HCOB with strong capital position and positive result in 2019, its first year of transformation
- CET1 ratio at 18.5% (2018: 18.4%)
- Total assets reduced by 13% to € 48 billion
- Pre-tax profit of € 77 million slightly better than targeted
- All restructuring steps – portfolio overhaul, de-risking and staff reduction – initiated as planned
For Hamburg Commercial Bank AG (HCOB), 2019 was a year marked by its successful, multi-year transformation into a well-capitalized and profitable bank that, as a provider of specialized finance with strict return and income targets, generated a satisfactory result in a tough economic setting.
The Bank was swift and decisive in reducing its business volume and balance sheet. New business, while deliberately targeting a smaller volume, recorded wider margins. This was partly due to considerably reduced funding costs in the wake of privatization and improved pricing discipline, while cost-efficiency programs that are taking effect also helped financial results.
“We already took the decision in the second half of last year to prepare our Bank for a prolonged weaker economic period. That includes intentionally curtailing new business in the cyclical sectors of the economy, generally applying even stricter risk and return requirements, and implementing cost and efficiency improvement programs inextricably linked to the smaller business volume. In such an environment, the key is to have the strongest possible capital position available, so the Bank is ready to act when the time is right after the crisis. Given the major uncertainty at present, it is not yet possible to quantify what the massive upheaval in the global economy because of the coronavirus will mean for the banking sector as a whole and for HCOB itself. We shall therefore be doing everything we can to support our clients in safeguarding their interests and to make our Bank even more resilient to the considerable challenges of upcoming months,” said Stefan Ermisch, CEO of Hamburg Commercial Bank AG.
Margins widening – cost cutting taking effect – funding clearly improved
As already announced in February, HCOB posted solid key financial figures with an IFRS-based pre-tax profit of € 77 (previous year: 97) million. This satisfactory operating result was primarily underpinned by the Real Estate and Shipping business segments, while overall the Bank benefited from strict cost discipline and the good quality of its loan portfolios. A planned reduction of deferred taxes in the wake of successfully overhauling our capital structure yielded net income after taxes of € 12 (77) million. Total income amounted to € 463 million and is not comparable with the previous year’s figure of € 1,586 million, which included exceptional items; particularly income of nearly € 1 billion following the revaluation of hybrid instruments.
Selective with new business – good portfolio quality
Given the looming, significant economic downturn, we intentionally reduced new business and generated a figure of € 7.2 (2018: 8.4) billion in the Group, accompanied by an encouraging widening of net margins. We furthermore invested in enhancing our syndication expertise across all asset classes to raise our balance sheet turnover rate.
By segment, this means a pre-tax profit of € 161 (33) million for the Real Estate segment, which – with solid net interest and net commission income – also benefited from receiving early repayment charges. The amount of new business of € 4.0 (4.6) billion was adjusted, especially in the second half of the year, to the tougher conditions on the German real estate market. With a portfolio totaling € 12.5 (12.4) billion, our Real Estate segment has for many years boasted strong business with national and international investors in the German market as well as sound market penetration in Germany’s most significant urban conurbations. In future, we shall also support some select clients with their projects in major European cities. We will be highly selective with new real estate business for the time being. Since the second half of 2019, our Bank has been significantly reducing its exposure in the project development, hotel and retail property sectors, or refraining from new business here. Meanwhile, our Bank still sees moderate growth potential in conventional office and logistics real estate.
The Corporates & Structured Finance segment (formerly Corporate Clients) comprises Corporate Banking & Advisory as well as Project Finance in the areas of renewable energy and infrastructure, with a volume of € 12.3 (13.6) billion. The segment is also looking after all institutional clients, with a focus on syndication activities. Corporates & Structured Finance posted a pre-tax result of € -36 (27) million, which was due principally to adverse effects on total income and, in loan loss provisioning, to non-strategic assets that were comprehensively eliminated when realigning the client portfolio. New business amounted to € 2.0 (2.8) billion, with volume in the growth area of project finance remaining largely stable, and HCOB more often assuming Lead Arranger positions in renewable energy and digital infrastructure. Given the extremely price-sensitive competitive setting that has been prevailing in conventional SME financing for a long time, for years now our Bank has been virtually absent from such cyclical and heavily contested sectors as mechanical engineering, automotive and component supply, or has sharply reduced and in some cases entirely terminated former loan portfolios.
