HSH Nordbank enjoys first restructuring benefits

• Earnings above budget
• Net interest and commission income increased
• Risk provisioning raised
• At 9.8 percent, Tier 1 capital ratio much improved
• Total assets reduced by 5 percent
• Efficiency enhancement and cost-reduction program taking effect
• Progress made in realignment

Hamburg/Kiel, August 21, 2009 - HSH Nordbank closed out the first half of 2009 better than planned. The net income before taxes came to EUR -530 million (previous year: EUR 155 million).

The result is attributable to consistently good earnings in the client units. HSH Nordbank’s total income increased to EUR 1,299 million in the first half (previous year: EUR 712 million). On the other hand, loan-loss provisioning was significantly increased in the second quarter, by EUR 771 million to a figure now of EUR 1,195 million (previous year: EUR 130 million), which’s negative effects were offset by valuation gains in the trading result. „It is evident that the measures to stabilize the Bank and to strategically realign it are taking hold. Not least thanks to the support of the federal states as well as the magnificent work done by our staff we are well on our way. In close collaboration with our shareholders, we shall direct the Bank into a secure future and will not disappoint the confidence that has been placed in us,” said Dirk Jens Nonnenmacher, CEO of HSH Nordbank. Furthermore, the result includes restructuring costs amounting to EUR 72 million as well as spending on guarantees provided by the Financial Markets Stabilization Fund (SoFFin) and provision by the federal states of Hamburg and Schleswig-Holstein of the guarantee facility totaling EUR 150 million.

Total income substantially increased

At EUR 1,006 million, net interest and commission income was well up on the previous year’s figure of EUR 919 million. The increase was due mainly to wider margins in the lending business and positive results from the very steep yield and liquidity curves evident on the market.In the context of strategic realignment the Bank concentrated its capacity on its new core areas of business and largely refrained from accepting new business. Instead, the Bank is helping its existing clients to overcome the crisis by postponing instalments of a considerable size.

The international financial markets calmed down perceptibly during the first half of the year. This was also reflected in HSH Nordbank’s trading and investment results.
Proactive reduction of the credit investment portfolio (CIP) to the present figure of about EUR 19 billion (on June 30, 2009) exerted positive effect on the trading result.
Whereas the previous year’s trading result still involved expenses of EUR 52 million, the Bank recorded income of EUR 516 million for the first six months of 2009. Revaluation results led to an income of about EUR 690 million (previous year: a loss of EUR 65 million). This also includes a positive contribution to income in the amount of about EUR 232 million as a result of revaluing own liabilities.

By contrast, the net income from financial investments dropped to a negative figure of EUR 313 million (previous year: a negative figure of EUR 141 million). This figure contains writedowns on the remaining CIP volume in the amount of EUR 242 million (previous year: EUR 155 million) as well as on equity holdings in the amount of EUR 74 million (zero in the previous year).

Savings measures showing further benefit

The efficiency-enhancement and cost-reduction measures launched in the previous year and continued in the first half of 2009 showed a beneficial effect in terms of administrative expenses. The decline by EUR 54 million to EUR 436 million (previous year: EUR 490 million) breaks down into EUR 35 million pertaining to non-personnel expenses and EUR 19 million to personnel expenses. The reduction in non-personnel expenses is attributable among other factors to the reduced spending on advertising, fees and travel expenses. It has already been agreed to cut 520 jobs on the basis of a workforce accord signed in April 2009 that ensures job-shedding in a way that minimizes social hardship. Of that total, 304 jobs were shed in Germany and 216 at foreign branches as well as subsidiaries.

Tier 1 capital ratio substantially improved

Following injection of the capital increase in the amount of EUR 3 billion approved in May, the Tier 1 capital rose to EUR 8.7 billion at the end of June. In addition, the Bank has had the default guarantee of the federal states of Hamburg and Schleswig-Holstein in the amount of EUR 10 billion at its disposal since the second quarter. The Tier 1 capital ratio including market-risk positions thereby improved significantly to 9.8 percent overall (on December 31, 2008 it stood at 7.5 percent). As a result, HSH Nordbank’s Tier 1 capital ratio is again on an internationally competitive level.

The Bank’s total assets fell in the context of its realignment by around five percent to around EUR 198 billion (on December 31, 2008: EUR 208 billion) as a result of proactive reduction in the credit investment portfolio as well as a reduction in trading assets.

Positive earnings trend in the market units

Operating business activity in HSH Nordbank’s market units produced stable performance in the first half of 2009 despite a limited amount of new business accompanied by increased risk provisioning. The total income of all market units rose significantly to EUR 1,307 million (previous year EUR 627 million).

Shipping

Following what was on the whole vibrant business in the previous year, new business on the major shipping markets came to an almost complete standstill in the first six months of 2009 due to the economy. Despite these tight market conditions, the Shipping Business Unit succeeded in the first half of 2009 in raising its income further to EUR 201 million (previous year: EUR 172 million). The primary contributing factor was net interest income, which was up to EUR 197 million (from EUR 130 million in the previous year) due to widened margins and the trend in the U.S. Dollar versus the Euro. Against the backdrop of the still tense situation on the shipping markets, the Bank recognized impairment charges in its Shipping BU totaling EUR 309 million in the first half of 2009 (zero in the previous year).

