HSH Nordbank

Hopes Dwindle for Sale of Hamburg Bank

  • Why it matters

    Why it matters

    The owners of HSH Nordbank, the troubled German state-owned regional bank, are preparing to begin the process of selling the bank next spring, but could struggle to attract buyers.

  • Facts

    Facts

    • The European Commission has demanded that HSH Nordbank be privatized by 2018 following a state bailout. If no buyer is found, the bank is to face liquidation.
    • The bank is Germany’s biggest providers of ship financing and is based in the country’s largest port, Hamburg. It has been hit hard by the crisis in the shipping sector over the last eight years.
    • The bank’s structure, comprising a healthy core bank and a loss-making winding-down bank, is regarded as a handicap.
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Feederschiff im Hamburger Hafen
HSH Bank, based in Hamburg, has seen a hard few years due to the crisis in the shipping industry. Source: Picture alliance

The chief executive of HSH Nordbank, Stefan Ermisch, probably has one of the most difficult jobs imaginable in Germany’s banking sector.

Like the entire industry, the state-owned regional bank, one of Germany’s Landesbanken, is suffering as a result of chronically low interest rates, which are putting pressure on returns. At the same time, HSH is Germany’s biggest shipping financier and is suffering from unpaid loans.

The crisis in the shipping market over the last eight years, due to an oversupply of vessels and falling demand, has caused ship owners to run out of liquidity. Some are unable to service their loans regularly, while others have gone bust.

This impact again became clear on Friday, when the bank said it had set aside €979 million in the first nine months of this year to cover for potential shipping loan losses, virtually all recorded in HSH’s bad bank portfolio of non-performing credit.

The bank has separated its troubles loans, mostly shipping, into a non-core bad bank, which enjoys most of the credit guarantees provided by its majority state and minority private owners.

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The bank’s healthy, core operations recorded a rise of net income before tax of €535 million, compares with €347 million in the same nine month period last year. A sharp increase of net interest income and cost reductions helped to improve core earnings, the bank said.

In the midst of these diverging developments, Mr. Ermisch has to find a buyer for the bank, both to good as well as the bad operations. HSH Nordbank’s majority shareholders, the German federal states of Schleswig-Holstein and Hamburg, would not have chosen to sell the bank themselves, but this is one of the conditions imposed by the European Commission in connection with bailouts in 2009 and 2015.

The commission has approved an increase in the bank’s balance sheet guarantee, which is essential to the bank’s survival, but has stipulated in exchange that the bank must be privatized by 2018.

Currently, the bank’s other owners include trusts advised by U.S. investor J.C. Flowers & Co and the Savings Bank Association of Schleswig-Holstein.

Although the formal sale process will not start until the spring, U.S. investment bank Citi, which has been appointed to manage the sale, is already beginning to promote the bank and is arranging “pre-marketing” meetings. Mr. Ermisch and Chief Financial Officer Oliver Gatzke will attend meetings with potential investors in Europe, Asia and the United States up until Christmas. A notice of sale is expected to be published in January. After that the clock will start ticking. Investors will be able to express interest and will receive more information. Indicative offers must then be submitted. This is also a requirement in order to gain access to the data room currently being prepared by the bank, in which sensitive accounting data will be available. The investors will then be expected to state their intentions.

But who needs HSH Nordbank? Some people feel there are too many banks in Germany, and in particular too many unprofitable banks. “It’s about as difficult to sell a bank these days as it is to sell a nuclear power plant,” said Hans-Peter Burghof, a professor of banking based in Stuttgart. “Banking in Germany isn’t much fun.”

Not everyone is so pessimistic, however. One investment banker said that HSH Nordbank offered strategic buyers from abroad a good opportunity to gain a foothold in the German market, or that alternatively it could allow German banks to widen their product range and gain market share. He also felt it would be a good fit with Asian institutions based in China.

Germany’s other Landesbanks could still be in the running, even if they have all officially said that they are not interested. “Why shouldn’t we have a closer look?” said a member of the management board of one Landesbank who did not want to be named.

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The manager added that the majority shareholders of HSH Nordbank would naturally want to “sell the bank as a whole at the highest possible price.”

The bank’s structure is a handicap. Its balance sheet shows a core bank and a winding-down bank. The core bank had total assets of €68 billion ($72 billion) in the first six months of the year and earnings potential of €200 million to €300 million. In contrast, the winding-down bank, which currently has total assets of €23 billion, recorded a pre-tax loss of €90 million in the first six months. This would have been much higher without the balance sheet guarantee provided by the states.

A shipping loan portfolio worth €5 billion has already been transferred to the bank’s owners. Another portfolio worth €3.2 billion, containing mainly real estate loans, is currently being sold on the market.

Sources in the banking sector believe it is likely that bidders will form a consortium. Some are said to be interested in the healthy core bank, others in the business of bad loans. Financial investors and private equity firms such as the U.S. companies KKR and Lone Star have in the past confirmed their interest in such investments.

“There are potential buyers for everything, ultimately it will be a question of price,” a source close to the owners told Handelsblatt.

The European Commission will have the last word in any case. According to sources, it is important to the commission to sell a viable unit. If no potential buyers can be found, the bank’s fate will be sealed. It will not be permitted to enter into any new business and its existing activities will be wound up.

Even if the bank is sold, however, its majority shareholders will be left with losses of billions, owing to the capital injection they provided in the past, the purchase of shipping loans and the balance sheet guarantee. The proceeds from the sale will be small in comparison.

 

Frank Drost is a Handelsblatt Editor in Berlin, covering financial supervision and banks. Gilbert Kreijger, an editor with Handelsblatt Global in Berlin, contributed to this article. To contact the author: drost@handelsblatt.com

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