March 2018 – HSH Nordbank is the first federal state bank to be privatised. Stefan Ermisch, Chief Executive Officer of HSH Nordbank, talks to Der Spiegel.
Mr. Ermisch, the sale of HSH Nordbank to financial investors marks the end of this Landesbank's short history. Do you feel like you've been digging its grave?
Stefan Ermisch: Actually, it's more like I've been assisting at its birth. The sale process was exhausting, but it was worth it. The state governments in Hamburg and Schleswig-Holstein managed the process prudently in the face of considerable resistance. I am grateful to the EU for having effectively forced a dysfunctional bank like HSH to reinvent itself. Never before has a Landesbank been privatised. This sends a signal to the financial sector.
That all sounds supportive of the state, and yet the history of HSH is a catastrophe for taxpayers in northern Germany.
Stefan Ermisch: The merger of the Landesbanken from Hamburg and Schleswig-Holstein into HSH was politically desired in 2003. From then until the financial crisis, the volume of ship loans was increased to over 40 billion euros at its peak, which was certainly not a wise decision.
It was an expensive one, most of all. The federal states had to step in with 3 billion euros of equity capital and a 10 billion euro guarantee. These 13 billion euros are gone. Shouldn't those responsible at the time be held to account much more seriously?
Stefan Ermisch: That is for others to decide. At that time the bank needed 13 billion euros of capital.
What else is in store for the taxpayers?
Stefan Ermisch: HSH has paid over 3 billion euros to the federal states in fees for the default guarantee; now a further 1 billion euros is being paid as the takeover price, leaving a burden of 9 billion euros. It's a crazy number, incredibly painful, but practically no major bank in Germany has survived the financial crisis without a capital increase.
Will it stop at nine billion?
Stefan Ermisch: In relation to the management of the 2009 crisis, yes. The non-core bank, where the majority of the non-performing loans reside, will be closed, and the taxpayers will not have to shoulder any further burden. These loans will be transferred to funds of our new owners. To make this possible, we have to make further write-downs on their value, leading to a loss in the three-digit millions for 2017. However, even after this, we will have a Common Equity Tier 1 ratio of around 15 percent, which is a very high ratio in a Europe-wide comparison.
Stefan Ermisch, Chief Executive Officer of HSH Nordbank
You'll probably need it. None of your five new owners holds more than 50 percent, so no one is obligated to issue a letter of comfort. The private banking association BdB, whose deposit protection scheme you are attempting to join, is reportedly asking for such a declaration of exemption.
Stefan Ermisch: The relevant talks are underway between the owners and the BdB. As you know, the individual shareholders of listed banks do not issue a letter of comfort either.
The difference is that they already belong to the BdB, and therefore its deposit protection scheme. You need to be admitted first. Is this something that could still stand in the way of the sale?
Stefan Ermisch: I don’t think so. Admission to the deposit protection scheme is granted on the basis of being free of legacy assets, being well capitalised and having a resilient business model. These are the conditions our team has been working hard for years to fulfil.
Your new owners don't have the best reputation. Flowers was a shareholder even before the crisis and he steered clear when HSH needed rescuing. Cerberus owns the weapons manufacturer Remington, which is filing for bankruptcy. Do you feel comfortable in their company?
Stefan Ermisch: We have very experienced investors with great banking expertise who will strengthen our financial profile, improve our rating and also benefit our customers. Cerberus, for example, has successfully restructured the Austrian bank Bawag, while Flowers has successfully restructured NIBC in the Netherlands.
Flowers was also a shareholder of Hypo Real Estate and has taken some serious losses in Germany.
Stefan Ermisch: Everyone took losses in the crisis. On top of that, the German banking market is extremely difficult, the boundaries between private, cooperative and savings banks remain rigid, and the market is very fragmented.
Did Flowers buy in too early?
Stefan Ermisch: In retrospect, I suppose he did. But now the banking sector is starting to gather momentum, also as a result of the privatisation of HSH. Financial investors are seizing the opportunity for market consolidation, which is overdue.
Yet the question remains: Who needs HSH? It is operating in the structurally weak northern states, it will be relatively small with a balance sheet total of over 50 billion euros, and Germany already has enough banks.
