Solid trend – HSH Nordbank with net income before taxes of € 110 million

Banking, Company Profiles, Finance, Markets, News, Reports, Ship Finance, Shipfinance, Statistics, Stock Markets — By on December 4, 2015 at 12:16 PM
Constantin von Oesterreich,

Constantin von Oesterreich,

Solid trend – HSH Nordbank with net income before taxes of € 110 million

  • Substantial increase in Group net interest income to € 612 (400) million
  • Decline in administrative expenses to € -447 (-498) million
  • Cost-income ratio improved to 48 (52) %
  • 13 % increase in adjusted Core Bank net income before taxes to € 326 million
  • Outlook: EU agreement in principle exerting a stabilising effect – profit expected for fiscal year 2015

HAMBURG/KIEL Despite public debate on the EU state aid proceedings, HSH Nordbank was again able to post a substantial profit in the first nine months of 2015. The progress made in operating business with an encouraging increase in net interest income plus costcutting effects particularly contributed to net income before taxes of € 110 million as of the end of September. In the previous year, there was a very positive effect from the debt waiver of the guarantors which had largely contributed to a net income before taxes of € 460 million.

As the agreement in principle with the EU Commission on HSH Nordbank was not reached
until 19 October 2015, a certain degree of restraint was perceptible in client business in the
third quarter. In addition to the continued high premiums payable for the guarantee, the
still heavy impairments on the legacy shipping portfolio continued to exert pressure. Moreover,
as in the second quarter, there was no further positive effect on income from the debt
waiver provided by the two public-sector owners, the states of Hamburg and SchleswigHolstein.

The earnings for the first nine months show that the Bank is headed in the right direction. In
particular, the Core Bank’s increase in operating earnings adjusted for all guarantee and
exceptional factors as well as legacy assets rose to € 326 (previous year: 288) million, reflecting
the growing progress made as a Bank for entrepreneurs.

HSH Nordbank still expects to be able to post positive net income before taxes for 2015 as a
whole.

“Over the next few months, we will be using the additional stability and forward planning
visibility achieved with the EU agreement to further grow our client business, ” said Constantin
von Oesterreich, the Chairman of the Management Board of HSH Nordbank.
“Following the final completion of the EU proceedings expected in the first half of 2016, we
will be stepping up plans for the medium-term privatisation of HSH Nordbank together with
our owners.”

The progress made in operating business in the first three quarters resulted in net income
before taxes of € 110 (460) million. In the previous year, the substantially larger debt
waiver of € 668 million on the part of the guarantors had exerted a very positive effect on
net income. At € 289 million, this effect has been far smaller in 2015, only arising in the first
quarter. The total expenditure of € 54 million on the European bank levy and the deposit
guarantee system of the German Savings Banks Finance Group was also placed on the books
in full in the first quarter of the year. Group net result came to € 24 (333) million.
Within loan loss provisioning, pressure was exerted in the first nine months of the year by
the additional premium of € -311 million, while the base premium came to € -355 million.

All told, the burden arising from the guarantee fees of € -666 million exceeded the relief
of a combined € 660 million provided by compensation and the debt waiver. Since 2009,
HSH Nordbank has paid a total of € 2.6 billion to its guarantors, the states of Hamburg and
Schleswig-Holstein, recognising an amount of € 3.5 billion through profit and loss.

Strong net interest income – appreciably lower administrative expenses

At € 853 (879) million, total income came close to the previous year’s figure thanks to a
sharp rise in net interest income to € 612 (400) million. It was particularly buoyed by new
business, which had been expanded judiciously, as well as generally solid margins. In addition,
exceptional effects were produced by hybrid instruments and hedge accounting. On the
other hand, negative effects arose from the progress made in winding down risk-exposed
legacy assets and loan repayments.

Net trading income and net income from financial investments likewise yielded a positive
effect, although as expected it was less pronounced than in the previous year. Reflecting
volatile conditions in the financial and foreign-exchange markets, net trading income
contributed € 87 (131) million to earnings. At € 54 (267) million, net income from financial
investments fell short of the same period of the previous year, which had benefited to
a greater extent from positive valuation effects and asset sales as part of liquidity management
and portfolio wind-down. Moreover, it came under pressure from the allowance made
for equity holding risks.

Despite the heavy regulatory requirements, administrative expenses were reduced again
under the ongoing cost-cutting programme and, at € -447 (-498) million at the end of September
2015 were appreciably lower than in the previous year. The Bank plans to scale administrative
expenses down to € 500 million per year by 2018 in order to achieve a sustainably
competitive cost base. As of 30 September 2015, the Bank had 2, 449 (31 December
2014: 2, 579) full-time employees. Accordingly, personnel expenses dropped to € -205 (-213)
million. Operating expenses were lowered to € -242 (-285) million thanks to the targeted
management of individual cost items. The cost/income ratio improved to 48 (52) percent
due to the lower administrative expenses.

