10-12-2016

HSH preparing for change of ownership ─ net profit € 163 million after nine months, but shipping loan provisions on the increase

HSH

In the first nine months of the year HSH Nordbank continued to reduce its legacy assets while setting aside substantially higher provisions for its shipping loans. At the same time, it earned EUR 163 (pre-year period: 24) million and improved its capital ratios.

The Bank is pushing ahead with the upcoming change of ownership; it is putting on a good performance in the Core Bank supported above all by the real estate and corporate clients businesses and is continuing its systematic cost-cutting course. In the words of HSH Nordbank’s CEO Stefan Ermisch, the Bank is still expecting a profit for the year as a whole despite the unabatedly difficult situation on the shipping markets and is preparing for the impending change of ownership.

“HSH Nordbank is showing an encouraging performance in all business areas of the Core Bank. We are traditionally strong in the commercial real estate business in Germany; we have gained a lot of ground in competition for SME clients and we are benefiting from our further optimised structures. The major charges dating from the times before 2009 are now for the most part pooled in the Non-Core-Bank. They will undoubtedly remain a problematic legacy for our Bank as no improvement is currently in sight in shipping despite the crisis having lasted several years already. We intend to cut more problem loans from our legacy business by the end of the year. For 2016 we reaffirm our cautious earnings forecast in view of the persistently high loan loss provisioning requirement for shipping, and we aim to close out the year with a profit within the Group”, said Stefan Ermisch, Chief Executive Officer of HSH Nordbank.

Strong Core Bank – new business picking up momentum
The Core Bank has shown a good performance with net income before taxes of EUR 535 (347) million after nine months. This result is driven by an increase in total income, which at EUR 772 (673) million recorded substantial growth mainly due to a sharp rise in net interest income to EUR 507 (371) million. Net trading income contributed EUR 146 (218) million and net commission income EUR 59 (72) million to the result. Further savings successes from the stringent cost-cutting programme that is currently under way led to lower administrative expenses of EUR -264 (-316) million.

HSH Nordbank has made further progress with its client and industry-focused strategy and expanded its new business in the first nine months. At EUR 5.8 billion, the volume was only modestly below the pre-year figure of EUR 6.4 billion despite a competitive setting and historically low interest rates. Due to a substantial pick up in new business in the third quarter and a well-stocked new business pipeline, the Bank expects performance to remain positive in the final quarter.

New business with corporate clients up one-third
The Corporate Clients segment expanded its new business at a particularly notable rate in the third quarter with a volume of EUR 1.1 billion; after nine months it totalled EUR 2.5 (1.9) billion and thus exceeded the benchmark figure by one-third. Total income of EUR 178 (211) million contributed to the segment’s net income before taxes of EUR 74 (93) million. The low interest rates together with regular and early loan repayments resulting from the persistently high liquidity of companies exerted strain in this regard.

Within Corporate Clients, the Logistics & Infrastructure unit signed new business worth EUR 0.5 billion as at September thanks to very good market penetration. Among other things, it financed district heating grids as well as rail transport and data infrastructure projects. The Energy & Utilities unit continued the good performance seen in the first half of the year: new business rose to EUR 0.8 billion after nine months. The focus here was on structured project finance in wind energy in Germany and Scandinavia. New business in the Trade and Food industry unit grew to EUR 0.6 billion in the 3rd quarter. In addition, income from payment transactions and the documentary business together with higher net commission income rose. Industry & Services and Healthcare contracted new business with a volume of EUR 0.5 billion during the year, gaining new clients across Germany.

In the Real Estate segment, the increase in net income before taxes to EUR 118 (101) million reflects the Bank’s strong market positioning, which has grown over the past dec-ades. New business with real estate clients was managed in accordance with the sector’s cycle and at EUR 3.1 (3.7) billion fell short of the pre-year figure as expected. Business in the western German metropolitan regions and with international institutional investors who invest in Germany was particularly successful. Here, too, the entire client business – as is the case throughout the sector – remains characterised by high exceptional repayments by clients as the liquidity position of German businesses is very comfortable at present providing high internal funding capabilities.

At EUR 102 (109) million, total income in the Shipping segment of the Core Bank was almost at the pre-year level. Net interest income, which declined as the portfolio was deliberately wound down, was offset by positive valuation effects in net trading income. New business was entered into on a very selective basis in the course of the year and came to EUR 0.2 billion; the third quarter on a standalone basis recorded no new business. The substantial year-on-year rise in net income before taxes to EUR 92 (45) million was furthermore supported materially by loan loss provisions after offsetting the second loss guarantee of EUR 42 million. The Shipping exposure of the Core Bank decreased further to EUR 7.1 billion as it was both reduced and partly shifted to the Non-Core-Bank. The quality of this portfolio is good: more than 90 percent of its loans are performing.

