HCOB at half year with solid result, strong capital position and success in transformation
- Extensive restructuring continued with conviction
- CET1 capital ratio increased to 21.7% (31/12/2019: 18,5)
- Total assets further reduced as planned to EUR 42 billion
- Solid net income before taxes of EUR 71 (prior-year 96) million
- Profit before taxes also expected for full year 2020 – despite recession and Covid-19
Hamburg Commercial Bank AG (HCOB) generated a net income before taxes of EUR 71 (prior-year period: 96) million in the first half year and has further expanded its already very solid capital ratio to 21.7% (31/12/2019: 18.5).
The fact that the Bank began preparing for the current recessionary environment as early as autumn 2019 with a cautious business strategy and tightened risk targets also contributed to the good overall result. HCOB also benefited from constantly rising operating profitability in the course of its transformation, lower refinancing costs and disposal gains. As part of the de-risking process, total assets were deliberately reduced and a more selective approach was applied to new business.
“The year 2020 is crucial for the successful transformation of our Bank. In the past year and a half we have made more progress than expected and achieved visible successes – despite the difficult economic development in the wake of the Covid-19 crisis. With a strong capital position, the good quality of our loan book and steadily improving profitability, we have put the Bank in a robust position to meet the economic challenges ahead. Nonetheless, the impacts of the Covid-19 pandemic will continue to be clearly felt, and the extent of these impacts is currently not foreseeable, either for HCOB or for the economy as a whole. We have prepared ourselves for this: We are becoming even more selective in our financing, we have a high level of risk protection in our credit book, we continue to reduce our risk positions and maintain our strict cost discipline. In this way, we are laying the foundation for resilience in an extremely volatile market environment and for even more long-term success in the German banking market as a profitable and financially strong specialized lender,” said Stefan Ermisch, CEO of Hamburg Commercial Bank.
Solid result – strong net interest income – higher total income
Net income before taxes (IFRS) amounted to EUR 71 (96) million in the first half of the year and was driven by strong net interest income and disposal gains. In contrast, there were adverse effects due to the Covid-19 crisis. These were particularly reflected in valuation losses on financial instruments, some of which were temporary, and in the forward-looking increase in risk provisions. With an improved total income and further reduced costs, the slightly lower pre-tax result is due to the risk provision of EUR -94 million, which contrasts with last year’s positive earnings contribution from a net reversal of EUR 25 million. Taking deferred taxes into account, income tax expense amounted to EUR -67 (-91) million, leading to a group net result of EUR 4 (5) million.
Total income rose by almost a quarter to EUR 280 (226) million in the first half of 2020. This was largely due to the significant increase in net interest income of EUR 351 (230) million, which – despite a planned reduction in the interest-bearing volume of receivables – was achieved thanks to more profitable new business and valuation effects for hybrid financial instruments. Net commission income was stable at EUR 27 (28) million, despite a planned reduction in business volume. This was offset by volatility on the interest rate and currency markets triggered by the Covid-19 crisis, which led to – partially temporary – valuation losses in the result from financial instruments categorized as FVPL, which had a significant negative impact of EUR -149 (-37) million on the total income.
The other operating result contributed EUR 100 (80) million to the net income before taxes and is largely attributable to the sale of buildings as part of the concentration of locations. The expenses for regulatory affairs, deposit guarantee fund and banking associations of EUR -29 (-37) million already include the full contributions for the bank levy and the deposit guarantee fund for the whole 2020.
De-risking and consistent portfolio reduction
The very weak economic development due to the coronavirus was also reflected in the loan loss provisions of EUR -94 (25) million, though the good credit quality, the high risk coverage of the non-performing exposure and the early portfolio reduction as a de-risking measure all played a part in limiting risk. The net additions were spread between specific loan loss provisions of EUR -64 million and general loan loss provisions of EUR -32 million and other effects of EUR 2 million. The result in the first half of 2019 was boosted by net reversals of loan loss provisions of EUR 25 million, particularly in Shipping. In view of the strained economic environment, the economic scenarios incorporated by the Bank at the half-year stage this year were, once again, considerably more adverse than in the prior year.
The NPE ratio (non-performing exposure) increased to 3.2% as a result of the reclassification of a major legacy exposure from the Real Estate segment. Excluding this loan, which is to be reduced in the near future, the ratio of 2.1% was only moderately higher than the 1.8% as at 31 December 2019, which is attributable in particular to a reduction in total exposure of around 12%. The risk coverage of the non-performing exposure was a solid 53%. In view of the difficult economic environment, the Bank will continue the de-risking strategy it initiated last year and accelerate the reduction of exposures that have defaulted or are at risk of default. In the first half of 2020, the Group’s total assets were reduced as planned by almost EUR 6 billion (around 12%) and stood at EUR 41.8 billion as at 30 June 2020.
The CET1 capital ratio increased to 21.7% after the first half year (31/12/2019: 18.5), mainly due to a decline in risk-weighted assets of EUR 2 billion to EUR 19.0 billion, despite regulatory impulses. Together with the leverage ratio of 9.9% (31/12/2019: 8.2), which has been strengthened once again, these figures demonstrate the Bank’s extremely good capital position.
Cost program takes effect – falling personnel costs – investments in IT restructuring
The Bank’s cost efficiency programs continue to be implemented consistently are yielding positive results: In the first six months of the year, administrative expenses were down overall to EUR -181 (-190) million. Personnel expenses fell by 17% to EUR -87 (-105) million as a direct consequence of the strict restructuring course. As of 30 June 2020, HCOB employed 1,215 fulltime equivalents (FTE; 31/12/2019: 1,482); the target by the end of 2022 is around 720 FTE, approximately 60% fewer than when the transformation began in 2018. The restructuring expenses necessary for this capacity reduction were already reflected in the 2018/19 financial statements. The expected increase in operating expenses to EUR -90 (-80) million is attributable to forward-looking transformation measures – especially in IT – which are necessary in the medium term to permanently reduce operating expenses.