The Bank intends to continue its selective approach in this segment as a whole, while strictly observing return requirements and placing particular focus on expertise in working capital financing and corporate finance. The past few weeks have shown that practically all businesses in Germany will still be struggling with the fallout from the coronavirus crisis for a long time. In this difficult period, HCOB will be a dependable partner, seeking prompt solutions and supporting its clients swiftly, pragmatically and reliably. That applies to the aid from the state-owned development bank KfW, launched by the Federal Government, as well as to the extensive support schemes at state and federal levels.
The Shipping segment generated an encouraging pre-tax profit of € 124 (-182) million, benefiting particularly from a reduced need for loan loss provisioning in view of the improved portfolio quality across the board. The new business of € 1.3 (1.0) billion was signed with German and foreign shipping companies with good credit ratings and the portfolio of what is now the smallest segment by volume and is clearly focused on commercial shipping totaled € 4.6 (4.5) billion.
The new Diversified Lending & Markets segment (formerly Treasury and Markets) focuses on the international corporates business as well as ‘special situations’ in the form of business opportunities arising outside the actual core client segments in Germany. The segment also includes the Bank’s supporting capital market activity. The portfolio is being built up carefully, in line with the very tight risk parameters, and will contribute to a diversification of the Bank’s portfolio in the future. Diversified Lending & Markets generated a target-beating pre-tax profit of € 33 (113) million. The income from sales of securities included in the previous year were the reason for the earnings decline. No business of any note was closed in Diversified Lending during the year under report, as the appropriate structures had to be established first. In the Markets sub-segment, the resolute optimization of our funding structure in particular, along with management of liquidity and market-price risks, yielded good results. However, the Bank does not enter into any conventional proprietary trading positions. Both our ongoing concentration on profitable client business and the favorable trend in spreads on items in our bank book also impacted positively on the results of our Markets activities.
Refinancing via the capital market significantly boosted
HCOB significantly strengthened its funding base by successfully placing a senior preferred issue of € 500 million on the capital market. This debut bond has a term of three years and, owing to strong demand from German and foreign institutional investors, was more than doubly oversubscribed, resulting in attractive pricing. In total, the Bank raised long-term funding of about € 2.8 billion in the 2019 financial year, benefitting from its broad and diverse investors base.
Consistent de-risking and strong key financial figures
As already announced in February, HCOB further improved its NPE ratio to 1.8% (end of 2018: 2.0) thanks to consistent de-risking and thereby beating its Non Performing Exposure strategic target ratio of 2.0%. Despite regulatory increases in risk-weighted assets, the CET1 ratio came to a very comfortable 18.5% (18.4), accompanied by a further improved leverage ratio of 8.2% (7.3) and a planned reduction of the balance sheet total to € 47.7 (55.1) billion.
“HCOB closed out 2019 successfully and is facing up to the huge challenges of the months ahead. As an established provider of specialist finance, it is our duty, particularly in such uncertain times, to be a dependable partner to our clients and to merit their confidence with all our commitment and expertise. In these tough times, the coronavirus crisis will lead to rising unemployment as well as ongoing restrictions on social and business activities in Germany. HCOB supports several social aid projects combating the impacts of coronavirus. Also against this backdrop the Management Board of HCOB took the initiative to waive 30 percent of its variable compensation for fiscal 2019,” Stefan Ermisch said.
