HSH Nordbank with increased half-year profit – Strong capital ratio and cost discipline

  • Core Bank with pre-tax profit of EUR 261 (previous year: 143) million
  • Increase in group net result after tax to EUR 160 (147) million
  • EU decision and portfolio transfer to state owners ease balance sheet
  • Loan loss provisions for shipping still high
  • Increase in CET1 ratio to 13.5%; CIR at a good level of 47%
  • CEO Ermisch: “Strong full-year performance expected for the Core Bank.”

Hamburg/Kiel, August 26, 2016 - After a muted start to the year, HSH Nordbank substantially increased its profit for the first half of the year. This was particularly underpinned by real estate and corporate client business, a swifter reduction of legacy assets in the shipping business and the systematic cost-cutting course.

The Bank’s strategic business segments reported encouraging performance with improved capital ratios. With a figure of EUR 261 (previous year: 143) million as at 30 June 2016, the Core Bank’s earnings were substantially higher. In line with expectations, the Restructuring Unit, which is dominated by legacy assets, sustained a pre-tax loss of EUR -90 million.

At the end of the first half, HSH Nordbank achieved a group net result after tax of EUR 160 (147) million and is well on course for the change of ownership planned for 2018. Loan loss provisions in the shipping segment remain high, while the Bank is also faced with heavy restructuring expenses in connection with the reduction in material and personnel expenses in the interests of further improvements to efficiency. At 47%, the cost-income ratio reached a good level, which is to be maintained in the medium term as well. However, according to CEO Stefan Ermisch, the profit reported in the first six months is no indication of the Bank’s full-year performance due to the persistently difficult conditions in the shipping markets and the historically low interest rates. Even so, he is confident that the Core Bank will continue to perform well in 2016 and that, along with the Group as a whole, it will be able to report a positive result, albeit a substantially lower one than in the previous year. This will mark the third consecutive year in which HSH Nordbank is able to report a Group profit.

Group net result underpinned by operating business

“The Core Bank is asserting itself well against the competition and, with pre-tax profit of EUR 261 million, strong capital ratios and cost discipline, showing its potential. This is incentive for all committed employees to continue this favourable performance over the next few months. In this way, we will be able to achieve the best possible position as a basis for the planned change of ownership. Underlying conditions remain very challenging of course – not least of all because of the still difficult conditions in the shipping markets and the historically low interest rates. We still expect to be able to report a full-year profit at the Group level. However, we will definitely be unable to repeat the very high pre-tax profit that was generated in 2015 due to non-recurring effects. I expect the Core Bank to post high earnings in 2016 thanks to strong new business and our disciplined cost management in the current quarter,” said HSH Nordbank CEO Stefan Ermisch.

The total income of EUR 555 (424) million recorded by the Core Bank was particularly driven by the high net interest income of EUR 448 (377) million arising from operating business, sales of securities and bonded loans. Further key income components include net trading income of EUR 66 (-26) million and net commission income of EUR 41 (54) million. In this way, the Core Bank is showing that it is headed in the right direction despite the difficult environment and corporate clients’ high internal funding capabilities against the backdrop of the historically low interest rates.

These factors also partially left traces on new business: In the first half of 2016, new business was valued at EUR 3.5 (4.9) billion. In this connection, HSH Nordbank deliberately continued to apply its own strict risk requirements. Despite the still muted borrowing demand, new corporate client business rose somewhat to EUR 1.4 (1.3) billion, reflecting the strong performance of the Energy & Utilities and Logistics & Infrastructure segments in the first quarter. After the exceedingly strong performance in the same period of the previous year, the Bank engaged judiciously in new business with real estate clients in the light of the general sector cycle. Looking ahead over the rest of the year, the Bank is budgeting new real estate business at least on the same level as in the first half. On the other hand, new shipping business was deliberately accepted on only a very selective basis.

The proportion of disbursed new loans remained stable over the previous year. Regular and early loan repayments exerted the opposite effect compared with new business, resulting in the planned slight reduction in the Core Bank’s total assets to EUR 68 (70) million. As planned, total Group assets dropped to EUR 91 (97) billion.

Cost targets adjusted in the light of expected earnings

The Group net result after tax climbed to EUR 160 (147) million. The total income of EUR 541 (645) million was materially driven by the net interest income of EUR 374 (448) million. The net commission income of EUR 50 (62) million reflects increased loan repayments as well as the swifter reduction of risk-exposed legacy assets in the Restructuring Unit. The net trading income of EUR 40 (71) million benefited from operating successes in client business as well as fair value remeasurement effects. Net income from financial investments rose significantly to EUR 74 (56) million due to securities sales.

