HSH prepares for multi-year transformation – extraordinary effects weigh on Q1 result

  • Group net result before taxes of € -60 (prev. year: 128) million
  • One-off cost of premature guarantee termination: € -100 million
  • Core Bank with pre-tax profit of € 182 (prev. year 279) million
  • CET1 capital ratio at a good level of 15.5% (31 Dec. 17: 15.4%)
  • CEO Ermisch: “We’re preparing for a multi-year transformation.”

Hamburg/Kiel, June 15, 2018 - As well as recording satisfactory operating performance and savings in the first quarter of 2018, HSH Nordbank also incurred the expected heavy burdens. In addition to the previously recognised annual premiums for the bank levy and the deposit guarantee fund, these included considerable costs related to privatisation.

The Bank is resolutely forging ahead with its transformation and is preparing for its future as a privatised bank, maintaining good capital and liquidity ratios, with a reduced balance sheet and, after the closing, free of virtually all legacy assets. The drivers of operational growth so far this year have again been real estate finance, the project business related to renewable energy and infrastructure, and individual focal sectors in the classic mid-sized corporates financing business. In Shipping the bank remains both selective and cautious.

“We are on the home straight in the privatisation process and are supporting all involved parties to the best of our abilities. Privatisation has passed all parliamentary hurdles after the vote taken in Hamburg’s state parliament on 13 June and the approval granted by Schleswig-Holstein’s state parliament in Kiel at the end of April. Now it is a matter of also fulfilling all the other terms of the purchase agreement signed on 28 February.

At the same time, we are preparing the Bank for a multi-year transformation, which will be a demanding journey, but one also full of opportunity. As a medium-sized bank, we will appeal to our clients as a partner offering outstanding services. Specifically, we will sharpen our profile for German mid-sized corporates with international ambitions: in the commercial real estate financing business, we are planning measured steps to move into selected neighbouring European countries. Furthermore, we will strengthen our presence in Singapore, as this location is gaining significance for our export-focused corporate clients and remains – alongside Athens – the most important hub for international shipping,” said Stefan Ermisch, CEO of HSH Nordbank. “Our good performance in attracting retail deposits, which we started offer-ing last autumn, is also ongoing.”

Group net result affected by extraordinary effects

The Group net result before taxes of € -60 (128) million was substantially influenced by privatisation effects. The provisions made for a settlement payment for premature termination of the second-loss guarantee – which was agreed in the purchase contract of 28 February between the federal states of Hamburg and Schleswig-Holstein and the bidders – resulted in a burden of € -100 million alone, as previously announced. In addition, the ongoing guarantee fees of € -31 (-41) million, the annual premiums for the bank levy and deposit guarantee fund of € -40 (-45) million and restructuring and privatisation costs of € -11 (-16) million weighed on the Group net result. Satisfactory performance in the operating business divisions, further savings and reversed loan loss provisions in the wake of some successfully restructured loans exerted a positive effect.

Our forward-looking divisions, namely Real Estate, Corporate Clients, Shipping and Treasury & Markets, all made positive contributions to the Core Bank’s pre-tax profit of € 182 (279) million, even though this reflected the lower income from the sale of securities than in the prior-year period. The result from Others and Consolidation included substantial privatiation costs, thus exerting the expected negative effect on income of € -101 (-58) million. The provisions made for the premature guarantee termination largely contributed to the negative pre-tax result of € -141 (-93) million of the Non-Core Bank, which is to be dissolved in the near future.

The Core Bank provided all of the Group’s total income, which came to € 161 (395) million, with the previous year's figure having benefited from significantly greater income from the managed sale of securities and thus higher net interest income. The operating business made a key contribution to total income, with moderately higher margins on new business and a virtually unchanged amount of interest-bearing receivables. Increased costs for liquidity buffers in the privatisation period, which are accepted as a necessary part of the transformation, exerted an adverse effect.

Thanks to stringent cost savings and despite rising regulatory costs, administrative expenses were down by ten percent to € -123 (-136) million. The personnel expenses of € -50 (-58) million reflect the declining number of employees of 1,789 (31 Dec. 2017: 1,926); operating expenses amounted to € -63 (-65) million.

Positive effect from Group loan loss provisioning – NPE ratio down

The Group’s loan loss provisions before the guarantee of € 96 (-99) million benefited from reversals, which were made thanks to an accelerated reduction of legacy assets and successful restructuring of shipping loans, in particular. After the guarantee (incl. hedging effect of credit derivative second-loss guarantee) and the forex result, the Group’s loan loss provisioning amounted to € 64 (-56) million.

As a consequence of applying IFRS 9 for the first time and therefore fair-value accounting for the portfolio transaction, the Non-Performing Exposure ratio was down by more than half to 5.1% (31 Dec. 2017: 10.4%). Risk coverage was at a very solid level of 57% (31 Dec. 2017: 64%). At closing a portfolio of non-performing loans from the Non-Core Bank will be sold to investors. As a result, the Bank will be free of virtually all legacy assets and attain a very good asset quality, also by European standards, with an NPE ratio of around just two percent.

