HSH Nordbank posts earnings uptrend in the first half

• Total income nearly doubled to EUR 809 million
  
• Group net income of EUR 90 million – up 67 percent on previous year
  
• Core Bank’s earnings contribution up sharply
  
• Core Tier 1 capital ratio raised to 12 percent by replenishment of the guarantee
  
• Outlook for 2013 unchanged: Group net loss expected
  
• Chairman of the Management Board Constantin von Oesterreich: “HSH Nordbank is focusing resolutely on profitable business areas and has thereby created the basis for this evident uptrend in the Core Bank’s earnings.”
  

Hamburg/Kiel, August 30, 2013 - HSH Nordbank maintained the uptrend of the first quarter of 2013 and in the first half of the current financial year generated Group net income amounting to EUR 90 million (previous year: EUR 54 million).

The factors behind this good trend were above all the encouraging business performance in the Core Bank, progress in the transformation into a 'Bank for entrepreneurs’ as well as appreciations in value of securities. On the other hand, the still very tight situation in the international shipping business as well as subdued demand for corporate loans exerted a dampening effect.

Net income before restructuring expenses improved to EUR 249 million in the first half (previous year: EUR 195 million). Including the restructuring result and expenditure for public-sector guarantees, the Bank as a whole posted net income before taxes of EUR 98 million in the first half of the year (previous year: EUR 19 million), of which the Core Bank provided EUR 131 million (previous year: a loss of EUR 30 million) and the Restructuring Unit incurred a loss of EUR 33 million (previous year: EUR 49 million). Adjusted for non-recurring and special items, Group net income before taxes even came to EUR 189 million (previous year: EUR 2 million).

Total assets were significantly reduced in the first half of 2013, namely by about EUR 10 billion to EUR 121 billion. This reflects the stepped-up shedding of legacy assets as well as resolute implementation of the EU requirements.

The Core Tier 1 ratio rose to 12.0 percent, up from 9.9 percent at the end of 2012, and is thus well above the level required by the banking supervisory authority. Alongside the ongoing reduction of risk positions, this substantial improvement in the Core Tier 1 capital ratio is attributable to the replenishment of the second loss guarantee from EUR 7 to 10 billion as provisionally approved by the EU Commission in June. By reducing the burden of legacy assets, the Bank has been early in permanently fulfilling the future requirements under Basel III with respect to capital resources.

“The encouraging trend in HSH Nordbank’s earnings is intact. We have succeeded in replacing income lost as caused by reducing total assets. We sharpened the focus of our business activity further during the first half of the year. We simultaneously expanded our customer base and concentrated on high-quality, lower-risk business. The Bank’s shareholders at the same time significantly strengthened its capital resources by replenishing the guarantee to EUR 10 billion. This has provided us with greater scope for action to grow our business on a lasting basis as well as to cope with our legacy assets – especially so in the shipping business,” said Constantin von Oesterreich, HSH Nordbank’s Chairman of the Management Board.

Encouraging earnings performance in the first half

This half-year result is attributable to the good performance in terms of total income, which almost doubled year on year to EUR 809 million (previous year: EUR 438 million). A contributing factor in this respect was new business, which has steadily increased so far this year and, at a figure of EUR 2.7 billion, almost matched the previous year's level (of EUR 2.9 billion) despite flat macroeconomic demand for loans as well as market-related adverse factors. The Bank furthermore again improved its margins and compensated for lost interest income by reducing its total assets. Net interest income rose to EUR 485 million in the first half, up from EUR 453 million for the same period of the previous year.

Net commission income increased to EUR 52 million from EUR 44 million one year earlier. This uptrend was supported by higher commissions charged on new lending busi-ness transacted by the client units.

Net trading income improved significantly to EUR 109 million, compared to a shortfall of EUR 210 million in the previous year. Key impact on the increase in earnings was exerted by lower charges resulting from measurement of EUR/USD basis swaps, which are used to fund forex transactions. Furthermore, legacy assets benefited from the easing tension on the market. Lower risk premiums as at the reporting date consequently entailed positive valuation effects especially in the Credit Investment Portfolio (CIP), which is managed by the Restructuring Unit.

