Pre-tax profit for the first half rose to € 432 million – forecast reaffirmed
- New business increased by more than two thirds to about € 4.5 billion on stable margins
- Common Equity Tier 1 capital ratio including buffer at a solid 12.8 percent
- Rapid year-on-year wind-down of legacy assets in the Restructuring Unit by 26 percent to € 37 billion
- Net loan loss provisions nearly halved to € -237 million – focus remains on ship finance
- Forecast reaffirmed: profit in 2014 before and after taxes
Hamburg/Kiel, August 29, 2014 - HSH Nordbank maintained the positive trend of the first quarter, reporting a solid profit as well as strong capital ratios at the half-year mark. This encouraging performance is based to a major extent on rising income from new business with clients on steady margins, decreasing administrative expenses as well as the expected considerably lower loan loss provisioning than in the previous year. Against the backdrop of this good performance in its operating business, HSH Nordbank reaffirmed its forecast and still projects a profit before and after taxes for the year as a whole.
The result for the first half of 2014 also benefited considerably from the effect of the capital protection clause, which – after heavy charges due to guarantee premiums in the preceding years – resulted, as expected, in the partial reversal of guarantee premiums that was also recognised in the income statement for the half-year period. Net income before taxes came to € 432 million (previous year: € 137 million). This figure includes payments of € -259 million for the guarantee provided by the federal states of Hamburg and Schleswig-Holstein (pre-year period: € -143 million). After taking € -131 million in income tax (pre-year period:€ -7 million) into account there remains Group net income of € 301 million (pre-year period: € 130 million).
The Core Bank continued to show its profitability by posting net income before taxes of € 185 million (previous year: € 131 million). The Core Bank's earnings were reduced by a non-recurring factor in the first quarter due to a conversion effect pertaining to hybrid financial instruments, which will be fully offset again by 2017. Whereas this factor still came to a negative amount of € -102 million in the first quarter of 2014, it was already down to € -96 million by the end of the June 2014.The Core Bank has thus been profitable in operating terms for two years, with this series of positive results interrupted only in the fourth quarter of 2013 due to a deliberately large amount of loan loss provisioning to cover restructuring exposures in the shipping business.
The increasing disbursements of new loans on stable margins exerted a positive effect. The amount of new business transacted in the first half of the year rose significantly to € 4.5 billion (pre-year period: € 2.7 billion) and thus, based on a target of about € 9 billion for fiscal 2014, performed as projected. Real estate finance was one of the focal areas. In addition, the Bank closed considerably more deals in its core businesses Energy & Infrastructure as well as Shipping International than in the previous year. On the whole, the sectors of relevance to HSH Nordbank's corporate client business performed stably during the first half of the year. Given the good financial situation of many SMEs, the demand for new loans generally remained subdued despite a pick-up in capital expenditure.
Constantin von Oesterreich, Chairman of the Management Board of HSH Nordbank, said: "We bolstered our competitive position further by the half-year mark. With the success of our Core Bank, the progressing wind-down of our legacy assets and the ongoing efficiency enhancements we continue to strengthen the basis for a sustained, successful future of HSH Nordbank."
New business expanded as planned
Total income amounted to € 646 million (previous year: € 809 million). Whereas the trend in the net interest income of the Core Bank's client segments was steady in the wake of the new business, net interest income in the Restructuring Unit was down significantly as planned because of the drop by nearly one quarter in its total assets. Furthermore, the decrease in total income was to a key extent due to special factors pertaining to net interest income. The aforementioned temporary, non-recurring factor involving calculation of the income from hybrid financial instruments thus had a negative effect of € -96 million. There was an adverse interest effect of € -44 million from the reversal of hedging transactions (hedge relationships). On the other hand, there was a positive effect amounting to € 102 million in net income from financial investments. A negative amount of € -21 million from adjustment of the yield curve as a result of calculating the net present value of provisions for expected fees pertaining to the second-loss guarantee also had to be absorbed in net interest income. Impairment reversals in the Credit Investment Portfolio and capital gains on the disposal of securities and equity holdings in net trading income and net income from financial investments exerted a clearly positive effect on total income. Improved cross-selling business, which is reflected in net commission income, also benefited total income.
