Expansion of new business substantiates positive trend of HSH Nordbank

• The Bank for Entrepreneurs is making solid progress in a difficult business environment
• Core Bank generating operating profit - new business up 45 per cent
• Margins improved with attractive risk/return profiles
• Earnings before restructuring at EUR 160 million
• Heavy charges from special items and loan loss provisioning for ship finance - consolidated loss of EUR -124 million
• Core Tier 1 ratio reaches 9.9 per cent
• Chairman of the Management Board Constantin von Oesterreich: “We are catching up in terms of client business and thereby gaining the strength we need to cope with the forthcoming challenges.”
  

Hamburg/Kiel, April 11, 2013 - In fiscal 2012 HSH Nordbank successfully advanced its transition to a “Bank for Entrepreneurs”. The Bank significantly increased its business in spite of difficult conditions in major sub-markets.

With good margins and attractive risk/return profiles the Bank increased the amount of new business in the Core Bank by 45 per cent to EUR 6.8 billion (previous year: EUR 4.7 billion). Cross-selling income also grew by a substantial amount in the course of the year.

Furthermore, the result for fiscal 2012 includes non-recurring income from the buyback of subordinated bonds and the valuation of hybrid financial instruments. However, this income was more than offset by a number of negative special items. These include expenditure resulting from the cash discounting of expected future payments for the base and additional premiums on the second loss guarantee, charges from the revaluation of the Bank’s own liabilities, writedowns in connection with the wind-down of equity holdings as well as measurement effects on interest-rate and currency derivatives.

The Bank posted earnings before restructuring costs of EUR 160 million (previous year: EUR 912 million). While the Core Bank contributed EUR 629 million to this positive result (previous year: EUR 365 million), the Restructuring Unit posted a loss of EUR -469 million (previous year: EUR + 547 million). Including the restructuring result and expenditure for public-sector guarantees, the Bank as a whole posted a loss before taxes of EUR -185 million (previous year: EUR -206 million). After taxes there remained a group net loss of EUR -124 million (previous year: EUR -265 million). The Core Tier 1 ratio at year-end came to 9.9 per cent (31 December 2011: 10.3 per cent).

“Our figures show that there are currently two sides to our business. One side shows the ‘Bank for Entrepreneurs’, which is gaining strength. The increase in client business, the larger amount of new business, the good margins and the improved structure of our credit portfolio show quite clearly that our business model is making progress and that HSH Nordbank has a future. On the other hand there are the Bank’s legacy liabilities from the years prior to the financial crisis – especially in shipping. They continue to constitute major challenges and still overshadow the Core Bank’s successes,” said Constantin von Oesterreich, Chairman of the Management Board of HSH Nordbank. “The charges resulting from shipping are the downside of our commitment to this sector. We still stand by our role as a reliable partner for the maritime sector, which is of major significance for Hamburg and the entire North of Germany,” continued Constantin von Oesterreich.

Successes in new business and risk reduction continued

Last year HSH Nordbank continuously strengthened and extended its client relationships as well as low-risk business. At EUR 6.8 billion, new business was up 45 per cent over the previous year in the past fiscal year (previous year: EUR 4.7 billion). The final quarter of 2012 alone contributed EUR 2.3 billion in new business and was the most successful since the introduction of the “Bank or Entrepreneurs” business model in September 2011. The positive trend in new business since that time has resulted in increasing interest income in the Bank’s core areas as loan amounts are paid out. Furthermore, net interest income benefited from risk-adequate interest margins. In addition, net interest income includes non-recurring income from the valuation of hybrid instruments amounting to EUR 631 million. This revaluation became necessary following the revision of our corporate planning. This meant that - in spite of the resolute wind-down of risk positions in the Restructuring Unit and the focus on core business - net interest income increased to EUR 1,520 million from EUR 1,350 million in the previous year.

The uptrend in new business is also shown in net commission income, which at EUR 119 million stood at the previous year’s level (EUR 120 million) in spite of the smaller amount of business as a whole. This is attributable above all to the closer linkup between the product and sales areas as well as a wider range of products, resulting in improved cross-selling income.