The cost-income ratio (CIR) improved to 47.6% as at 30 June 2020 (31/12/2019: 69.3) as a result of effective cost programs and increased earnings.
Conventional new business reduced significantly with steadily improving profitability
In recent months, HCOB’s overall focus was on supporting existing clients, also in the context of prolongations. The Bank also participated in the support programs initiated by the German government. Conventional new business moved into the background due to a significant decline in the propensity of customers to invest and the Bank’s de-risking strategy. Accordingly, gross new business amounted to a comparatively low EUR 1.4 billion, though the Bank’s profit-oriented and risk-conscious approach and the lower funding costs were reflected in the pleasing development of margins in all segments.
In the Real Estate segment, new business was deliberately reduced to EUR 0.3 (2.3) billion, with a pleasing trend in operating net interest income. Before risk provisioning, business with real estate customers contributed EUR 45 (78) million to Group net income before taxes, burdened in particular by valuation effects on customer derivatives. In the prior-year period, the segment benefited from a positive one-off effect from the reversal of provisions for legal risks.
The Corporates & Structured Finance segment comprises the Corporate Banking & Advisory business units as well as project financing in the areas of renewable energy and infrastructure. At EUR 0.3 (0.8) billion, new business was down on the prior-year period, particularly in the traditional corporate client segment. Nevertheless, the cross-selling result remained virtually unchanged. The good operating earnings performance and the sale of loans from the cover pool contributed to the improved net income before taxes and before loan loss provisions of EUR 61 (-6) million.
In the Shipping segment, new business was at the previous year’s level of EUR 0.5 (0.5) billion and was concluded exclusively with shipping companies holding good credit ratings. The Bank’s shipping portfolio has proven very robust during the crisis, achieving solid operational performance. Valuation effects from customer derivatives and loans categorized at fair value had a negative impact, which led to a neutral result before taxes and before risk provisioning of zero for the Shipping segment (prior-year period: EUR 12 million).
The still young segment Diversified Lending & Markets (formerly Treasury & Markets) got off to a good start with new business of EUR 0.2 billion and will carefully and continuously build up a portfolio. The Markets business unit generated income from diversification. Conversely, the valuation of legacy portfolios burdened this segment and led to a moderate negative result before taxes and before risk provisioning of EUR -3 (-1) million.
The administrative and Bank-wide functions and reconciliation effects combined in Other and Reconciliation contributed EUR 62 (-12) million before risk provisioning to net income before taxes. This figure includes proceeds from the sale of buildings that were divested as part of HCOB’s building strategy and with a view to a more streamlined bank.
Outlook – earnings forecast confirmed, subject to impacts of Covid-19
“We will consistently pursue our clear restructuring course in the coming months. We will continue to focus on a strong capital base, accelerated reduction of risk positions and a solid risk shielding. Our portfolio will be more diversified, structures and processes further adjusted and cost programs resolutely implemented. We are thus preparing ourselves for an equally successful second half of our far-reaching transformation,” said Stefan Ermisch.
In view of the progress made in the Bank’s transformation, the satisfactory business development in the first half of 2020 and the focused orientation, there is no doubt from today’s perspective that HCOB will switch to the Deposit Protection Fund (ESF) of the Association of German Banks (BdB) at the beginning of 2022 as planned.
Overall, the Bank continues to expect a positive IFRS net income before taxes for the 2020 financial year, slightly above the level seen in the prior year. This forecast is subject to unforeseeable effects from the implementation of the transformation or unforeseeable geopolitical influences, such as a significantly longer period of recession and only slow economic recovery following the coronavirus crisis.
| Statement of income (IFRS, in million euros) | Jan-June 2020 | Jan-June 2019 | Change in % |
|---|---|---|---|
| Net interest income | 351 | 2301 | 53 |
| Net commission income | 27 | 28 | -4 |
| Result from hedging | 2 | -4 | >100 |
| Result from financial instruments categorized as FVPL | -149 | -37 | >-100 |
| Net income from financial investments | 5 | 41 | 25 |
| Result from the disposal of financial assets classified as AC | 44 | 5 | >100 |
| Total income | 280 | 226 | 24 |
| Loan loss provisions | -94 | 25 | >100 |
| Total income after loan loss provisions | 186 | 251 | -26 |
| Administrative expenses | -181 | -190 | -5 |
| Other operating result | 100 | 80 | 25 |
| Expenses for regulatory affairs, deposit guarantee fund, banking associations | -29 | -37 | -22 |
| Net income before restructuring and transformation | 76 | 104 | -27 |
| Net income from restructuring and transformation | -5 | -8 | 38 |
| Net income before taxes | 71 | 96 | -26 |
| Income tax expenses | -67 | -91 | -26 |
| Group net result | 4 | 5 | -20 |
| Group net result attributable to Hamburg Commercial Bank shareholders | 4 | 5 | -20 |
| Additional figures of Hamburg Commercial Bank Group | 30/06/2020 | 31/12/2019 |
|---|---|---|
| Total assets (in bn Euro) | 42 | 48 |
| CET1 capital ratio in % | 21.7 | 18.5 |
| Leverage Ratio (in %) | 9.9 | 8.2 |
| Employees (FTE) | 1,215 | 1,482 |
1 The previous year figure was adjusted.
The information contained in this press release does not constitute an offer for the sale of any type of Hamburg Commercial Bank AG securities. Securities of Hamburg Commercial Bank 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.
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