STEFAN ERMISCH IN CONVERSATION
„A HUGE TRANSFORMATION PROCESS EXTENDING OVER SEVERAL YEARS LIES AHEAD OF US“
What is your assessment of the past year?
Stefan Ermisch: 2017 was another year of change, characterised by preparations for the privatisation. We worked hard towards this aim, and our colleagues did excellent work in the process. On 28 February 2018 we were ready: the federal states of Hamburg and Schleswig-Holstein and the four US private equity investors Cerberus Capital Management, J.C. Flowers, GoldenTree Asset Management and Centaurus Capital as well as Austria’s BAWAG agreed on the sale of HSH Nordbank. This means the first successful privatisation of a landesbank in Germany – a historical event. And a huge opportunity for us. We stand at the outset of an exciting journey. However, the two federal state parliaments, the regulatory authorities as well as the European Commission must still give their final approval to the change of ownership. A seamless transition from the guarantee system of the Savings Banks Finance Group to the Federal Association of German Banks has also yet to be managed. As we are breaking new ground here, experts on the guarantee systems are called upon and we are, of course, supporting them to the best of our ability.
HSH Nordbank closed out the year with a loss of 528 million euros after taxes. Why is that?
Stefan Ermisch: The loss is primarily because we sold non-performing exposures (NPEs) from the Non-Core Bank totalling 6.3 billion euros to a vehicle from among the investors. We had to set aside unscheduled loan loss provisions for this. In return, the Bank will be freed from virtually all legacy assets that have been weighing us down massively for years. This liberation is a crucial step for a successful privatisation. The quality of our portfolio thereby improves in one go to a very good level by European standards – our NPE ratio falls below two percent.
How did the operating business perform last year?
Stefan Ermisch: Profit before tax in the Core Bank comes to 732 million euros, which is just under ten percent above the previous year’s figure. We are also benefiting from the leveraging of hidden reserves, which helps us to bear the burden of the past. In new business, we almost reached the good pre-year level with a figure of 8.5 billion euros, and 2.3 billion euros alone were extended to around 120 new clients, something I find particularly gratifying. On top of this, at over
15 percent, our CET 1 capital ratio is very solid – also when compared with the competition. All told, we have achieved remarkable structural successes. The result is generally satisfactory.
To what extent has the privatisation affected new business?
Stefan Ermisch: There were more than a few who doubted that the Bank could be sold and who made their views known. This led to disquiet and did not make doing business any easier. Given these underlying conditions, our team put up a good show; new business really is respectable.
Is the Bank prepared for the switch to the private bank side?
Stefan Ermisch: One step at a time. In recent years, we have done everything to ensure that the privatisation is successful thanks to our good performance and an improvement in our structures. But this alone is certainly not enough, we cannot afford to relax and lean back. A huge transformation process extending over several years lies ahead of us. We are developing from a landesbank with state owners to a bank with private shareholders. The difference could hardly be more pronounced. For us, change will form part of our everyday life more than ever before.
What does this mean specifically?
Stefan Ermisch: In future, we will have to be much more efficient in our work, as illustrated in the following four goals. First, a modest return on equity of at least eight percent. Second, an adequate cost/income ratio of 40 percent when compared with other commercial banks. Third, a
sustainable CET1 ratio of 15 percent as our yardstick of security. Fourth, an NPE ratio of less than two
percent, which represents the quality of our portfolio.
Are these the challenging goals of the new owners?
Stefan Ermisch: They are by no means overstated. We must set them as a challenge for ourselves because we want to be competitive. Incidentally, the European Commission also has very clear ideas about the future profitability of our Bank, just as it does about the profitability of other financial institutions. It grants its approval to privatisation only if proof of a bank’s viability has been provided – the above performance indicators play a key role here. The Commission wants a strong, commercially successful bank with a stable market presence. Which is exactly what the management team wants.
How will the Bank’s business model change?
Stefan Ermisch: We will continue to be a commercial bank with loans as an anchor product but with a new name. Our current business areas constitute the structure of the new bank. At the same time, we will widen our horizons while maintaining a sense of proportion. We will be able to do this because after the transaction is closed, which is expected to take place in the second or third quarter, the restrictions from the EU state aid proceedings will no longer apply.
What might an expansion of activities look like?
Stefan Ermisch: Looking forward, we will be able to extend our real estate business cautiously to a number of international markets. We will strengthen our presence in Singapore, Asia’s growth centre, and new opportunities are opening up in the capital markets business. We already have operations outside Germany when it comes to financing infrastructure projects and renewable energies, and here we intend to expand our radius slightly. Despite the predatory competition, we will carefully intensify our clearly sector-focused presence in the German SME segment, selling more services and thereby improving our non-interest-related income.
Will structural and personnel changes be necessary?
Stefan Ermisch: We are faced with the task of transforming a former public-sector bank whose total assets once came to around 200 billion euros into a private bank with target total assets of less than 60 billion euros. Years ago, we agreed a necessary capacity reduction to fewer than 1,600 full-time equivalent positions by mid-2019 with our social partners. With the success of the privatisation, all issues relating to the Non-Core Bank will no longer apply, as the latter will cease to exist. We will face the new tasks presented by the future.
What does this mean?
Stefan Ermisch: We are seeking to become an agile and excellent commercial bank of medium-sized nature. We will discuss the necessary personnel adjustments with our social partners at the appropriate time. Generally speaking, it is about further streamlining the back-office structures that are still too complex and that partly date from the old days, and about strengthening sales in a meaningful way. We will increase our speed, become more agile and work more independently of rigid hierarchies. What this also means is a change in our management structure. We need more creativity; more diversity. Our aim is to create a new bank that is successful with its private shareholders. I see great potential in the new bank.