Net interest income dropped to € 231 million (pre-year period: € 480 million). Adjusted for the above-mentioned non-recurring items, which together came to a negative amount of € -161 million, there was solid net interest income of € 392 million.
Net commission income rose to € 73 million (pre-year period: € 52 million). Alongside more loan commissions, this reflected improved cross-selling of additional credit finance services, boosted by the significant expansion of new business.
Net trading income amounted to € 112 million (pre-year period: € 114 million).Whereas the valuation of interest-rate/currency derivatives (EUR/USD basis swaps) as well as own liabilities measured at fair value exerted a negative effect, reduced counterparty risks in the derivatives business, among other factors, had a positive effect. HSH Nordbank furthermore recorded appreciation of its trading portfolio within the Credit Investment Portfolio. Net income from financial investments improved significantly to € 240 million (pre-year period: € 167 million). Above all, this reflects capital gains and valuation effects in the wake of the good performance of the financial markets in the first half of 2014. Reallocations of securities as well as reversals of impairment losses on debt instruments pertaining to the US residential real estate market also made a positive contribution to earnings. The disposal of European government bonds and other debt instruments boosted net income from financial investments by a gross amount of € 102 million. The Bank also further reduced the size of its portfolio of equity holdings and exerted a beneficial effect on net income from financial investments via disposals.
Decreasing need for loan loss provisioning – capital protection clause taking effect
As expected, the Bank reduced its additions to loan loss provisioning in the first half of 2014. Before taking the second-loss guarantee provided by the federal states of Hamburg and Schleswig-Holstein into account, net loan loss provisioning expense was down by nearly half to € -237 million as opposed to € -463 million in the pre-year period. This pertained mainly to legacy assets in the shipping portfolio. We furthermore recorded moderate additions for European mortgages in the Restructuring Unit as well as for one-off cases in the Energy & Infrastructure division.
The hedging effect of the guarantee lowered net loan loss provisioning expense by € 100 million. On the other hand, however, there were expenses of € -99 million for the additional premium imposed by the EU Commission, thus leaving a net benefit of the hedging effect of just € 1 million. The capital protection clause pursuant to the guarantee agreement with the federal states exerted a discernibly positive effect on loan loss provisioning. The Bank thus reversed additional premiums for the guarantee in the beneficial amount of € 573 million in the income statement, which had been recognised in the first half and the preceding periods as loan loss provisioning expense. The partial reversal of the additional premium is based on the temporary debt waiver by the guarantor, ensuring a Common Equity Tier 1 capital ratio of at least 10.0 percent after the switch to Basel III and regulatory capital measurement from German GAAP to IFRS in 2014. Taking this beneficial effect into account, HSH Nordbank presents a positive amount of € 337 million in loan loss provisioning (pre-year period: a negative amount € -192 million).
Further reduction of administrative expenses
HSH Nordbank's cost reduction programmes proved effective in the first half of 2014 as well. Administrative expenses decreased further to € -338 million (pre-year period: € -382 million. Personnel expenses were down from € -166 million to € -146 million due to the ongoing adjustment programmes. Operating expenses (excluding depreciation) rose slightly from € -155 million to € -161 million. Realised savings were in part undermined by substantial additional costs associated with regulatory requirements. The special audit for the ECB's Asset Quality Review alone has to date involved expenses of about € 10 million. Depreciation/amortisation of tangible and intangible assets was down significantly to € -31 million (pre-year period: € -61 million).
Premium expenses up after 2013 guarantee replenishment
The expenses for public-sector guarantees, which comprise the basic premiums paid to the federal states of Hamburg and Schleswig-Holstein, rose to € -259 million in the first half (pre-year period: € -143 million). This higher basic premium is due to the replenishment of the guarantee facility from € 7 to 10 billion in 2013 as well as the share of about € -57 million pertaining to the first half of 2014 for the agreed back-payment of the basic premium. The premiums that HSH Nordbank had paid to the guarantors by the end of the first half of 2014 rose to a total of € 2.0 billion (31.12.2013: € 1.7 billion), of which € 1.7 billion is accounted for by the ongoing basic premium and € 0.3 billion for the back-payment. HSH Nordbank is, with the premiums paid, making a significant contribution to compensating for the aid provided by Hamburg and Schleswig-Holstein.