Against the backdrop of the low interest rates and heavy competition, the Bank is systematically realigning its cost targets in the light of the adjusted earnings expectations at an early stage in order to strengthen its efficiency on a sustained basis. A new target for administrative expenses of EUR -424 million in 2018, down from the previous figure of EUR -500 million, had previously been defined and communicated in May. The result of EUR -98 (-12) million from restructuring in the first half of 2016 includes provisions recognised for additional redundancies up until 2019.

Administrative expenses, which dropped appreciably to EUR -277 (-302) million, reflect the effects of the ongoing cost-cutting programme. The personnel expenses of EUR -129 (-141) million are influenced by the reduction in the number of full-time equivalents compared with the end of last year to 2,290 (2,384). Material expenses dropped slightly to EUR -132 (-140) million due to lower building costs in tandem with continued high regulatory expenses.

As at 1 January 2016, a basic premium of 2.2% is payable on the undrawn part of the second loss guarantee provided by the federal states of Hamburg and Schleswig-Holstein. Consequently, guarantee expense decreased in accordance with the agreements provided for in the EU decisions, dropping to EUR -126 (-235) million at the end of the first half. This means that since 2009 the Bank has recorded a total of EUR 2.8 billion through profit and loss and paid this to the guarantor.

Loan loss provisions for shipping still high – increase in the CET1 ratio to a good 13.5%

Persistently difficult conditions in the shipping market also led to further restructuring requirements for legacy shipping loans in the first half of the year, thus accounting for a large proportion of the high pre-guarantee net loan loss provisions of EUR -520 (-199) million. Compensation for the guaranteed portfolio came to EUR 671 (326) million, resulting in positive post-guarantee net loan loss provisions of EUR 151 (127) million.

The Common Equity Tier 1 ratio (CET 1 ratio, according to Basel III phase-in rules) rose to a good 13.5 %, up from 12.3 %, reflecting the reduced risk positions following the transfer of the portfolio to the two states Hamburg and Schleswig-Holstein as well as the net profit reported for the first half of the year. In addition to the strong capital ratios, the successful asset reductions are reflected in a further improvement in the leverage ratio of 6.8 (end of 2015: 6.3) % (ratio of Tier 1 capital to business volumes), which is far in excess of the required level.

Improved balance-sheet structure thanks to transfer of portfolio to the states

Effective 30 June 2016, the Bank transferred a portfolio of non-performing ship loans worth EUR 5 billion (as at 31 December 2015) to the state owners and was thus relieved of an appreciable volume of legacy assets. The Bank received the market price of EUR 2.4 billion set by the EU Commission, while the resultant losses of EUR 2.6 billion were settled under the guarantee. Of this, the Bank retained around EUR 1 billion, meaning that the second-loss guarantee of EUR 10 billion was drawn on for the first time for the remaining EUR 1.6 billion.

Income Statement (EUR m) H1 2016 H1 2015 Change in

Interest income 1,846 2,330 -21
Interest expense for investments and derivatives -79 -19 >100
Interest expenses -1,399 -1,812 -23
Interest income from investments and derivatives 69 9 >100
Net income from hybrid financial instruments -63 -60 -5
Net interest income
Net commission income 50 62 -19
Result from hedging 2 8 -75
Net trading income 40 71 -44
Net income from financial investments 74 56 32
Net income from investments accounted for using the equity method 1 - 100
Total income
Loan loss provisions1) 151 127 19
Administrative expenses -277 -302 -8
Other operating income 43 53 -19
Expense for bank levy and deposit guarantee fund -63 -54 17
Net income before restructuring
Result from restructuring -98 -12 >-100
Expenses for government guarantees -126 -235 -46
Net income before taxes
Income tax expenses -11 -75 -85
Group net result
Group net income attributable to non-controlling interests
- - -
Group net results attributable to HSH Nordbank shareholders 160 147 9

1) incl. Hedging effect of credit derivative second loss guarantee

Additional key figures of HSH Nordbank Group 30 June 2016 31 December 2015
Total assets (in € bn) 91 97
Risk assets (RWA; in € bn) 34.5 37.4
Common Equity Tier 1 ratio (CET1 ratio, phased in) (%)2) 13.5 12.3
Core capital ratio (%)2) 17.3 16.4
Regulatory capital ratio (%)2) 22.2 20.6
Full-time staff (FTEs) 2,290 2,384
Cost-income ratio 47 43
Leverage ratio 6.8 6.3

2) Pursuant to same period calculation under the rules of the Capital Requirements Regulation (CRR).

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