30-08-2018

Shipping Loans’ Restructuring Helps HSH Nordbank’s Profits

HSH Nordbank has continued to resolutely forge ahead with its multi-year transformation and reports a satisfactory result for the first half of 2018.

The operating performance, considerable cost savings and released loan loss provisions due to successfully restructured shipping loans almost entirely offset the expected heavy burdens associated with privatisation. The Bank’s capital and liquidity ratios remain at a high level.

“Following the signing at the end of February, privatisation is on the home straight and everyone involved is working hard towards its formal completion. We have established key conditions for this in the past few months and I’m convinced that we will be a successfully privatised bank in the fourth quarter. We continue to forge ahead with our realignment towards being an efficient commercial bank with a profitable, client-oriented approach,” said Stefan Ermisch, CEO of HSH Nordbank.

On 28 February 2018 a group of private-sector, mutually independent investors signed a purchase agreement for HSH Nordbank. These are Cerberus European Investments LP, J. C. Flowers & Co. LLC, GoldenTree Asset Management L.P., Centaurus Capital LP and BAWAG P.S.K. AG or investment funds initiated by them.

Privatisation weighs on Group result

The Group net result before taxes amounts to € -1 (prev. year: 173) million with a significant impact of privatisation-related factors such as the provision made in the first quarter for premature termination of the second-loss guarantee in the amount of € -100 million. In addition to the ongoing guarantee fees, the charges pertaining to the guarantee virtually doubled year on year to € -158 (-80) million. There were also restructuring costs of € -31 (-25) million as well as the annual contributions involving the bank levy and deposit guarantee fund amounting to € -34 (-41) million. Income from the operating business, other savings on the cost side and releases in loan loss provisioning of € 81 (-241) million exerted a positive effect. After taxes, the Group net result was € -77 (158) million.

The forward-looking Core Bank contributed a pre-tax profit of € 378 (543) million to the Group result. Expenses on restructuring and transformation as well as overall bank positions summarised under Others & Consolidation had an adverse effect, with a result before taxes of € -188 (-38) million. The pre-tax result of € -191 (-332) million in the Non-Core Bank, which is to be dissolved, mostly stems from the provision for premature guarantee termination.

Sales of securities scaled back – successful cost savings

Group’s total income came to € 341 (744) million, which was expected as in the previous year there was significantly greater income from the managed sale of securities, carried out to compensate for heavy burdens stemming from legacy portfolios in the Non-Core Bank. In the current financial year, the improved net interest income of € 286 (259) million made a significant contribution to total income. Above all, this reflected the positive new business with widening margins from the first to the second quarter of the year, along with a stable amount of interest-bearing receivables.

The positive trend on the cost side also continued in the first half of 2018. Administrative expenses were reduced further in the wake of the Bank’s successful cost cutting pro-grammes, namely by nine percent to € -223 (-246) million. The personnel expenses of € -99 (-113) million reflect the considerable reduction in the number of employees by 164 to 1,762 (full-time employees). In particular, savings on project and building costs brought operating expenses down to € -111 (-124) million.

Core Bank performing well

The Core Bank performed well and closed out the first half-year with net income before taxes of € 378 (543) million. The total income of € 435 (721) million reflects the scaled-back sales of securities, which were carried out to a significantly greater extent in the previous year to compensate for the burdens of non-performing legacy exposures in the Non-Core Bank at that time.

The Bank is adhering resolutely to its own risk/return parameters for new business. In total, new deals observing these in-house profitability requirements amounted including € 0,3 bil-lion for syndication to € 3.8 (4,4) billion, with margins on new business moving in a favoura-ble direction and widening considerably from the first to the second quarter of the year. In the Real Estate Clients segment, the Bank met its new business target with a figure of € 2.0 (2.3) billion thanks to its good market position. The Corporate Clients segment signed business worth € 1.2 (1.6) billion in a highly competitive environment. In the Shipping segment, the new business of € 0.3 (0.3) billion matched the previous year’s figure.

The proportion of the bank levy and deposit guarantee fund accounted for by the Core Bank of € -26 (-25) million was roughly at the previous year’s level. Guarantee expenses – including the settlement payment for termination of the guarantee – quadrupled versus the first half of 2017 and had a negative effect on the Core Bank result in the amount of € -41 (-10) million. Releases in loan loss provisioning of € 157 (9) million (incl. the hedging effect of the credit derivative), which are attributable to the encouraging trend on the shipping markets and successfully restructured loans in this segment, exerted a positive effect.

NPE-ratio of about 2 % upon closing – CET1-ratio remains at high level with 16 %

The Group’s loan loss provisioning amounted to € 81 (-241) million after currency effects and the hedging effect of the credit derivative.

As a consequence of applying IFRS 9 and the associated fair-value accounting for the portfolio transaction, the non-performing exposure ratio fell by more than half to 4.7 % (31 Dec. 2017: 10.4 %). Risk coverage is very solid at 63.3 % (31 Dec. 2017: 63.8%). Once the privatisation deal is closed, the Non-Core Bank’s portfolio of non-performing exposures will be sold to investors, leaving the Group almost entirely freed of legacy assets. At that time, the good asset quality, even by international standards, will be reflected in an NPE ratio of about 2 %.

The CET1-ratio improved to 16.0 % (31 Dec. 2017: 15.4 %), which is also a very solid level in a sector-wide comparison. The leverage ratio, which puts core capital in relation to business volume, likewise demonstrates the solidity of the balance sheet structure with a very good figure of 8.0 % (31 Dec. 2017: 7.7 %). The Group’s total assets were further reduced as planned, to € 64.5 (31 Dec. 2017: 70.4) billion, due to IFRS 9 fair-value accounting and the ongoing transformation process.

Outlook

Formal closing of the sale – and thereby final completion of the change of ownership – is expected in the fourth quarter of 2018. Disproportionately heavy privatisation and restructuring costs will be incurred in the second half of 2018, meaning that the Bank still anticipates a full-year loss before taxes of about € -100 million. The outlook could change later in the year once the sale is closed and the switch to new ownership is completed.

Source: HSH Nordbank

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