HSH Nordbank generates pre-tax profit of € 222 million in the first half

  • Total income of € 652 (646) million
  • New business up to € 4.9 (4.5) billion
  • Cost-income ratio improved to 44% (48%)
  • No new debt waiver in Q2; bank levy a burden
  • Like 2014, figures for 2015 forecast to be in the black
  • Solid Common Equity Tier 1 capital ratio of 12.4%
  • In-depth talks with EU Commission ongoing

Hamburg/Kiel, August 28, 2015 - HSH Nordbank again achieved progress in terms of operating profit in the first half of 2015, having resolutely reduced its costs further and having reported, with a pre-tax profit of € 222 (432) million, a result well into the black despite significantly less reversals with effect on income due to the debt waiver of its main shareholders.

The Bank is thus well on its way to completing its second year in succession in profit as planned despite heavy premium charges. However, the legacy shipping loan portfolio continues to weigh heavily on the Bank and again made extensive valuation allowances unavoidable in the first half of 2015. The debt waiver of its guarantors Hamburg and Schleswig-Holstein almost halved to € 289 (573) million and thus contributed € 284 million less to earnings than was still the case in the first half of the previous year. The guarantee fees rose to € -468 (-358) million in the first half, of which a basic premium of € 235 million alone. In total, HSH Nordbank has meanwhile paid € 2.5 billion in cash to its guarantors Hamburg and Schleswig-Holstein since 2009.

Total income stabilised encouragingly with a figure of € 652 (646) million. This involved net interest income increasing strongly to € 448 (231) million compared to the same period in the previous year. The Core Bank's new business, which generated stable margins especially with real estate and corporate clients, exerted a substantially positive effect on income.

HSH Nordbank furthermore again achieved evident successes in winding down risky legacy assets. Administrative expenses once again reflected the savings made as result of the ongoing cost reduction programme. The already fully absorbed annual premiums for the European bank levy and the deposit guarantee system of the savings banks incurred charges totalling € -54 million, of which as much as € -44 million was charged to the Core Bank. At Group level, this therefore left pre-tax profit totalling € 222 (432) million; after taxes the result came to € 147 (301) million.

Meanwhile, the talks ensuing from the ongoing state aid proceedings – primarily between the majority shareholders in HSH Nordbank, i.e. Hamburg and Schleswig Holstein, as well as the EU Commission – continue unabated. This dialogue is in-depth and constructive. The target is to reach a general agreement with the shareholding federal states by the autumn of 2015.

"Our nearly 2,500 employees are working hard and with dedication; that is the basis for HSH Nordbank's success in its day-to-day business. However, our Bank has to overcome more than the tough competition and the difficult market conditions. To this day, HSH Nordbank's suffers from the serious omissions and poor decisions of the past. Its current management continues to work resolutely on addressing these mistakes. That is a painful way to go, but it is the only right one. Particularly with a view to the billions in ship loans we now need substantial relief for our balance sheet, which is the case that our shareholders Hamburg and Schleswig-Holstein are making in the talks with the EU Commission," said Constantin von Oesterreich, Chairman of the Management Board of HSH Nordbank.

Strong net interest income – target-beating drop in administrative expenses
Total income was up to € 652 (646) million at the half-year mark. Net interest income, which performed well by nearly doubling to € 448 (231) million thanks to the encouraging trend in new business and the absence of adverse exceptional factors from the previous year, made the largest contribution. The ongoing, strategic downsizing of the Restructuring Unit and loan repayments in the Core Bank trimmed net interest income as expected.

Net commission income totalled € 62 (73) million in the first half. The Core Bank was in this respect up by six percent to € 54 (51) million. Loan commissions related to the expansion of new business were the primary factor underpinning this result. In addition, it positively reflected improved cross-selling of products and services beyond loan finance. In so doing, HSH Nordbank visibly expanded its position in the newly set-up Transaction Banking. The restructuring of legacy loans also contributed to net commission income with a figure of € 8 (22) million, albeit to a significantly lesser extent than in the previous year. Net trading income, which is based exclusively on client transactions, amounted to € 78 (112) million, having been affected by valuation effects in connection with the volatility on the financial and foreign exchange markets. The net investment income of € 56 million was well below the previous year's € 240 million, the earlier result having benefited substantially from market-related impairment reversals and capital gains.