Core Bank performing well

The Core Bank performed as expected in the first quarter and closed it with net income before taxes of € 182 (279) million. The total income of € 238 (395) million declined primarily because income from the managed sale of securities was significantly higher in the first three months of 2017. Furthermore, the Core Bank accounted for about three quarters of the annual premiums, amounting to € -27 (-28) million, for the bank levy and the deposit guarantee fund as well as a total € -19 (-5) million for the guarantee. The Core Bank benefited from reversals in loan loss provisioning in the amount of € 61 (-5) million.

Despite fierce competition, the Bank’s strict risk/return parameters were adhered to and re-sulted in new business of € 1.7 (2.2) billion. The profitability requirements that the Bank has set out were reflected in an encouraging margin on new business that was slightly up on the previous quarter.

In the Real Estate Clients division, new business almost matched the previous year’s level with a figure of € 1.0 (1.1) billion thanks to strong market penetration in German metropolitan regions and good performance in the business with international institutional investors. The Corporate Clients division provided new business of € 0.6 (0.8) billion, particularly involving project finance for wind turbines and data networks. The Shipping segment showed signs of stabilisation in some markets and concluded business worth € 0.2 (0.2) billion with shipping companies that have a good credit rating.

CET1 ratio steady at a high level

The Common Equity Tier 1 (CET1) ratio proved to be a strong cornerstone in the first quarter of the year, also in comparison with the European competition. The CET1 ratio was at a good level of 15.5% (31 Dec. 2017: 15.4% on a pro-forma basis). The leverage ratio, which puts core capital in relation to business volume, likewise proves the solidity of the balance sheet structure with a very good figure of 7.6% (31 Dec. 2017: 7.7%).

As planned, total assets were further reduced to € 65.7 (31 Dec. 2017: 70.4) billion in the course of balance sheet restructuring.

Outlook

HSH Nordbank expects its sale to be formally concluded – thus finalising the change of ownership – in the third quarter or at the latest in the fourth quarter of 2018. For the transition fiscal year 2018, which will be heavily influenced by transformation and privatisation effects, the Bank still projects a pre-tax loss of approximately € -100 million. The outlook could change later in the year once the sale is closed and the switch to new ownership is completed.

Income Statement (EUR m) Jan – March 2018 Jan – March 2017 Change in
(%)

Net interest income 135 290 -53
Net commission income 11 18 -39
Result from hedging -5 -6 17
Result from financial instruments categorised as FVPL1 -19 87 >-100
Net income from financial investments2 39 6 >100
Total income
 
161
 
395
 
-59
 
Loan loss provisions (incl. credit derivative)3 64 -56 >-100
Administrative expenses -123 -136 -10
Other operating income 20 27 -26
Expenses for bank levy and deposit guarantee fund -40 -45 -11
Net income before restructuring and privatisation
 
82
 
185
 
-56
 
Net income from restructuring and privatisation -11
-16
31
Expenses for government guarantees -131 -41 >100
Net income before tax
 
-60
 
128
 
>-100
 
Income tax expenses -43 -24 79
Group net result
 
-103
 
104
 
>-100
 
Comprehensive income attributable to non-controlling interests 1 - 100
Group net result attributable to HSH Nordbank shareholders -104 104 >-100

1In the previous year item “trading income” (FVPL = Fair Value through Profit or Loss)

2Grouping of profit and loss positions required by IFRS9

3After effects from the guarantee and forex result and including hedging effect of credit derivative second-loss guarantee


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Additional key figures of HSH Nordbank Group 31 March 2018 31 March 2017
Total assets (in Euro bn) 65.7 70.4
RWAs post-guarantee (in Euro bn) 25.7 26.2
Common Equity Tier 1 (CET1) capital ratio in %)4 15.5 15.4
Full-time employees (FTEs) 1,789 1,926
Cost-income ratio 68 32


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The information contained in this press release does not constitute an offer for the sale of any type of HSH Nordbank AG securities. Securities of HSH Nordbank AG may not be sold in the United States without registration pursuant to US securities legislation, unless such a sale takes place on the basis of relevant exceptional provisions.

This press information can contain forward-looking statements. These statements are based on our beliefs and assumptions, on information currently available to us which we consider reliable. Forward-looking statements include all statements which are not historical facts, including information concerning future growth prospects and future economic developments.

Such forward-looking statements are based on assumptions relating to future events and are subject to uncertainties, risks and other factors, a large number we cannot influence. Thus actual events can differ considerably from the forward-looking statements made. We make no warranty for the correctness or completeness of these statements or the actual occurrence of the statements made. Furthermore, we assume no obligation for updating the forward-looking statements after this information has been published.