility in some market segments influenced our investment business. However, the deterioration in profit year-on-year resulted also from a valuation effect in the previous year. The refinancing activities in the run-up to the phaseout of state guarantees led to valuation gains in the second half of 2005 which were reflected in the segment‘s interest income. The pre-tax return on equity fell accordingly, from 26.9% to 16.5%.

The reconciliation column shows the difference between the sum of the individual segments’ operating results and the operating result of the HSH Nordbank Group as a whole. It contains consolidation adjustments, unallocable subsidiaries and other items that cannot be allocated to other segments, particularly allocations to reserves in accordance with Section 340g of the German Commercial Code. The Transaction Services unit’s results are also shown in the reconciliation column. In addition, the reconciliation column reconciles management accounting segment earnings to the Statement of Income pursuant to the German Commercial Code. This includes unrealized segment earnings resulting from marking to market, e.g. for trading positions and equity holdings. The reconciliation column also eliminates any differences in allocation to income and expense items between the management accounting treatment applied in segment reporting and the accounting principles applied in the external accounts prepared according to the German Commercial Code.

HSH Nordbank Group: Income statement

HSH Nordbank Group
(EUR millions)
1/1 to 12/31 2006 1/1 to 12/31 2005 Δ %
Operating income 2,172.3 2,119.3 +2.5
Net interest income 1,535.4 1,608.1 -4.5
Net commission income 423.9 314.6 +34.7
Net trading income 140.6 135.9 +3.5
Other operating income 72.4 60.7 +19.3
Operating expenses -918.7 -873.0 +5.2
Personnel expenses -468.6 -408.1 +14.8
Other operating expenses -450.1 -464.9 -3.2
Operating profit 1,253.6 1,246.3 +0.6
Risk provisions -308.8 -633.2 -51.2
Operating profit after risk provisions 944.9 613.1 +54.1
Extraordinary income/expenses -21.1 151.1
Taxes on income -191.8 -65.6 +192.4
Payouts on silent participations -272.0 -298.6 -8.9
Profit after tax 460.0 400.0 +15.0
HSH Nordbank Group
(EUR millions)
4th quarter of 2006 4th quarter
of 2005
Δ %
Operating income 580.3 562.5 +3.1
Net interest income 394.1 424.4 -7.2
Net commission income 92.7 95.7 -3.2
Net trading income 63.8 39.3 +62.3
Other operating income 29.7 3.1 +858.0
Operating expenses -255.9 -219.5 +16.5
Personnel expenses -141.9 -103.8 +36.7
Other operating expenses -114.0 -115.7 -1.5
Operating profit 324.4 343.0 -5.5
Risk provisions -58.6 -262.2 -77.7
Operating profit after risk provisions 265.8 80.8 +228.9
Extraordinary income/expenses -21.1 -10.9 +93.5
Taxes on income -17.4 61.2
Payouts on silent participations -69.2 -69.8 -0.9
Profit after tax 158.1 61.3 +157.9
HSH Nordbank Group
(EUR millions)
1/1 to 12/31 2006 1/1 to 12/31 2005 Δ %
Total assets 189,382 185,065 +2.3
Business volume 241,579 233,370 +3.5
Employees (number) 4,433 4,528
Cost/income ratio (%) 42.3 41.2
Return on equity (%) 15.0 14.1
Tier 1 capital (EUR billions),
German Banking Act
7.4 6.8
Tier 1 capital ratio (%),
German Banking Act
7.0 6.7

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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