Thanks to its cost reduction programme, the Bank reduced administrative expenses by more than budgeted to € -302 (-338) million. The number of employees was down by 110 from the 2014 yearend to 2,469 full-time staff, which lowered personnel expenses to € -141 (-146) million. The Bank plans to scale administrative expenses down to € 500 million per year by 2018 in order to achieve a sustainably competitive cost base. To date and according to the reconciliation of interests concluded with the works council in the second quarter, agreement on individual solutions has been reached for about 40 percent of the targeted job shedding. The cost-income ratio improved further to 44 percent from 48 percent in the same period of the previous year. Overall, the costs to meet regulatory requirements again rose substantially – as in the whole sector.

Margins in client business largely stable
The Core Bank, in which the strategic business divisions of HSH Nordbank are pooled, generated pre-tax earnings of the € 157 (185) million in the first half of the year. Unlike in the previous year, this figure already includes the portions pertaining to the Core Bank of the bank levy of € 30 million to be paid for the first time as well as the deposit guarantee of the Savings Banks Finance Group in the amount of € 14 million for the year 2015 as a whole. With a nine-percent increase to € 4.9 (4.5) billion, the generally favourable trend in new business exerted a positive effect on the Core Bank's result. The proportion of new loans disbursed also rose within the year, whereby the Core Bank's total assets rose to € 77 billion (31.12.2014: € 76 billion). The stronger US dollar also boosted the total asset figure. The interest margins generated were largely stable despite the demanding competitive setting. At the same time, the risk situation involving business with real estate and corporate clients as well as finance for energy and infrastructure projects remained inconspicuous. The Core Bank's operating earnings stripped of all guarantee and exceptional factors as well as legacy assets rose to € 268 (236) million and show that the business model – when freed from legacy assets – is heading in the right direction.

As an in-demand partner for real estate finance throughout Germany, HSH Nordbank increased its new business most strongly in this particular sector. The Bank thus generated a 20 percent gain to € 2.9 (2.3) billion in the first half. In line with the selective approach taken, new business in ship finance remained steady at an unchanged € 0.7 (0.7) billion. By contrast, the Corporate Clients division was, with a figure of € 1.3 billion, down slightly from the previous year's € 1.5 billion even though demand from corporate clients for loans picked up considerably in the second quarter. In business involving finance for energy and infrastructure projects, which was recently pooled within the Corporate Clients division, the focus was on new business in Germany as well as other European countries.

Charges arising from legacy business in ship finance, on-schedule and early loan repayments as well as on the whole negative valuation effects again offset the generally solid earnings performance. There were, furthermore, the expenses - born mostly by the Core Bank - pertaining to the European bank levy in the amount of € -40 million and the deposit guarantee system of the savings banks in the amount of € -14 million.

Loan loss provisioning dominated by legacy exposures in the shipping portfolio
The loan loss provisioning in the first half reflected increased allocations for completed and planned restructuring in the legacy ship loan portfolio. On the other hand, there were significant net reversals involving real estate and corporate loans, which was attributable to improved risk assessments and loan repayments.

A compensating effect of the guarantee in the amount of € 319 million offset the virtually unchanged net loan loss provisioning of € -199 (-195) million. This stems from the € 263 million balance of the gross compensation amount for the guaranteed portfolio and the forex result, less the additional premium of € -233 million plus € 289 million due to the capital protection clause, which were incurred exclusively in the first quarter. Overall, after the offsetting effects of the guarantee, there remains a positive balance of loan loss provisioning of € 120 million, which, in view of a significantly smaller debt waiver, is significantly below the previous year's level of € 337 million.

HSH Nordbank resolutely reduced the legacy portfolios pooled in the Restructuring Unit during the first half of the year. The disposal of non-strategic loan and securities positions took the segment assets down significantly to € 27 billion (31.12.2014: € 31 billion) despite opposing effects from the appreciation of the US dollar.