Net trading income amounted to EUR -238 million in 2012 (previous year: EUR -173 million). Whereas in the previous year above all valuation losses exerted a negative impact on European bonds, in 2012 net trading income was influenced mainly by losses in value in interest-rate and currency derivatives (EUR/USD basis swaps) amounting to EUR -378 million (previous year: EUR +248 million), which are used to refinance foreign currency transactions – especially in the shipping sector. The valuation of our own issues measured at fair value also had a negative impact of EUR -167 million in fiscal 2012 (previous year: EUR -71 million). By contrast, the performance of items in the Credit Investment Portfolio was mainly positive thanks to improved market sentiment.

Net income from financial investments amounted to EUR 53 million as compared to EUR 90 million in the previous year. Sales of non-strategic equity holdings and securities had a positive impact while writedowns in individual sub-portfolios had the opposite effect.

Loan loss provisions up due to the shipping crisis and the special items of the second loss guarantee

The Bank’s loan loss provisions for fiscal 2012 stood at EUR -656 million, compared to EUR 389 million in the previous year. This trend reflects the effects of the weak macroeconomic setting and the worsening crisis in the shipping sector. Accordingly, above all higher impairments had to be taken into account in the shipping portfolios. In addition to this, larger loan loss provisions were required in the Restructuring Unit, especially for real estate loans in other European countries – principally in the Netherlands.

As loan loss provisioning was necessary mainly for existing portfolios covered by the second loss guarantee from the federal states of Hamburg and Schleswig-Holstein, utilisation of the second loss guarantee as shown in the balance sheet increased to around EUR 2.8 billion. On the basis of the long-term loan loss provision planning revised in the third quarter of 2012, we expect the defaults from the portfolio covered by the guarantee will also in future lie above the Bank’s retained amount to EUR 3.2 billion. Consequently, in the year under report charges expected in future (base and additional premium) amounting to EUR -473 million for the second loss guarantee had to be recorded as non-recurring expenditure in loan loss provisioning for the first time. The loan loss provisions formed for the exposures covered under the second loss guarantee are offset by a compensation item for the corresponding amount. However, this compensation item is reduced by EUR -247 million from the additional premium to be paid and EUR -473 million from the aforementioned once-only inclusion of future charges for the second loss guarantee. Including further effects, the guarantee thus reduced risk provisioning by EUR 567 million and consequently had its planned risk-minimising effect on the Bank.

Cost-saving measures taking effect on schedule

HSH Nordbank was able to further reduce operating and personnel expenditure by resolutely implementing the cost-cutting measures initiated as early as 2011. Year on year, operating and personnel expenditure (excluding write-downs) dropped by EUR 83 million to EUR -670 million. Since the end of 2011 the number of full-time jobs fell by 561 to 3,123 as of 31 December 2012. Including the departures already contractually agreed, by the end of 2012 the Bank had implemented around three quarters of the job shedding planned in accordance with the EU state aid decision by 2014. Administrative expenditure was negatively affected compared to the previous year by non-scheduled write-downs on property, plant and equipment and equity holdings, nevertheless decreasing by EUR 16 million to EUR -821 million.

Total expenditure for the provision of public-sector guarantees declined to EUR -302 million in fiscal 2012 (previous year: EUR -883 million). Of this, the bulk was accounted for by the capital-sparing second-loss guarantee issued by the states of Hamburg and Schleswig-Holstein. The reduction of the guarantee facility by EUR 3 billion to EUR 7 billion in 2011 resulted in a decrease in premium expenditure to EUR -284 million (previous year: EUR -814 million). The pre-year figures include a one-off payment to the guarantors of EUR 500 million, which had been imposed on the Bank by the EU Commission and was then returned to the Bank in the context of a capital increase. Since April 2009 the Bank has paid some EUR 1.9 billion to the guarantors for the provision of the second loss guarantee – including this special payment.

Expenditure for the liquidity-hedging guarantees of the Financial Market Stabilisation Fund (SoFFin) was reduced by repayments to EUR 18 million (previous year: EUR -69 million). In July 2012, the Bank repaid its final SoFFin-backed bond of EUR 3 billion on schedule.

