HSH Nordbank remains on course after the first nine months

MUNICH (HSH Nordbank AG) - HSH Nordbank AG’s business was satisfactory in the first nine months of 2005, the Bank thus having stayed on its previously successful course.

  • Operating income up 7 %
  • Further decline in loan-loss provisions
  • Sharp increase in reserves
  • Net income up 68 %
  • Return on equity improved from 12.3 % to 14.0 %

“The good operating earnings have enabled us to replenish our reserves substantially following the sizeable withdrawal necessitated by the EU reimbursement”, commented Alexander Stuhlmann, Chairman of the Management Board of HSH Nordbank AG upon presentation of the nine-month figures in Kiel.

The HSH Nordbank Group raised its total assets appreciably to EUR 190.7 billion, up from EUR 171.1 billion on September 30, 2004, equivalent to a gain of 11.5 %. This was in particular the result of increased funding operations ahead of the abolition of the state guarantees as well as the rise in the U.S. dollar exchange rate and also strong new lending business. These were also the reasons for the substantial increase in business volume of 13.9 % to EUR 235 billion.

Operating profit before risk provisions and evaluation amounted to EUR 903 million in the period under report and was thus 3.0 % above the very good 2004 result.

In total, operating income climbed by 7.0 % to a good EUR 1.5 billion, with the gain having been underpinned by all income items.

Net interest income rose by 3.3 % year on year to just under EUR 1.2 billion despite the still restrained capital spending of German businesses and the persistent pressure on margins.

Net commission income was up 10.4 % on the same period in 2004, coming to EUR 219 million in the first nine months of 2005. This increase was due to higher loan commissions – in particular from our international lending business, reflecting the larger number of arranger positions assumed by the Group.

Net trading income rose by 35.3 % over the first nine months of 2004 to EUR 97 million. This result was again achieved without higher risk exposure.

Net other operating income totaled to EUR 58 million in the first nine months, up 44.7 % on the 2004 figure. This increase was in particular attributable to gains on the sale of shares in AGV, HSH Nordbank's lease finance subsidiary.

In all, administrative expenses were as budgeted substantially above the previous year’s level, rising by 13.0 % to a total of EUR 654 million in the first nine months of 2005. However, in the light of foreseeable developments and the steps already taken, it will be possible to limit this rate of growth in the future.

Operating expenses increased by 11.2 % to EUR 349 million, due primarily to higher consulting expenses in connection with implementation of the new strategy. Looking ahead over the next few years, this item should decline substantially due to a sizeable drop in consulting expenditure.

Personnel expenses amounted to EUR 304 million, up 15.1 % year on year. This increase was due to the necessary staff hired to implement the new strategy as well as to pay-scale increases and higher pension provisions. In the medium term, the rise in personnel expenses will be perceptibly limited by the personnel measures that have been initiated.

As of September 30, 2005, the number of Group employees came to 4,497, a marginal decline of 25 over the same date one year earlier.

In spite of expenditure on the new business model with its greater focus on services, the cost-income ratio still looks good. However, at 42.0 %, it is higher than in the previous year (September 30, 2004: 39.7 %).

Operating profit before risk provisions/evaluation amounted to EUR 903 million in the period under review, 3.0 % higher than in 2004.

At the end of the first nine months of 2005, the item risk provisions/evaluation stood at EUR 371 million, up 12.2 % on the previous year. Of this amount, however, EUR 250 million – i.e. by far the bulk – is accounted for by allocations to the reserves pursuant to Section 340 f+g of the German Commercial Code. To compare, the Bank set aside reserves of EUR 135 million in the first nine months of 2004.

In the lending business, risk provisions amounted to EUR 173 million – a further decline of EUR 23 million or 11.7 %. Risk provisions for the securities business were written back EUR 101 million in the first nine months, constituting an improvement of EUR 103 million over 2004. Combined risk provisions for the lending and the securities business thus contracted by EUR 126 million year on year.

As a result of the large allocations to reserves, operating profit after risk provisions was down slightly, i.e. by 2.6 % to EUR 532 million.

The return on equity (ROE) stood at 14.0 % on September 30, 2005, an improvement of 1.7 percentage points year on year and an increase of 1.2 percentage points compared with December 31, 2004.

At EUR 339 million, the HSH Nordbank Group’s net income for the period exceeded that of the previous year by a substantial 68.1 %. When assessing this figure, it should be noted that part of the impact of the settlement of the EU subsidization proceedings was accounted for in an extraordinary result of EUR 162 million.

Thus, HSH Nordbank used the entire additional capital of EUR 556 million provided by the stockholders – equaling the total reimbursement (EUR 756 million) less the Bank’s retention amount (EUR 200 million) - to replenish the reserves pursuant to Section 340g of the German Commercial Code. Associated with this are deferred taxes amounting to EUR 222 million. In addition, we formed provisions for restructuring in the amount of EUR 60 million.