The legacy shipping exposures from the period pre-2009 are mostly pooled in the Non-Core-Bank and remain problematic. The Bank has taken account of this by setting aside high loan loss provisions for these legacy cases. The Non-Core-Bank has reported loan loss provisions before guarantee for shipping of EUR -959 million. It is these legacy loans that also primarily tie up the guarantee, which the federal states provided in 2009 to recapitalise the Bank.

The Treasury & Markets segment was newly created to ensure a more transparent reporting structure. It pools the sale of capital market products, the deposit business with savings banks and institutional clients and the Bank’s refinancing activities. With net income before taxes of EUR 251 (108) million, especially due to sales of promissory notes and securities, the segment made a major contribution to the Core Bank’s good earnings performance.

Good Group net result – Non-Core-Bank loan loss provisioning remains high
In a challenging setting, the Group on the whole performed well with earnings of EUR 183 (110) million before taxes and EUR 163 (24) million after taxes significantly above the previous year’s figures. Total income of EUR 728 (856) million was driven primarily by net interest income of EUR 503 (612) million. A considerable decrease in interest-bearing receivables weighed on operating income. The Core Bank made the principal contribution to the net commission income of EUR 69 (88) million, with lower commissions from restructuring reducing the figure. The net trading result of EUR 66 (90) million benefited from the operating profits in the client business, which was offset by the valuation effects from client derivatives due to the trend in interest rates. Net income from financial investments improved significantly to EUR 92 (54) million due to securities sales.

Given the persistently very difficult conditions in the shipping business, substantial loan-loss provisioning on ship loans of EUR -979 million before the guarantee had to be applied in the first nine months of 2016, of which 98 percent pertains to the Non-Core-Bank. Reversals characterised the loan loss provisioning for real estate, corporate clients and other items of EUR 13 million on balance. The Group’s risk provisioning in the lending business before the guarantee therefore amounts to EUR -966 (-306) million. Compensation for the guaranteed portfolio (incl. forex result) came to EUR 1,115 million, resulting in post-guarantee loan loss provisions of EUR 149 (40) million. In particular, the loss accounts associated in the second quarter of 2016 with the federal state portfolio transfer exerted a positive effect on the loan loss provisioning result.

Strict cost management ahead of the change in ownership
The administrative expenses reflect the successful savings due to the ongoing cost reduction programme and were down to EUR -421 (-447) million. The personnel expenses of EUR -188 (-205) million are influenced by the reduction in the number of full-time employees compared with the end of 2015 to 2,226 (2,384). Revaluation of the property, plant and equipment of consolidated subsidiaries was reflected principally in the impairment losses of EUR -50 (-34) million. Reduced building costs furthermore resulted in significantly lower operating expenses of EUR -183 (-208) million. Provisions in the amount of EUR -118 (-18) million for planned redundancies were taken into account in the restructuring result.

Risk eased – CET1 and leverage ratio improved
The transfer of non-performing loans to the federal states of Hamburg and Schleswig-Holstein in the amount of EUR 5 billion (as of 31 December 2015) is a key element of the agreements between the federal states and the EU Commission, and it constitutes an important prerequisite for the impending change of ownership. Additionally and in line with the EU decision, the Bank may dispose of a further EUR 3.2 billion worth of loans on the market and charge the resulting losses directly to the guarantee. Exposures were chosen with a clear focus on further easing of risk to the Bank’s balance sheet for this ongoing transaction. The portfolio enjoys significant investor interest. The disposal is to be completed by the middle of 2017, with a substantial proportion to be sold in the fourth quarter of 2016.

In its normal business operations, too, the Bank continues to free itself of problem loans, thereby strengthening its capital and liquidity position. The wind-down of legacy assets from operating business amounted to a further three billion euros alone in the first nine months.

The nine-month result and the substantial reduction of risk assets led to an improved CET1 ratio of 13.7 percent (31 December 2015: 12.3 percent), which, as in the past, puts it at a good level. The same applies to the leverage ratio, which has, at 7.5 percent (31 December 2015: 6.3 percent), reached a very high figure and is an expression of the successful balance-sheet restructuring.