Common Equity Tier 1 ratio at a solid level – no debt waiver in Q2
The capital ratios reported at the end of the first half of 2015 remained at a solid level. For instance, the Common Equity Tier 1 ratio (CET1) in accordance with the Basel III (phased in) transition rules stood at 12.4 percent (including a buffer of 2.4 percentage points due to the capital protection clause). The CET1 ratio of HSH Nordbank came to a solid figure of 11.5 percent (contains a buffer of 1.5 percentage points) also on the assumption of complete (fully loaded) implementation of the Basel III rules. There was no further reversal with effect on income from the debt waiver in the context of the capital protection clause in the second quarter. At the half-year mark the € 289 million debt waiver was significantly below the previous year's figure of € 573 million, which was the primary reason for the earnings before taxes of € 222 million falling well below the previous year's high € 432 million.

The slightly, 0.2 percentage point lower buffer in the CET1 ratio compared to 31 December 2014 is attributable mainly to the planned, slight increase in risk-weighted assets to € 39.9 billion (31.12.2014: € 39.5 billion). This was due to the appreciation in the US dollar (€/USD 1.12 as at 30 June 2015 versus €/USD 1.21 as at 31 December 2014) and to the planned expansion of the new business.

Earnings after taxes came to € 147 (301) million. Tax expenses from current and deferred taxes amounted to € -75 million in the first half, thus putting the rate at 34 percent. Adjustment was made for further additional legacy tax assets dating back many years. This included the outcome from audits starting in 2003 as well as the agreement in principle with the authorities on an investment in Luxembourg disposed of in 2011.

Outlook: Core Bank to make further gains – Consolidated profit again in 2015
The business model of HSH Nordbank has proven itself in the market in the past few years. The Core Bank is forecast to generate considerably improved pre-tax earnings for the year as a whole. The Restructuring Unit is to be expected to report a significant pre-tax loss due to the planned decrease in relief from the debt waiver and the further, stepped-up portfolio wind-down. Overall, at Group level, the forecast is therefore once again a pre-tax profit for fiscal 2015 as a whole, albeit an amount well below the previous year's high amount of € 278 million.

"This Bank has made good progress in the past few years thanks to dependable work, strength of purpose and the confidence of its clients. We will continue to pursue this path and make HSH Nordbank, with its appreciably established business model, a lastingly profitable regional bank. We will also continue to resolutely address the mistakes of the past and simultaneously take the right, though sometimes also unpopular, strategic decisions for the future. With a view to the ongoing state aid proceedings in Brussels we believe that our shareholders will soon reach a decision with the EU Commission," said Chairman of the Management Board Constantin von Oesterreich.

Income Statement (EUR m) Jan.-June 2015 Jan.-
June1) 2014
Change in

Interest income 2,311 2,647 -13
Interest expenses -1,803 -2,256 -20
Net income from hybrid financial instruments -60 -160 63
Net interest income
448 231 94
Net commission income 62 73 -15
Result from hedging 8 -12 >100
Net trading income 78 112 -30
Net income from financial investments 56 240 -77
Net income from investments accounted for using the equity method - 2 -100
Total income
652 646 1
Loan loss provisions 120 337 -64
Administrative expenses -302 -338 -11
Other operating income 39 54 -28
Expenses for European bank levy -40 - >100
Net income before restructuring
469 699 -33
Restructuring result -12 -8 - 50
Expenses for government guarantees -235 -259 -9
Net income before taxes
222 432 -49
Income tax expenses -75 -131 -43
Group net income
147 301 -51
Consolidated net income/loss attributable to non-controlling interests
- 1 -100
Consolidated net income/loss attributable to HSH Nordbank shareholders 147 300 -51
Additional key figures of HSH Nordbank Group 30.06.2015 31.12.2014
Total assets (in € bn) 108 110
RWA after guarantee (in € bn) 40 40
Common Equity Tier 1 ratio (CET1 ratio, phased in) (%)1) 2) 12.4 12.6
Core capital ratio (%) 1) 13.8 14.4
Regulatory capital ratio (%) 1) 18.0 18.7
Full-time staff (FTEs) 2,469 2,579

1) Pursuant to matching period calculation under the rules of the Capital Requirements Regulation (CRR).
2) Incl. a buffer of 2.4 (30.6.2015) or of 2.6 percentage points (31.12.2014) from the capital protection clause.

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