The other operating income of EUR 191 million (previous year: EUR 36 million) was influenced by income of EUR 261 million stemming from the buyback of publicly placed subordinated bonds in the first quarter of 2012 as well as write-offs of EUR 52 million on assets of a subsidiary.

Total assets reduced further – Tier 1 capital ratio well above 9 per cent

The Bank reduced total assets further in the past year; to EUR 131 billion (31 December 2011: EUR 136 billion). The trend reflects the resolute reduction in risk-prone legacy portfolios as well as non-strategic portfolios in the Restructuring Unit. The Restructuring Unit’s assets were reduced to EUR 50 billion in 2012 (previous year: EUR 58 billion) and were thus on target. The Bank also continued to reduce its equity holdings as agreed with the EU Commission. Since 2009, the value of the Bank’s portfolio of equity holdings has declined by more than 85 per cent. During the year under report, furthermore, we identified other equity holdings that are no longer to be deemed as part of the core business and are therefore also to be disposed of.

The Core Tier 1 capital ratio without consideration of hybrid instruments (Common Equity Ratio) stood at 9.9 per cent on 31 December 2012 (31 December 2011: 10.3 per cent). It thus remained well above the regulatory minimum and the ratio of 9.0 per cent as prescribed by the European Banking Authority. The main reasons for the slight decline versus the previous year’s figure are worsened risk parameters due to the gloomier conditions during the year under report and the reduced guarantee amount. Positive factors only partially compensated for these adverse effects. Further relief is attributable to the US dollar’s year-on-year depreciation – especially so in the fourth quarter of 2012.

Increase in the second loss guarantee planned

In order to meet the increased risks in the legacy portfolios as well as the changed regulatory conditions on the capital market and with respect to the rating agencies in the future, too, the Bank has asked its shareholders to initiate the necessary steps to increase the guarantee facility from EUR 7 billion to the original level of EUR 10 billion. This is intended to ensure an appropriate capital ratio – especially for the restructuring-intensive years 2013 and 2014.

Increasing the guarantee facility to its original level requires a corresponding amendment to the existing guarantee agreement because the existing agreement does not provide for such a top-up. In addition, the guarantee agreement is to be amended on the basis of international accounting standards for determining capital scheduled for 2014 or thereafter. This requires an amendment to the capital protection clause agreed with the EU Commission in the guarantee agreement, which enables the waiver of receivables from the additional premium against a debtor warrant to ensure the equity ratio.

“Increasing the guarantee facility again exclusively serves the purpose to ensure lasting adequate capital resources and to strengthen HSH Nordbank. We are currently engaged in in-depth discussions with our shareholders to implement this measure. The state governments of Hamburg and Schleswig-Holstein have already approved this topping-up. They will submit the increase in the guarantee facility to the EU Commission for its approval. Initial talks have already taken place,” said Constantin von Oesterreich.

Outlook

In its new lending business, HSH Nordbank will in 2013 follow on from its successes of the past year and further step up involvement in its target markets. Here, the key business areas of renewable energies and real estate assume particular significance. We also intend to expand our business with the savings banks in a dedicated business unit set up for this purpose.

The risk profile will be minimised at the same time. This will happen by concentrating on high-quality and low-risk business as well as effective management of the existing loan portfolios. The realignment of the organisational structure and processes to the new business model has already been largely implemented and is to be fully completed by 2014.

Considering the charges stemming from the Restructuring Unit’s legacy portfolios as well as the increased guarantee costs resulting from the planned increase of the guarantee facility, we expect HSH Nordbank to again post a net loss at Group level in 2013. For 2014 we project a declining need for loan loss provisioning versus the two preceding years and a continued uptrend in the Bank's core business. Furthermore, we expect the capital protection clause agreed with the EU Commission to exert a positive effect on earnings. We therefore forecast a group net result for 2014 that is distinctly positive.

“The progress made in restructuring to become the Bank for Entrepreneurs and the increasing success of the Core Bank’ s client business over the course of last year reinforces our determination to resolutely pursue the path on which we have embarked. Strengthening our capital base by increasing the guarantee facility will provide us with leeway to master the challenges that lie ahead of us, to successfully continue the restructuring and to lastingly position HSH Nordbank profitably on the relevant markets,” Chairman of the Board Constantin von Oesterreich said.