HSH Nordbank: Privatisation marks nine-month results

  • Nine-month Group net income before taxes of € 8 (previous year: 201) million
  • Guarantee brings negative impact of € -188 million – including cash settlement for early termination
  • Administrative expenses reduced by 13% to € -319 million
  • CET1-ratio consolidated at a good level at 16.1% (31 Dec. 2017: pro forma 15.4%)
  • Total assets condensed to € 61.3 (31 Dec. 2017: 70.4) billion
  • Leverage ratio very high at 8.1% – solid balance-sheet structure

Hamburg/Kiel, November 16, 2018 - In the third quarter HSH Nordbank continued to focus its energies on the upcoming privatisation while generating a satisfactory Group net result in operations. Thanks to savings on the cost side, a solid business performance and restructuring successes in the ship loan portfolio, the high costs incurred in connection with the privatisation were offset in full. The key capital and liquidity figures remain high.

“Thanks to the agreement reached in early November on the seamless transition of HSH Nordbank to the protection scheme of the private banks, we have now cleared one of the crucial hurdles for the change in ownership. We are on the point of completing the privatisation and expect the deal to be closed very soon – after which a new era will begin for the Bank”, said Stefan Ermisch, CEO of HSH Nordbank. “Our profound transformation into a sustainably profitable bank will be a tremendous accomplishment. Over the coming months we will unlock new potential and focus on establishing a commercial bank from the North with a clear profile on the German banking market.”

The contract of sale for the Bank was signed on 28 February 2018. The future owners are the following private equity investors, which are independent of each other: Cerberus European Investments LP, J. C. Flowers & Co. LLC, GoldenTree Asset Management L.P., Centaurus Capital LP and BAWAG P.S.K. AG or funds initiated by these investors.

Privatisation effects weigh on Group net result

The Group net result before taxes totals € 8 (prior-year period: 201) million and exceeds expectations thanks to a solid operating performance, marked cost reductions and reversals of loan loss provisions. High expenses for the second loss guarantee totalling € -188 (-116) million were a major burden on the result because a cash settlement of € -100 million was incurred for the early termination of the second loss guarantee, on top of the base premium. Added to this were restructuring and privatisation costs amounting to € -49 (-43) million and the expense for the bank levy and deposit guarantee fund totalling € -34 (-41) million.

On the basis of earnings before taxes, the return on equity before taxes (RoE) for the Group amounts to 0.2 % (31 Dec. 2017: -9.7%). Despite the improvement since yearend 2017, this performance indicator – which will be of crucial importance for the Bank going forward – is well below the target RoE before taxes of at least 8 % by the end of 2021. Given expenses for deferred taxes of € -110 million as at the end of September, this results in a loss before taxes of € -102 (176) million.

The net income before taxes of the Core Bank contributed € 475 (668) million to the Group net result. The items for the entire Bank that are pooled under Others & Consolidation, including restructuring and transformation costs, negatively impacted the Group by a total of € -237 (-16) million. As expected, the Non-Core Bank, which is to be dissolved in the near future, also recorded a negative result before taxes, amounting to € -230 (-451) million.

Administrative expenses fall by 13 % – sales of securities scaled back

At € 488 (993) million, the Group’s total income was at the expected level. In the previous year there was substantially higher income from the managed sale of securities realised to offset high charges from legacy loans of the Non-Core Bank.

Net interest income at € 398 (390) million recorded a slight improvement over the prior-year period. This was due in large part to income from the operating business, while the encouraging performance of new business margins thanks to the Bank’s stringent profitability requirements was also noticeable. The positive response of market participants to the Bank’s privatisation has additionally been reflected in an improvement in funding spreads. This was counteracted by the noticeable burden resulting from the transformation-related accumulation of liquidity reserves and further refinancing costs.

Net commission income totals € 22 (52) million and thus fell short of the previous year’s figure, which had been marked substantially by income from the restructuring of non-performing legacy loans.

The result from financial instruments categorised at FVPL was marked by subsequent valuation effects in connection with the portfolio transaction and negatively impacted Group earnings by € -25 (159) million. In the prior-year period, the result was noticeably boosted by the positive forex result and appreciations in the Credit Investment Portfolio.

Net income from financial investments (including other income items) essentially reflects the substantially lower realisation gains from the sale of securities compared to the previous year and contributed € 101 (406) million to total income.

On the cost side, the Bank has made further progress by lowering administrative expenses by around 13% to € -319 (-366) million. In particular, targeted cost management and savings on projects and buildings reduced operating expenses to € -159 (-184) million. Personnel expenses of € -144 (-167) million reflect the scheduled decline in the number of FTEs, which fell by 206 to 1,720 compared with year-end 2017.