Transportation

The Transportation Business Unit generated earnings of EUR 98 million in the first six months of 2009 (previous year: EUR 102 million). This slight drop is attributable to lower commission income and smaller additional income from cross-selling business due to less new business in aircraft, infrastructure and railway finance. Due in particular to the increase in impairment charges to EUR 77 million (impairment reversal of EUR 2 million in the previous year), the Transportation BU only reported a modestly positive result before tax of EUR 10 million in the first half (previous year: EUR 81 million).

Energy

The Energy Business Unit generated total earnings of EUR 61 million in the first half of 2009 (previous year: EUR 55 million). Here the Business Unit benefited from income from numerous wind energy and solar projects realized and started in Germany and abroad in fiscal 2008. Since the fourth quarter of 2008 Energy has recorded a marked drop in new business due to less activity by clients and higher financing costs, which was reflected especially in net commission and trading income, both of which are dependent on volumes and transactions. Impairments of EUR 3 million also had to be charged in the Energy unit (reversal of EUR 3 million in the previous year), with earnings before tax down to EUR 13 million from EUR 45 million in the same period of the previous year.

Real Estate

In the Real Estate segment, which comprises HSH Nordbank’s finance business in the real estate sector and the activities of its subsidiary HSH Real Estate AG, the Bank generated total income of EUR 209 million in the first half of 2009 (previous year: EUR 205 million). The fact that it was nevertheless possible to apply adequate margins to cover risks in new business in the last year and in the first half of 2009, too, had a positive effect. The result before tax nevertheless fell substantially to EUR 56 million (previous year: EUR 107 million), due not least also to a significant increase in impairment charges to EUR 141 million (previous year: impairment of EUR 18 million).

Corporate Clients

The general restraint in capital spending in the corporate sector resulted in a subdued demand for loans in the Corporate Clients Business Unit. Nevertheless, with total income of EUR 221 million the Corporate Clients unit attained a high level (previous year: EUR 259 million). There was a substantial increase in impairments to EUR 158 million (previous year: EUR 45 million) against the backdrop of the difficult economic situation and increased risk of default. A large proportion of the impairment charges pertained to the foreign and LBO business that will in the future be allocated to the restructuring unit.

Private Banking

In the Private Banking unit operating earnings for the first half of 2009 amounted to EUR 27 million (previous year: EUR 36 million). The decrease is attributable in particular to the significantly lower income from the deposit-taking business. The main reason for this is shrinking interest margins, which is due to falling market rates and intense competition for client deposits. Impairment charges in the Private Banking unit rose to EUR 5 million (previous year: EUR 1 million).

Savings Banks

The difficult capital-market setting continued to characterize business with savings banks during the period under report. The ongoing restraint by savings banks and their clients in the demand for investment products led to a decline in commission income. Net interest income remained unchanged in spite of the scheduled reduction of funding with savings banks and municipalities, the main reason being large inflows of short-term liquidity. Overall, the earnings before tax of EUR 9 million for the first half of 2009 missed the corresponding figure for the previous year by EUR 1 million.

Financial Markets

HSH Nordbank's Financial Markets Business Unit recorded pre-tax earnings of EUR 425 million (previous year: EUR 151 million) in the first six months of 2009, excluding writedowns on the credit investment portfolio. The contribution resulted from proactive management of the Bank’s balance-sheet items. Impairment of credit portfolios came to EUR 112 million (zero in the previous year). The benefit from cross selling, i.e. the sale of capital-market products to the Bank’s client segments, continued to make a key contribution to stabilizing HSH Nordbank’s earning power.

Adjustments to the previous year’s figures

The half-year report contains an adjustment to the 2008 consolidated financial statements (restated pursuant to IAS 8). The adjustments thus made reduced distributable Group profit by EUR 95 million. This therefore now puts the consolidated Group net loss on December 31, 2008 at EUR 2.8 billion. The adjustments had no impact whatsoever on either the IFRS-based comparable figures as at June 30, 2008 or the German GAAP-based 2008 financial statements, which were key to the recapitalization plan.

Outlook

The situation in the banking sector improved in the first half of 2009 as a result of calming down on the international capital markets. Despite this trend toward recovery, HSH Nordbank expects, as repeatedly stated, the banking sector still to be weighed down well into 2010 by problematic securities and increased defaults on corporate and consumer loans. The shakeout of bank balance sheets as well as restoration of confidence in the financial sector will therefore remain on the agenda. HSH Nordbank has used the past few months to forge ahead with its strategic realignment, in particular also involving its split into a core bank and a restructuring unit. This involves separating non-strategic operations and portfolios without direct client reference, such as the credit investment portfolio, from the core-bank portfolios and gradually reducing them. “We have further refined our plan in close collaboration with the shareholders. The portfolios to be spun off have been defined and strategies for the restructuring unit have been developed. We shall discuss the details of this as well as the future structure of the core bank with the Supervisory Board in the next few days for the process of obtaining approval for the Bank’s restructuring and submitting this to the EU Competition Commission. We will thus reach another milestone toward HSH Nordbank’s revamp,” said Dirk Jens Nonnenmacher. The first step is to involve the individual portfolios being transferred to an internal restructuring unit. The structure and separate reporting for this restructuring unit is to be implemented by the end of this year. The Bank is also currently analyzing options for the planned legal split of the restructuring unit from the core bank. “Our plan for the core bank is viable for the future and sustainable and enduring,” said Nonnenmacher.