Total assets up due to new business and enhanced liquidity
The rising disbursements on profitable new loans and the deliberate boosting of liquidity increased total assets. Including consolidation effects, the segment assets of the Core Bank rose to € 76 billion from € 69 billion on 31 December 2013. At the same time, the Bank continued to speedily wind-down the risky legacy assets of the Restructuring Unit. Including consolidation effects the segment assets of the Restructuring Unit decreased from € 40 billion on 31 December 2013 to € 37 billion at the end of the first half of 2014. The segment assets of the Restructuring Unit have thus diminished by more than a quarter within one year (30.06.2013: € 50 billion). The biggest progress in the year to date was made in winding down problematic ship and real estate loans. Including consolidation effects, total assets of HSH Nordbank rose to about € 113 billion in the first half of 2014, as opposed to € 109 billion at the end of 2013.
Solid capital resources even under Basel III
The capital ratios of HSH Nordbank stood at a very solid level at the mid-year mark of 2014 under the Basel III transition rules that have applied since the beginning of 2014. The Common Equity Tier 1 capital ratio (CET1 capital ratio) came to 12.8 percent at the half-year mark, which includes a buffer of 2.8 percentage points from the second-loss guarantee provided by the federal states (31.12.2013 pro forma: 13.0 percent - incl. 3.0 pp buffer). Even assuming implementation in full of the Basel III rules, HSH Nordbank's CET1 ratio at the end of the first half came to a solid figure of 10.9 percent with a buffer of 0.9 of a percentage point (31.12.2013 pro forma: 11.7 percent - incl. 1.7 pp buffer).
With the capital ratios reported at the mid-year mark in 2014, HSH Nordbank has a resilient capital base with which it is well prepared for the ECB's Comprehensive Assessment and the related Asset Quality Review as well as the stress test. The Management Board will resolutely implement its strategy with a view to the second half of the year, with rapid wind-down of the legacy assets in the Restructuring Unit remaining a primary objective. The Bank will increasingly pursue alternative portfolio solutions with the involvement of strategic investors in order, above all, to further reduce the volume of shipping loans in the Restructuring Unit. In addition, the Core Bank will gain an increasingly stronger foothold in its target markets. The Management Board still projects a profit before and after taxes for fiscal 2014 as a whole. This reaffirmed forecast is based on considerable relief in terms of loan loss provisioning versus the previous year, including the positive effect of the capital protection clause. The Management Board furthermore expects increasing income from new business with clients as well as lower administrative expenses – despite probable additional charges relating to regulatory requirements. The result will be underpinned mainly by the Core Bank, which is likely to report a profit for fiscal 2014.
|Income Statement (EUR million)|| January
|Net income from hybrid financial instruments||-160||-76||>-100|
|Net interest income||231||480||-52|
|Net commission income||73||52||40|
|Result from hedging||-12||10||>-100|
|Net trading income||112||114||-2|
|Net income from financial investments||240||167||44|
| Net income from financial investments accounted for
under the equity method
|Loan loss provisions||337||-192||>-100|
|Other operating income||54||53||2|
|Net income before restructuring||699||288||>100|
|Result from restructuring||-8||-8||0|
|Expenses for government guarantees||-259||-143||81|
|Net income before taxes||432||137||>100|
|Income tax expenses (-)/income (+)||-131||-7||>-100|
|Group net income||301||130||>100|
| Group net income attributable to non-controlling interests
|Group net income attributable to HSH Nordbank shareholders||300||131||>100|
|Additional key figures of HSH Nordbank Group||30/06/2014||31/12/2013|
|Total assets (EUR billion)||113||109|
|RWA before guarantee (EUR billion)||67||62|
|RWA after guarantee (EUR billion)||39||38**|
|Common equity Tier 1 capital ratio* (%)|| 12.8
incl. buffer of 2.8 pp
incl. buffer of 3.0 pp
|Tier 1 capital ratio* (%)||14.4||14.3**|
|Regulatory capital ratio** (%)||18.9||19.7|
|Employees (full-time equivalents)||2,676||2,834|
* taking account of the interim results as at 30.06.2014 and the adoption of the 2013 annual financial statements of HSH Nordbank AG; ratios as at 31.12.2013 pursuant to Basel III
** based on matching periods according to the Capital Requirements Regulations (CRR)
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