Transparent, forward-looking restructuring since privatization
In summary, the transformation program in 2019 primarily focused on consistent cost management and greater operating efficiency. This entailed a personnel and operating cost program that was agreed in early 2019 and was already reflected in the 2018 balance sheet. Administrative expenses in 2019 amounted to € -413 (-402) million, with the slight increase from the previous year attributable to investment in areas such as IT and smaller cost effects from job reductions.
At the end of 2019, the Bank employed 1,482 (1,716) full-time equivalents (FTE). In December 2019 the Bank ramped up its efficiency program from late 2018 due to the weaker than previously assumed economic outlook for Germany and the global economy; the program now puts the target for the total number of FTE at approximately 700 in 2022, rather than approximately 1,000. The additional provisions required for this are already reflected in the 2019 financial statements. At the end of 2018, there were still around 1,700 FTE at HCOB. Since its privatization, Hamburg Commercial Bank has thus devoted itself to a transparent and forward-looking restructuring program that ranks among the most extensive in the European banking sector.
Outlook subject to the fallout from the coronavirus
Taking into account the restructuring provisions formed as of the reporting date, the Bank expects to generate a positive IFRS-based result before taxes for fiscal 2020 – the second year of its multi-year transformation. This earnings forecast is subject to any unforeseeable effects resulting from the implementation of the restructuring/transformation process, unforeseeable geopolitical influences and any significant increase in the economic burden caused by the coronavirus pandemic.
| Statement of income (IFRS, € m) | 2019 | 2018 | Change in % |
|---|---|---|---|
| Net interest income | 321 | 1,621 | -80 |
| Net commission income | 61 | 35 | 74 |
| Result from hedging | -2 | -9 | 78 |
| Result from financial instruments categorized as FVPL | -19 | -136 | 86 |
| Net income from financial investments | 20 | 731 | -73 |
| Result from the disposal of financial assets classified as AC | 82 | 2 | >100 |
| Total income | 463 | 1,586 | -71 |
| Loan loss provisions | 11 | -316 | >-100 |
| Hedging effect of credit derivative second loss guarantee | – | -51 | 100 |
| Administrative expenses | -413 | -402 | 3 |
| Other operating result | 133 | -107 | >100 |
| Expenses for regulatory affairs, deposit guarantee fund, banking associations | -51 | -89 | -43 |
| Net income before restructuring and transformation | 143 | 621 | -77 |
| Net income from restructuring and transformation | -66 | -366 | 82 |
| Expenses for government guarantees | – | -158 | -100 |
| Net income before taxes | 77 | 97 | -21 |
| Income tax expenses | -65 | -20 | >100 |
| Group net result | 12 | 77 | -84 |
| Group net result attributable to non-controlling interests | – | 7 | -100 |
| Group net result attributable to Hamburg Commercial Bank shareholders | 12 | 70 | -83 |
| Additional figures of Hamburg Commercial Bank Group | 31 Dec 2019 | 31 Dec 2018 |
|---|---|---|
| Total assets (€ bn) | 48 | 55 |
| Common Equity Tier 1 (CET1) capital ratio (in %) | 18.5 | 18.4 |
| Overall capital ratio in % | 23.5 | 23.3 |
| Leverage Ratio (in %) | 8,2 | 7.3 |
| Liquidity Coverage Ratio in % | 165 | 225 |
| Net Stable Funding Ratio in % | 114 | 121 |
| Full-time employees (FTE) | 1,482 | 1,716 |
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.
This press information can contain forward-looking statements. These statements are based on our beliefs and assumptions, on information currently available to us which we consider reliable. Forward-looking statements include all statements which are not historical facts, including information concerning future growth prospects and future economic developments.
Such forward-looking statements are based on assumptions relating to future events and are subject to uncertainties, risks and other factors, a large number we cannot influence. Thus actual events can differ considerably from the forward-looking statements made. We make no warranty for the correctness or completeness of these statements or the actual occurrence of the statements made. Furthermore, we assume no obligation for updating the forward-looking statements after this information has been published.