Earning power improved – focus on expansion of new business

The Core Bank, in which the strategic business divisions of HSH Nordbank are pooled, generated
total income of € 598 (563) million in the first nine months of 2015 thanks to increased
net interest income. The Core Bank’s net interest income from operations,
which reflects the Bank’s earning power in client business, rose by twelve percent to € 475
(426) million.

Comprising various banking services beyond loan financing, the cross-selling result rose to
an encouraging € 201 (198) million due to greater product sales.

The Core Bank’s new business came to € 6.4 billion in the first nine months of 2015,
thus falling short of the previous year’s high figure of € 7 billion. This reflects the marketinduced
borrowing restraint on the part of corporate clients as well as the overall slightly
softer demand ahead of the EU agreement in principle, which had not yet been reached at
the end of September. At the same time, the Bank continued to strictly observe its own internal
risk parameters and earnings targets, additionally scaling back new shipping business
in the light of the very difficult market conditions and the volatile US dollar. The quality of
the Core Bank portfolio benefited from the discharge of existing loans which had been
granted subject to less favourable earnings and risk parameters in relative terms.

As loan repayments offset the effects of increased new business, the Core Bank’s total
assets at the end of the first nine months came to € 75 (31 December 2014: 76) billion.
What is more, the deliberately swifter wind-down of risk assets left traces at the Group level,
causing total Group assets to contract to € 105 (31 December 2014: 110) billion.
Loan loss provisioning for ships exerting pressure

In the first nine months of 2015, loan loss provisioning was dominated by heavy allocations
for the shipping portfolio in response to the sustained difficult market conditions. Restructuring
activities, which increasingly sought to run off risk-exposed ship loans, likewise left
traces. On the other hand, the risk situation in the other divisions remained inconspicuous.
Net reversals were recorded for corporate and real estate client portfolios due to loan repayments
and improved risk assessments.

Net loan loss provisioning of € -306 (-256) million was accompanied by the compensating
effect of € 349 million under the guarantee. This comprises the gross compensation for
the guaranteed portfolio and the forex result of a total of € 371 million, less the additional
premium of € -311 million plus an amount of € 289 million from the debt waiver. Adjusted
for these compensation effects under the guarantee, net loan loss provisioning came to a
positive € 43 million, which was down on the previous year’s figure of € 387 million due to
the significantly smaller debt waiver.

Despite opposing currency-translation effects, total assets in the Restructuring Unit
dropped to € 30 (34) billion due to the systematic and recently intensified wind-down of
legacy assets, particularly those denominated in US dollars.

Solid Common Equity Tier 1 ratio

The capital ratios reported as of 30 September 2015 remained solid. Thus, the Common
Equity Tier 1 ratio (CET1) in accordance with the Basel III (phased in) transition rules
stood at 12.8 percent (including a buffer of 2.7 percentage points due to the capital protection
clause). Even on the assumption of Basel III fully loaded, the CET 1 ratio stood at a solid
12 percent (including a buffer of 2 percentage points).

Risk-weighted assets (RWA) dropped by € 1.1 billion over 31 December 2014 to € 38.4
billion. In this connection, the increase in RWA resulting from payments disbursed in new
business and the appreciation of the US dollar (EUR/USD 1.12 as of 30 September vs.
EUR/USD 1.21 as of 31 December 2014) was more than offset by the reduction arising from
the sharp cut in the portfolio.

Outlook: Implementation of the EU agreement in principle

The agreement in principle reached by the EU Commission and the public-sector owners of
HSH Nordbank on 19 October of this year will be fleshed out in greater detail over the coming
months. Under the agreement, non-performing loans of up to € 6.2 billion are to be
transferred to the majority shareholders, the states of Hamburg and Schleswig-Holstein,
and a further portfolio of up to € 2 billion sold via the market alongside the ongoing portfolio
run-off acitivities Any losses arising from this will be covered by the second-loss guarantee.

At the same time, HSH Nordbank’s operating company will pay significantly lower fees
for the guarantee under its new structure. The final conclusion of the EU state aid proceedings
is expected in the first half of 2016.

HSH Nordbank assumes that the fourth quarter of this year will materially be characterised
by the positive agreement in principle reached with the EU Commission and that material
effects arising from this will show up in the Group financial statements for 2015.

HSH Nordbanke 4 DEC 2015

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