HSH Nordbank making progress in implementing its new business model

• Growing volume of new business shows progress in client business
• Higher loan loss provisions and non-recurring expenses for guarantee fees weigh on earnings
• Group net loss of EUR -25 million
• Common equity ratio remains above 9 percent
• Chairman of the Management Board Constantin von Oesterreich: "The implementation of our ‘Bank for entrepreneurs’ business model is progressing rapidly and we are regaining our footing in client business."
  

Hamburg/Kiel, December 5, 2012 - HSH Nordbank made further progress in the first nine months of the current financial year in implementing its new "Bank for entrepreneurs" business model.

Against this backdrop we were able to increase the volume of new business significantly compared to the previous year. In this context, cross-selling income has also increased appreciably of late. The nine-month result came under pressure from substantially higher loan loss provisions which, in addition to the strain resulting from the underlying market conditions, also include non-recurring expenses for guarantee fees for the second loss guarantee provided by the federal states of Hamburg and Schleswig-Holstein. However, positive non-recurring effects from the valuation of hybrid financial instruments compensated for part of the charges.

With the market and sector setting deteriorating further, the bank reported a group net loss of EUR -25 million after EUR -269 million in the prior-year period. Before restructuring costs and expenditure on government guarantees as well as tax effects, the Bank generated net income of EUR 299 million (previous year: EUR 794 million). At 9.4 percent as at 30 September the Bank's common equity ratio exceeded the minimum ratio of 9 percent required again in the third quarter despite the significant increase in loan loss provisions.

"The implementation of our ‘Bank for entrepreneurs’ business model is progressing rapidly and we are regaining our footing in client business. HSH Nordbank is aware of its responsibility of supplying the regional economy with loans," said Constantin von Oesterreich, Chairman of the Management Board of HSH Nordbank. "At the same time we have also adjusted our loan loss provision plan to overall economic developments - in particular in shipping - and have made comprehensive provisions in view of the increase in risk potential."

Increase of new business and cross-selling – pressure from increased loan loss provisions

HSH Nordbank further strengthened its client relationships and took advantage of the opportunities in the market on a risk-conscious basis. This is also reflected in the new lending business, which almost doubled compared to the first nine months of 2011, to EUR 4.5 billion. Net commission income also recovered in the third quarter. This progress, which is attributable to the realignment of the business segments, only partly compensated for the strain resulting from the market conditions, though.

The increase in the volume of new business over the course of the year will only have a delayed impact on the Bank's key profit items. Net interest income was adversely affected by the focus on strategic core business together with the resolute reduction of risk positions. At the same time, the size of the Bank's interest-bearing asset base has declined over several quarters. Net interest income was influenced positively, though, by non-recurring interest income of EUR 317 million (previous year: EUR 60 million) from the valuation of hybrid financial instruments. At EUR 1,107 million net interest income was therefore only just below the previous year’s figure (EUR 1,121 million).

Net commission income of EUR 75 million was also down on the previous year (EUR 93 million). In addition to declining loan commissions in the wake of focusing the business and the closure of foreign branches, the sale of the private banking clients business of a Luxembourg subsidiary the previous year had an impact in the securities business. Nevertheless, the positive influence of the growth in new business in recent months was already seen here. Consequently, the third quarter result exceeded that of the two preceding quarters of this year. One reason for this was higher income from cross-selling business with clients, which was enhanced by the realignment of the product segments.

Net trading income as at 30 September 2012 was influenced negatively mainly by valuation effects with respect to own liabilities and interest rate/currency derivatives (euro/US dollar basis swaps), which are used to fund foreign exchange business - in particular in ship financing. Net trading income amounted to EUR -339 million (previous year: EUR -319 million). On the other hand, the performance in the Credit Investment Portfolio had a positive impact thanks to the improved market sentiment towards the end of the quarter, a development that was reflected in both net trading income and in net income from financial investments. The latter improved to EUR 175 million from EUR 145 million the previous year. In this connection, the Bank benefited from the sale of non-strategic investments and valuation gains on securities. On the other hand, portfolio impairments, which the Bank had recognised to allow for heightened sovereign risks, exerted strain.

In view of the euro sovereign debt crisis, the global economic downturn and especially the increasingly critical state of the international shipping industry, HSH Nordbank revised its long-term loan loss provision plan in the third quarter and significantly increased loan loss provisions as at 30 September. For the first nine months of this year the Bank reported an allocation to loan loss provisions of EUR -458 million compared to a write-back of EUR 365 million in the previous year. In particular, higher impairments on exposures requiring restructuring in the shipping portfolios exerted pressure. In addition, higher loan loss provisions were also required in other portfolios of the Restructuring Unit which were also affected by the difficult market developments, including above all European real estate loans, especially in the Netherlands.

As the loan loss provisions were required mainly in legacy portfolios, which are covered by the second loss guarantee provided by the federal states of Hamburg and Schleswig-Holstein and are offset by them in the balance sheet, utilisation of the second loss guarantee rose by EUR 868 million to EUR 2,393 million over the course of the year. This figure is set against a corresponding compensation item from the second loss guarantee. The compensation item is reduced by EUR-164 million resulting from the additional premium to be paid and non-recurring fees of EUR -474 million resulting from fees for the second loss guarantee to be expected in future which have an impact on earnings in this accounting period. Including additional factors, the guarantee relieves loan loss provisions by a total amount of EUR 414 million. The reason for the reduction of the compensation item by expected fees for the second loss guarantee is the HSH Nordbank's revised loan loss provision plan, the key results of which were published at the beginning of November. According to the revised plan, the Bank anticipates that effective payments from the second loss guarantee provided by the federal states of Hamburg and Schleswig-Holstein will have to be made for the first time in 2019. After deducting the first loss piece to be borne by the Bank itself, the effective payments expected from the second loss guarantee amount to a maximum of EUR 1.3 billion by 2025.

