Post-ECB Stress

The Next Big Hurdle

HSHNordBank
Let's hope this isn't her last day on the job.
  • Why it matters

    Why it matters

    Germany’s network of state-owned regional lenders like HSH have long been a problem spot for Germany’s banking sector. Critics have called for the system to be scrapped.

  • Facts

    Facts

    • German states Hamburg and Schleswig-Holstein own about 85 percent of HSH Nordbank.
    • The two states issued public guarantees to the bank in the aftermath of the 2008 financial crisis. The guarantee was recently raised to €10 billion.
    • HSH Nordbank plans to cut a fifth of its workforce in a bid to reduce costs by €170 million by end-2017.
  • Audio

    Audio

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On paper, all of Germany’s major banks have been given a clean bill of health by the European Central Bank, which last month completed an invasive scrutiny of Europe’s largest banks. None of the 24 German banks that were subjected to the ECB’s “stress test” are currently being required to raise additional funds.

But for at least one German bank however, the “pass” grade from the ECB was something of an illusion.

HSH Nordbank, a state-owned lender that ran into trouble by financing the global shipping industry ahead of the 2008 financial crisis, just barely scraped through the central bank’s test. Many had thought it would in fact fail. The nail-biting result called for a glass of champagne and illicited some surprise.

“We can only survive in the marketplace if we can bring our costs under lasting control.”

Constantin von Oesterreich, Chief Executive, HSH Nordbank

“It really was a tough examination, as we had expected. We came out with a check mark. Not many believed that we would,” Konstantin von Oesterreich, the bank’s chief executive, told Handelsblatt in an exclusive interview. “Meanwhile, our focus is once again squarely on the future.”

But passing the ECB’s stress test was far from the last hurdle for the troubled bank. Next, HSH will have to convince the European Commission that it has a real future – or else it could be closed down for good. Authorities in Brussels are in the process of investigating whether the bank has received illegal state subsidies.

Indeed it was only with the help of its own public backers, the northern German states of Hamburg and Schleswig Holstein, that the bank survived the ECB’s test. The two states have issued a total guarantee to the bank of €10 billion ($12.5 billion). This amount was raised from €7 billion ahead of the ECB’s examination. Because these two states are effectively the owners of HSH, the money could be counted as “capital,” even though these reserves did not come from private sources.

Mr. von Oesterreich insisted the guarantees are temporary in nature, but to prove this to Brussels he will have to show that the bank can survive without state help in the long run. It is the second time the bank has been put through such scrutiny from Brussels – the first time was in 2009 after the two states issued the €7 billion guarantees.

ConstantinVonOesterreich-BostelmannForHandelsblatt
HSH chief exexutive Constantin von Oesterreich still has his work cut out for him. Source: Bostelmann for Handelsblatt

 

He is confident the EU Commission will not recommend that HSH be closed down.

“No, I think that is very unlikely. To be clear, nobody can have any interest in that. But we do have to show how our core banking business model is sustainable. We also have to show how we can deal responsibly with our legacy assets and wind them down quickly.”

It would not be the first time the EU Commission has forced the closure of one of Germany’s troubled network of state-owned regional lenders, many of which got into trouble by issuing bad loans ahead of the 2008 financial crisis. Brussels authorities in 2012 forced the break-up of WestLB, which at the time was Germany’s largest regional lender and had been backed by the powerful western state of North-Rhine Westphalia.

“Nobody can have any interest in [closing HSH Nordbank]. But we do have to show how our core banking business model is sustainable. ”

Constantin von Oesterreich, Chief Executive, HSH Nordbank

HSH Nordbank will have to work hard to become sustainable in the long term. Mr. von Oesterreich announced that HSH intended to save about €170 million by the end of 2017, the goal being to bring the bank’s costs down to €500 million. That means cutting abut one fifth of the workforce – 500 jobs out of a total 2,600.

“Capital costs are at the center of this [cost-cutting], but sadly that is not all. It will cost jobs. We can only survive in the marketplace if we can bring our costs under lasting control,” Mr. von Oesterreich said.

Mr. von Oesterreich said he expected the bank can sustainably achieve a total annual return of €1 billion, which would mean a return-on-equity before taxes in the “high single digits.” If the bank succeeds in bringing its annual costs down to €500 million, that would give it ratio of costs to returns of 50 percent.

The state guarantees themselves are part of the cost problem. The loan costs the bank about €400 million per year in fees. HSH has already paid out a total of €2.1 billion. Mr. von Oesterreich said he knows this is not sustainable. “The states as well as the EU Commission are aware of this burden.”

That state money was the only thing that enabled HSH Nordbank to scrape through the ECB’s stress test. The bank was declared “healthy” because it had a capital ratio of 6.1 percent after being put through a serious economic crisis scenario by the central bank. That was just barely above the 5.5 percent level that was required by the ECB.

071 HSH Nordbank

The bank would have been open to raising the money it needed to meet shortfall on the open market, Mr. von Oesterreich said, “but the decision didn’t lie with us.” Instead, the states stepped in, sparking the investigation by the European Commission.

The E.U. Commission is also part of the problem. Brussels authorities issued strict guidelines as part of an agreement to keep the bank alive back in 2011: the bank was required to halve its balance sheet, which currently stands at about €110 billion, and was prevented from doing business outside of Germany except in the areas of shipping, renewable energy and infrastructure financing.

Somewhat paradoxically, Mr. von Oesterreich said he expected this second review by the European Commission will actually loosen some of these restrictions. “I see opportunities for us to come to a reasonable economic agreement,” he said. “I don’t expect any major new restrictions.”

Until the E.U. Commission decision comes, HSH’s future is far from secured. Investors remain uncertain about whether to fund the bank. New business is also much harder to come by if potential clients think you’re about to be shut down. Mr. von Oesterreich said the bank is still on track.

“We will release our results at the start of December. But one thing I can say now: we are on track,” he said.

Whether HSH will truly survive as a stand-alone bank in the long term is uncertain. German regulators have recently stepped up calls for consolidation in the country’s over-banked financial industry, which has nearly 3,000 separate lenders.

Mr. von Oesterreich said the bank’s future is in the hands of the states that own it, but any merger is only likely to happen when the bank is in better health.

“If we arrive at where we want to get to, this could become a topic for the owners. But this is hardly a discussion topic for here and now,” he said.

 

Frank Drost covers banking regulation for Handelsblatt in Berlin. Robert Landgraf and Michael Maisch currently lead Handelsblatt’s coverage of finance out of Frankurt. Christopher Cermak is an editor covering financial issued for the Handelsblatt Global Edition in Berlin. To contact the authors: drost@handelsblatt.com, landgraf@handelsblatt.com, Maisch@handelsblatt.com and cermak@handelsblatt.com

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