The cost-income ratio of currently just under 60 % still is well above the target figure of no more than 40 % to be achieved by the end of 2021. Substantially improving this ratio on the basis of clearly identified earnings and cost potential will be a key task once the deal is closed.

Solid performance of the operating business

The operating business showed a solid performance in the first three quarters, although the volume of new business at € 5.4 (6.4) billion remained below the previous year’s level amid a competitive setting, due to the strict earnings and risk parameters. Taken together with around € 0.4 billion in loans earmarked for syndication, largely from the real estate sector, newly contracted financing came to € 5.8 billion. The encouraging trend of new business margins is, however, evidence of the Bank's increasingly successful focus on profitability.

In the Real Estate Clients segment the Bank took advantage of its good market position to underwrite € 3.2 (3.4) billion in new business. The Corporate Clients segment contracted € 1.8 (2.4) billion amid an intensely competitive environment. In terms of financing in Shipping, the previous year’s level of € 0.4 (0.4) billion was maintained as a result of strict risk/return criteria

Loan loss provisions substantially positive after reversals in the ship portfolio

The loan loss provisions within the Group total € 60 (-332) million after currency effects and the hedging effect of the credit derivative, having benefitted from recovery trends on the relevant markets and reversals due to successful restructurings in ship financing.

In the wake of accounting pursuant to IFRS 9 and the resultant measurement of portfolio transactions at fair value, and with the continuing run-down of legacy loans, the Non-Performing Exposure ratio was more than halved to 4.5 % as at the reporting date compared with the year-end 2017 figure of 10.4 %. Following the completion of privatisation and the sale of non-performing loans in the Non-Core Bank to investors (portfolio transaction), the Bank will be virtually free of legacy assets and have an NPE ratio of around 2 %, which is low even by European standards.

The Common Equity Tier 1 ratio (CET1-ratio) is solid at 16.1 % (31 Dec. 2017: pro forma 15.4 %) and reflects the reduced risk weighted assets (RWA) amounting to € 24.2 (31 Dec. 2017: pro forma 26.2) billion. The leverage ratio, which describes Tier 1 capital in relation to business volume, is also very good at 8.1 % (31 Dec. 2017: 7.7 %) and is also an expression of the solid balance sheet structure.

The Group's total assets continued to be reduced as scheduled to € 61.3 (31 Dec. 2017: 70.4) billion in line with the ongoing transformation and due to reduced loans and advances to banks.

Outlook

The Bank expects considerable additional burdens, especially restructuring expenses in connection with the privatisation and ongoing transformation process, and still anticipates a loss before taxes amounting to around € -100 million for the financial year 2018. The outlook could change upon closing of the entire sale, which is expected soon.

Statement of income (€ m) Jan - Sept 1
2018
Jan - Sept
2017
Change in
%

Net interest income1 398 390 2
Net commission income 22 52 -58
Result from hedging -8 -14 43
Result from financial instruments categorised as FVPL2 -25 159 >-100
Net income from financial investments3 101 406 -75
Total income
 
488
 
993
 
-51
 
Loan loss provisions4 60 -322 >-100
Administrative expenses -319 -366 -13
Other operating result1 50 96 -48
Expenses for bank levy and deposit guarantee fund -34 -41 -17
Net income before restructuring and privatisation
 
245
 
360
 
-32
 
Net income from restructuring and privatisation -49 -43 -14
Expenses for government guarantees -188 -116 62
Net income before tax
 
8
 
201
 
-96
 
Income tax expenses -110 -25 >100
Group net result
 
-102
 
176
 
>-100
 
Group net result attributable to non-controlling interests 1 10 >-90
Group net result attributable to HSH Nordbank shareholders -103 166 >-100


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Additional key figures of HSH Nordbank Group 30 September 2018 31 December 2017
Total assets (in Euro bn) 61.3 70.4
Risk assets (RWA; in Euro bn) 24.2 26.2 5
Common Equity Tier 1 (CET1) capital ratio (in %)5 16.1 15.4 5
Full-time employees (FTEs) 1,720 1,926
Cost-income ratio (in %) 59 32


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1 Data as at 30 September 2018 was prepared in accordance with IFRS 9. Data for the comparison period was not adjusted and is calculated in accordance with IAS 39.

2 In the previous year (IAS 39), the item “net trading income” (FVPL = Fair Value through Profit or Loss).

3 Incl. other income items.

4 Incl. hedging effect of credit derivative second-loss guarantee.

5 From March 2018, the capital ratios will no longer be shown taking into account the regulatory relief effect of the federal state guarantee. To enable a comparison with the key capital figures as at the reporting date, “pro forma” ratios are shown as at 31 December 2017.

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.