Net income from financial investments rose slightly to EUR 167 million from EUR 152 million in the previous year. The appreciation of debt instruments is reflected in the half-year result. The main contributing factors in this respect were reversals of write-downs in the CIP due to the recovery of the US residential real estate market. Net income from financial investments also again benefited from the sale of securities and equity holdings, albeit to a lesser extent than in the previous year.

Loan loss provisions reflect weak market and economic conditions

Loan loss provisioning amounted to EUR 224 million in the first half (previous year: EUR 111 million). Additions to loan loss provisions amounted to EUR 495 million (previous year: EUR 457 million) and are attributable mainly to preventive measures pertaining to the shipping crisis. As the loan loss provisioning mostly involved portfolios that are covered by the second loss guarantee provided by the states of Hamburg and Schleswig-Holstein, the effect of the guarantee reduced the provisions made. After deducting the additional premium imposed by the EU Commission, the effect of the guarantee amounted to EUR 271 million.

Costs further reduced

HSH Nordbank’s cost reduction programme again showed a perceptible impact in the first half of the year. Despite increased depreciation/amortisation charges, savings on operating expenses and job-shedding lowered administrative expenses by a further EUR 15 million to EUR 370 million (previous year: expenses of EUR 385 million). Excluding exceptional impairment charges amounting to EUR 29 million, administrative expenses would even have dropped by 11 percent to EUR 341 million. The trend of operating expenses, which were down by EUR 12 million to EUR 154 million when disregarding depreciation/amortisation charges, reflects, among other factors, less building-related expenses and lower IT costs in the context of downsizing the Bank. Personnel expenses were reduced from EUR 184 million to EUR 166 million, the key factor here having been the reduced number of staff. It was down by 185 versus the end of 2012, to 2,938. The job shedding planned by 2014 has already been almost completely implemented in contractual terms.

Expenses for public-sector guarantees, which amounted to EUR 143 million for the first six months (previous year: EUR 157 million), are entirely accounted for by the second loss guarantee issued by the federal states of Hamburg and Schleswig-Holstein. Since April 2009, the Bank has recognised premium expenses totalling about three billion euros for provision of the second loss guarantee. About two billion euros of this total was paid to HSH Finanzfonds AöR as the guarantor and about one billion euros was recognised in the income statement as non-cash basic and additional premiums.

Outlook

Conditions on some markets will again challenge HSH Nordbank during the second half of the year. For instance, the strained situation of the international shipping business that has been ongoing for years – and for which HSH Nordbank does not anticipate any sustained recovery before 2015 – will continue to weigh heavily on the Bank. Furthermore, the banking supervisory authority will again be conducting an extensive review of the resilience of system-relevant banks. This will be happening in advance of the transfer planned for 2014 of regulatory responsibility for larger banks from national supervisory authorities to the European Central Bank. This is to involve a balance sheet assessment to examine the quality of the banks’ portfolios. Against this backdrop, too, the Bank still anticipates according to its planning the need for a large amount of loan loss provisions later on this year to cover the troubled assets in its Restructuring Unit. Furthermore, additional fee expenses for the increased guarantee facility and a pro-rata exceptional payment to the guarantor will have an impact on the second half of the year. This exceptional payment will put the guarantor in the same position as if the guarantee had not been temporarily reduced in the meantime. For these reasons the Bank still forecasts a negative 2013 result for the Group as a whole.

The provisional approval issued in June for the guarantee increase applies until the EU Commission issues its final decision. The formal state aid proceedings that the EU Commission has launched will probably not be completed before 2014. From today’s perspective, the Bank is confident the state aid proceedings will find in favour of its business model to become a 'Bank for entrepreneurs' and that the restructuring of HSH Nordbank will be taken to a successful conclusion.

In line with the seasonal trends of previous years, the Bank expects an increase in new business during the second half of the year. This expectation is based on a significant increase in client interest over the past few months, due to which the new business pipeline has grown to well in excess of EUR 10 billion.

“The ‘Bank for entrepreneurs’ is increasingly becoming a firm feature on its target markets. Its earning power and efficiency is rising steadily. The success of the past few quarters and the sustainability of our planning show that HSH Nordbank is heading in the right direction towards a secure future with an appropriate level of profitability,” Constantin von Oesterreich said.