Stefan Ermisch: We are a restructured, medium-sized corporate bank. When the sale is complete, we will have a fresh start with virtually no legacy assets. Only two percent of our loans will then be at risk of default, which is almost unique in Europe. HSH is strong in commercial real estate and infrastructure loans as well as renewable energy project financing. Combined with our range of capital market products, this creates a balanced mix that will generate earnings.
Your new owners must have high return expectations. How do you intend to satisfy them?
Stefan Ermisch: We want to earn eight percent before taxes. This is also what the EU is demanding, though we are not quite there yet. We need to increase revenues, cut costs.
You’re not alone there, either. In plain language, that means cutting jobs.
Stefan Ermisch: Ten years ago we had around 4,400 full-time positions, now we are at around 1,800, and by mid-2019 we will have to shrink to below 1,600 to achieve our cost targets. We agreed with the works council on how to get there years ago. Further job cuts are likely. Personnel requirements are also reduced because we are carving out the non-core bank and no longer have the complicated guarantee and the EU procedure.
Is it still necessary to have headquarters in both Kiel and Hamburg?
Stefan Ermisch: That doesn’t make too much sense, though that doesn’t mean we’re leaving Kiel.
Where do you need to improve?
Stefan Ermisch: In sales. We must continue to develop, not only branching out from the Hamburg metropolitan region, but also expanding internationally. This is an area where we can do more in the future. For example, we have a branch in Singapore that we want to expand so we can be there for German exporters. And we want to gain a foothold in real estate finance in attractive regions of Europe, albeit with caution and very strict risk controls.
One of your new owners, the Vienna-based bank Bawag, primarily serves retail savers. Do you also intend to get into the deposits business?
Stefan Ermisch: We have already set up an internet offering for overnight deposit accounts and have accumulated 800 million euros in just a few months. In the medium term, we are aiming for at least 5 billion euros. We will rely less on the capital market for refinancing and more on savings deposits. This is less volatile and also preferred by the regulators. To be clear: this will not make us a retail bank, and we will not be offering consumer credit.
Are you actually glad to not be dealing with the politicians any more?
Stefan Ermisch: It’s not about what makes me feel personally most comfortable. It’s a question of which environment will best serve a corporate bank’s development. EU law effectively prohibits state owners from behaving like shareholders, because any form of support is defined as state aid and subject to conditions and sanctions. Shareholders should shape a business. We have been a heavy burden for our public owners, so it is good to end this chapter. I am glad because now we can develop free from political pressure.
Up to now your salary was capped at 500,000 euros. Will you be earning a lot more in the future?
Stefan Ermisch: My contract ends this November. When I became CEO, I voluntarily waived all forms of bonuses and later extended my contract. The new owners can therefore freely decide how to proceed.
Do you want to stay on board?
Stefan Ermisch: It gives me great pleasure to play a part in shaping such an historic development. It has given me many sleepless nights, but I have enjoyed it and am ready to continue.
Do you believe HSH's privatisation marks the beginning of the end for the system of state, private and cooperative banks?
Stefan Ermisch: I can imagine it would send a signal in terms of regulatory policy.
Aside from HSH, Cerberus is invested in Deutsche Bank, Commerzbank and Bawag, which is making acquisitions in Germany. Could all this drive the consolidation of the sector?
Stefan Ermisch: Cerberus and the other owners expect the profit margins of Germany’s banks to rise, and they expect a reorganisation to take place.
What role is HSH to take in this reorganisation?
Stefan Ermisch: The first important thing is to make the transition to the private banking world. Some hurdles remain to be overcome. The ECB and the European Commission will review our business model again, and the parliaments in Hamburg and Kiel will have to approve it. I'm optimistic about this. Then begins a transformation process lasting several years. We are just embarking on an exciting journey. One thing we certainly can foresee is a change of name.
What will the bank be called?
Stefan Ermisch: We don’t know that yet. But if it’s up to me, it will remain a German name.
Financial investors tend to sell on their portfolio companies after a few years. What’s your preferred exit scenario?
Stefan Ermisch: Cerberus and Flowers, as the key shareholders, are demanding and competent investors with a long-term perspective, though at some point they will want to make an exit – a partial one, at least. If the next step at HSH were to be an IPO a few years down the line, that would be a good thing, and an indication that we’ve done everything right.
The interview with Stefan Ermisch published on 10 March 2018
Copyright: Tim Bartz, Martin Hesse; DER SPIEGEL 11/2018; pages 72-73