Cost-cutting measures increasingly taking hold

Administrative expenses were down on the previous year by EUR 13 million to

EUR -558 million. Adjusted for numerous companies which were included in the Group financial statements for the first time in the 2011 annual financial statements, administra-tive expenses even declined by EUR 45 million. This reveals the success of the Bank's strategic and organisational realignment on the basis of the EU decision announced in the second half of 2011 which involves adjusting structures and processes to the Bank's reduced size in tandem with significantly lowered costs.

One material element of the reduction in administrative expenses in the past and in the future entails staff reductions, which were agreed at the end of 2011, implementation of which commenced at the beginning of 2012. As a result, staff numbers within the Group (expressed as full-time equivalents) have dropped by 410 since the end of 2011 to 3,274 as at 30 September 2012. Including the redundancies for which contracts have already been signed, around two-thirds of the staff reductions planned by 2014 had been carried out by the end of the third quarter of 2012.

Total expenditure for the provision of public-sector guarantees declined to EUR -231 million (previous year: EUR -796 million) in the first nine months. Of this, the bulk was accounted for by the second loss guarantee issued by the federal states of Hamburg and Schleswig-Holstein. Following the partial repayment of EUR 3 billion in 2011, which reduced the outstanding amount to EUR 7 billion, fee expenses for this guarantee dropped to EUR -213 million (previous year EUR -742 million). The previous year’s figure includes a one-off payment to the guarantors of EUR 500 million, which was subsequently contributed to the Bank in the form of a capital increase. Since April 2009 the Bank has so recognised as expense a base premium of EUR 1.3 billion to be paid to the guarantors for the provision of the second loss guarantee (excluding the additional one-off payment of EUR 500 million). Expenditure for the guarantees of the Financial Market Stabilisation Fund (SoFFin) was reduced by repayments to only EUR -18 million (previous year: EUR -54 million). In July 2012, the Bank repaid its final SoFFin-backed bond of EUR 3 billion on schedule.

Stronger capital ratio targeted

HSH Nordbank's total assets remained virtually stable at EUR 136.4 billion (31.12.2011: EUR 135.9 billion) despite the continued reduction in the business volume of the Restructuring Unit, as planned. The increase in the Bank's liquidity and collateral pool contributed to this, among other things.

As at 30 September 2012 the Tier 1 capital ratio excluding hybrid financial instruments (common equity ratio) stood at 9.4 percent (31.12.2011: 10.3 percent) and thus remained higher than the regulatory minimum and the ratio of 9.0 percent prescribed by the Euro-pean Banking Authority. The Tier 1 capital ratio including market risk positions came to 11.8 percent (31.12.2011: 13.8 percent). The decline in the equity ratios compared with the end of 2011 is due to the substantial increase in risk-weighted assets, which was due above all to the crisis in the shipping industry, as a result of which the risk parameters deteriorated significantly. This increase could only partially be offset by measures to reinforce capital, the ongoing winding-down of non-strategic portfolios and the second loss guarantee.

In the third quarter the Bank identified a number of additional individual measures which are having a positive impact on the common equity ratio and which will therefore contribute to the lasting fulfilment of the higher capital requirements in the future once Basel 3 has been introduced. The measures which have already been implemented include the highly risk-aware management of new business and loan extensions. Furthermore, the share of US dollar transactions is being limited continuously in order to reduce the negative impact of the strong fluctuations in exchange rates. A further measure is the process of reducing legacy portfolios in the Restructuring Unit, focusing in particular on those entailing greater risk. Syndicate deals, in particular of non-strategic commitments, are also being increased.

HSH Nordbank further strengthened its solid funding basis between January and September 2012. Stable sales of unsecured bonds within the German savings bank system and with institutional investors made a major contribution to this success. The trend in the sale of Pfandbriefe was encouraging. The Bank's main issues included two benchmark mortgage-backed Pfandbriefe, which were issued in March and May each for an amount of EUR 500 million for a term of five and four years, respectively. The issues met with very broad demand on the part of national and international institutional investors. Overall, the Bank was already able to raise almost the amount of funding planned for the whole of 2012 on the markets in the first nine months of the year.

Outlook

The very difficult underlying conditions will continue to have a major influence on the trend in business over the further course of the year. In view of the significantly dampened expectations on individual markets, in particular shipping, HSH Nordbank is assuming an increase in loan loss provisioning requirements in the months ahead, a development that will impact Group net income. In order to ease the pressure on its capital ratios further, HSH Nordbank is steadily implementing the individual measures identified in the third quarter and is examining additional steps to strengthen the capital ratios and meet the growing regulatory capital requirements in the long term.

The further resolute realignment of the Bank remains a central element of the strategy. Based on the increases in efficiency and cost reductions already achieved, all of the steps required to establish an organisation which is fit for the future are being implemented consistently. HSH Nordbank aims to further strengthen the market position in its core areas of business based on the significant increase in new business with clients over the course of the year and take advantage of the income potential in the context of increased risk standards.

Despite the clearly visible success in implementing its business model, HSH Nordbank envisages continuing strains for its business for the time being. These are attributable to the unexpectedly difficult market conditions, both with regards to extent and duration.

"The difficult market setting and the twofold burden for the Bank to implement the EU decision and establishing a ‘Bank for entrepreneurs’ will accompany us further. The pro-gress made in realigning the Bank and the success in terms of client business give us reason to be confident, however: Our new business model and further operational measures will enable us to cope with the increasing challenges and lastingly strengthen HSH Nordbank," says Chairman of the Management Board Constantin von Oesterreich.