“At the present time, we expect the operating profit of the entire 2005 financial year to exceed the pre-year figure once again. Particularly against the backdrop of the difficult market conditions, this would be an exceptionally gratifying result that would keep HSH Nordbank on the path on which it has successfully embarked even without state guarantees”, was Stuhlmann’s assessment of the prospects for the whole of 2005.

Segment report

Shipping Clients segment
The good business performance in the area of the ship finance continued. Operating profit after risk provisions rose to EUR 197 million – a gain of 18.6 % over the previous year. The return on Tier 1 capital improved from 18.4 % to 21.7 %. At more than EUR 5 billion, new business was strong and more than offset the impact of a large volume of maturing loans and non-scheduled repayments as a result of shipping companies’ good liquidity situation.

We enjoyed cross-selling benefits both with new and long-standing customers, thanks to which net commission income was significantly above the previous year’s figure. There was demand from our customers not only for conventional hedging products, but increasingly also for consulting services and structured special products, the development of which we stepped up in our Bank by setting up the new “Structuring and Development” unit.

The increased competition with many new providers in the ship-finance sector as well as the ongoing, dynamic trend in the charter markets caused the margins on new business to contract sharply. Risk provisioning was down substantially year on year once again thanks to the favorable market conditions.

With the second ship-loan securitization transaction within the context of a private placement, the credit risks of a select portfolio of ship loans with a total value of about USD 570 million were transferred by issuing credit-linked notes. OCEAN STAR 2005 was the first public securitization transaction in the Landesbank sector after the disappearance of state guarantees. Thanks to the successful closing of OCEAN STAR 2004 and OCEAN STAR 2005 with a total volume of about USD 1.6 billion, HSH Nordbank succeeded within a year in establishing ship loans as a new tradable asset class on the capital market.

Real Estate Clients segment
Operating profit after risk provisioning in the area of real estate finance was up from EUR 34 million to EUR 116 million – above all thanks to a further decrease in risk provisions and a substantial increase in net commission income. The return on Tier 1 capital climbed from 4.4 % to 15.6 %. The sharper focus on international operations made a particularly strong contribution to the good performance. Given the difficult conditions prevailing on the German real estate market, the proportion of new business outside Germany was raised to more than 50 %.

On November 14, 2005, HSH Nordbank opened a representative office for the real estate business in San Francisco. Together with its strong local sales team, HSH Nordbank is well poised to take advantage of the good business potential available on the North American real estate market.

Corporate Clients segment
Alongside the global corporate client business run from Hamburg and Kiel, this segment also comprises the operations of the Copenhagen branch involving corporate clients. Operating profit after risk provisioning rose 5.9 % to EUR 163 million. The return on Tier 1 capital increased from 21.5 % to 23.1 %. The gains in earnings thus more than offset the higher risk provisions. However, the pressure on margins still persists. The further increase in earnings that was nevertheless achieved is based on sharpened focus on target customers combined with our increasingly services-oriented range of products. For instance, HSH Nordbank offers innovative capital market-related solutions for boosting the capital of small and medium-sized enterprises as an alternative to conventional borrowing. Moreover, jointly with our clients advantage is taken of the potential that frequently exists in the area of interest optimization.

Special Corporate and Institutional Clients segment
This segment comprises the Transportation, Savings Banks/Public Sector Clients, Lease Finance and Financial Institutions/Global Trade Finance divisions. Operating profit after risk provisioning rose to EUR 161 million – a gain of 9.6 %. The return on Tier 1 capital was up year on year from 21.3 % to 22.6 %. Both higher net interest and net commission income contributed to the improved result, in total more than offsetting the increased risk-provisioning requirement.

Private Clients segment
Operating profit after risk provisions on business with private clients, which has also included the international private banking operations of our Luxembourg office since the beginning of the year, rose to EUR 25 million - a gain of 29.6 %. The return on Tier 1 capital reached 18.8 % (2004:
16.2 %). By pooling our international private banking operations in Luxembourg and by linking them up with our established private client business in Northern Germany, we have substantially enhanced the efficient deployment of the entire range of products and services.

Financial Markets segment
With operating profit after risk provisions of EUR 353 million, the Financial Markets segment, which comprises the Capital Markets, Portfolio Management and Investments as well as Asset Liability Management divisions, made a significant contribution to the Bank’s overall profit. The increase of 37.0 % over the previous year was due to substantially higher net interest income and capital gains in the item risk provisioning/evaluation. The return on Tier 1 capital improved from 26.0 % to 30.9 %.

The difference between the combined operating profit of all the individual segments and that of the HSH Nordbank Group is accounted for in a Consolidation column containing items that cannot be allocated to any particular segment.

HSH Nordbank AG is a strong regional bank in Northern Europe. It has total assets of € 191 billion and employs roughly 4,500 staff around the world. It is the market leader in its core region of Hamburg and Schleswig-Holstein. As a global provider of specialist finance, its main focus is on transportation and real estate. In fact, HSH Nordbank is the world’s leading provider of ship finance and covers the entire value chain in the transportation segment. In the area of real estate, HSH Nordbank is one of the strongest banks in Germany, acting as a provider of services relating to all aspects of real estate. It is an acknowledged partner of the capital markets.

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