Clear separation of Core Bank and legacy assets
HSH Nordbank adjusted its segment reporting in the third quarter of 2016 in order to present its business areas and potential for creating value more transparently as well as to appropriately show guarantee effects. This professionalisation meets the expectations and demands of the investor community and is therefore also an important step towards a successful change of ownership. The Core Bank now comprises all of the Bank’s forward-looking units and ties up only a small proportion of the guarantee, whereas the Non-Core-Bank Unit pools virtually all of the pre-2009 legacy business and therefore also takes up a major share of the guarantee.

First, core business and legacy assets were clearly separated, involving the transfer of EUR 6.2 billion in non-performing loans – mostly from shipping – to the Non-Core-Bank. The Core Bank is consequently almost entirely clean of legacy assets and has good growth opportunities. At the same time, EUR 4.5 billion worth of forward-looking portfolios previously held in the former Restructuring Unit were allocated to the Core Bank. The Non-Core-Bank’s total assets were up by EUR 1.7 billion in the wake of this portfolio reallocation, while those of the Core Bank were down accordingly.

The second step involves focusing more sharply on the Core Bank’s business segments and encompasses improved presentation of them. The Core Bank now comprises Real Estate, Shipping, Corporate Clients as well as Treasury & Markets segments; while the Restructuring Unit has been renamed to Non-Core-Bank. The principal guarantee effects previously presented in the respective consolidation columns of the Core Bank and the Restructuring Unit will in the future be matched in accordance with their cause to the individual business segments, resulting in changed income and cost items. ‘Other & Consolidations’ comprises items for the entire bank, the bank levy and the deposit guarantee fund as well as the restructuring result and consolidation effects. This achieves rigorous and clear reporting on the Core Bank’s strategic business segments and the legacy assets of the Non-Core-Bank.

Overall, the Group’s total assets were down to EUR 88 billion (31 December 2015: 97). This comprises EUR 48 billion pertaining to the Core Bank, EU 23 billion to the Non-Core-Bank and EUR 16 billion to the newly presented ‘Other & Consolidations’.

Outlook

Based on the good nine-month result, the Bank reaffirms its cautious earnings forecast for 2016 as a whole and continues to aim for a profit within the Group, even though it will fall short of the previous year’s result. “The Bank will continue to strengthen its client business as well as to resolutely wind down its legacy assets. We will thereby establish a solid foundation for the impending change of ownership”, HSH’s CEO Stefan Ermisch said.

Income Statement (EUR m) Jan.-Sept. 2016 Jan.-
Sept. 2015
  Change in
(%)
Interest income 2,664 3,365   -21
Negative interest on deposits and derivatives -121 -28   >100
Interest expense -2,066 -2,653   -22
Positive interest on borrowings and derivatives 116 16   >100
Net income from hybrid financial instruments -90 -88   -2
Net interest income 503 612   -18
Net commission income 69 88   -22
Result from hedging -2 12   >-100
Net trading income 66 90   -27
Net income from financial investments 90 54   67
Net income from investments accounted for using the equity method 2   >100
Total income 728 856   -16
Loan loss provisions 1) 149 40   -58
Administrative expenses -421 -447   -6
Other operating income 71 88   -19
Expenses for bank levy and deposit guarantee fund -56 -54   4
Net income before restructuring 471 483   -2
Result from restructuring -118 -18   >-100
Expenses for government guarantees -170 -355   -52
Net income before taxes 183 110   66
Income tax -20 -86   -77
Group net result 163 24   >100
Group net income attributable to non-controlling interests 1   -100
Group net results attributable to HSH Nordbank shareholders 163 23   >100

1) incl. hedging result from credit derivative second-loss guarantee

Additional key figures of HSH Nordbank Group 30.09.2016 31.12.2015
Total assets/liabilities (in € bn) 88.3 97.0
Risk assets (RWA) after guarantee (in € bn) 34.0 37.4
Common Equity Tier 1 capital ratio (CET1 ratio, phased in) (%)2) 13.7 12.3
Core capital ratio (%) 2) 17.5 16.4
Total capital ratio (%) 2) 22.7 20.6
Full-time staff (FTEs) 2,226 2,384
Cost-income ratio 53 47 3
Leverage ratio 7.5 6.3

2) pursuant to same-period calculation under the rules of the Capital Requirements Regulation (CRR), 3 Date: 30 Sep 2016

Source: HSH Nordbank

Previous Next
 

In Conversation with Mr Neeraj Bansal, Deputy Chairman, JNPT

View More Videos


Gallery

India Ship Management Summit 2016

View All Albums