Financial Report 2018 of Hamburg Commercial Bank AG MANAGEMENT REPORT OF HAMBURG COMMERCIAL BANK AG 2 Basis 2 Business activities 2 Objectives and strategy 4 Management system 6 Economic report 8 Underlying economic and industry conditions 8 Business developements 13 Earnings-, net assets and financial positions 15 Segment results 24 Employees of Hamburg Comercial Bank 29 Forecast, opportunities and risk report 32 Forecast report including opportunities and risks 32 Risk Report 38 Comment on the annual financial statements of Hamburg Commercial Bank AG in accordance with tehe German Commercial Code (HGB) 69 Final declaration to the dependent company report 73 ANNUAL ACOOUNTS OF HAMBURG COMMERCIAL BANK AG 74 Balance sheet 75 Income Statement 79 Notes 81 General information and notes 81 Accounting and valuation principles 83 Notes on the balance sheet assets 95 Notes on the balance sheet liabilities 102 Notes on the income statement 108 Other diclosures 112 INDEPENDENT AUDITOR’S REPORT 138 RESPONSIBILITY STATEMENT BY THE MANAGEMENT BOARD 144 Information on the combined management report To improve the clarity of presentation, the management reports of Hamburg Commercial Bank AG (formerly HSH Nordbank AG) and the Hamburg Commercial Bank Group have been combined in accordance with Section 315 (5) of the German Commercial Code (HGB) in conjunction with Section 298 (2) HGB, unlike in the previous year. The annual and Group financial statements of Hamburg Commercial Bank (including the combined management report) will be jointly submitted to the operator of the German Federal Gazette and published in the Federal Gazette. In addition, the annual and Group financial statements of Hamburg Commercial Bank are available on the Internet at www.hcob-bank.com. The following information in the combined management report relates to the Hamburg Commercial Bank Group as a general rule; in the event of material differences with regard to Hamburg Commercial Bank AG, separate explanations are provided. 2 Hamburg Commercial Bank Combined Management Report 2018 Basis of the Group Business activities of focussed transformation, its registered office is to be located in Hamburg in the future. Successful sale of HSH Nordbank AG and Hamburg Commercial Bank is one of the leading banking conclusion of EU state aid proceedings partners for upper medium-sized companies in the core region of Northern Germany. The Bank is also active throughout The federal state owners Hamburg and Schleswig-Holstein, as Germany in the Real Estate, Project Finance, Corporate well as the minority owner Sparkassen- und Giroverband für Clients, Shipping and Capital Markets & Products segments. In Schleswig-Holstein, sold their stake of 94.9 % in HSH Nord- the project and real estate financing business, the focus is also bank AG, which was held indirectly via HSH Beteiligungs on other European countries. The Bank conducts business Management GmbH, in full to several investors on 28 February with shipping clients throughout the world. Based on conven- 2018 (signing). The sale was closed on 28 November 2018 after tional loan financing, Hamburg Commercial Bank offers all of the conditions precedent had been fulfilled. The buyers tailored products and individual financial solutions for its are independent funds of Cerberus Capital Management, L.P., customers. J.C. Flowers & Co. LLC and GoldenTree Asset Management LP as well as an Acquisition Company of Centaurus Capital LP Segments, divisions and locations and BAWAG P.S.K. The sale marks the end of the long-standing EU state aid The operating business activities of Hamburg Commercial proceedings, which resulted in far-reaching structural relief for Bank are divided into the Corporate Clients, Real Estate, the Bank. This is reflected primarily in a significant improve- Shipping and Treasury & Markets segments. In addition, the ment in the risk and capital structure. As part of the privatisa- reporting date marks the last time the Bank is reporting on the tion process the Bank was relieved of large parts of its non- results of the Non-Core Bank, in which the legacy portfolios, performing legacy loans (portfolio transaction). These mainly which have since been sold and are non-strategic and included ship financing arrangements from the years prior to predominantly non-performing, were bundled. The adminis- 2009. In addition, the second loss guarantee of € 10 billion trative divisions and overall bank positions are disclosed as provided by the federal state owners was terminated prema- segments not subject to reporting requirements in the “Other turely in return for a compensation payment of € -100 million and Consolidation” division. and settled in full. The Bank has branches in Singapore, Athens and Luxem- HSH Nordbank is the first successfully privatised Landes- bourg as well as a representative office in Hong Kong in line bank in Germany. The privatisation lays a solid foundation for with its focused direction. In Germany, over and above the the next stage in the forward-looking transformation process, offices in Hamburg and Kiel, the Bank has offices in Berlin, during which the Bank will gradually develop into an agile Düsseldorf, Frankfurt am Main, Munich and Stuttgart. commercial bank with a business model that is sustainable in The branches listed above are of secondary importance for the long run. The privatised bank has changed its name and understanding the Group situation. has been operating under the name Hamburg Commercial Bank AG since 4 February 2019. Equity holdings and scope of consolidation Headquarters, regional focus, clients and In addition to the parent company, the scope of consolidation products for the Group financial statements comprised 32 fully consoli- dated subsidiaries as at the reporting date (31 December 2017: Hamburg Commercial Bank AG, formerly known as HSH Nord- 53 fully consolidated subsidiaries). There were no additions bank AG, emerged in June 2003 from the merger of compared with the previous year's reporting date. The Hamburgische Landesbank Girozentrale with Landesbank company CAPCELLENCE Vintage Year 18 Beteiligungen Schleswig-Holstein Girozentrale. It is managed in the legal GmbH & Co. KG, which was newly established during the year, form of a corporation (Aktiengesellschaft). The Bank has its was incorporated into a Group company during the year under registered office in Hamburg and Kiel. In line with the process review. Combined Management Report Basis of the Group 3 The decrease in the scope of consolidation by 21 subsidiar- The impact of these changes to the scope of consolidation on ies is due to: the statement of income is addressed, to the extent that the impact is material, in the “Earnings situation” section. Further - The sale of the shares in FSL Holdings Pte. Ltd. in the first details on the scope of consolidation can be found in Note 5 quarter of 2018 as part of the winding-down of legacy (Scope of consolidation) in the notes to the Group financial burdens. This sale also resulted in the companies FSL Asset statements. Management Pte. Ltd. and FSL Trust Management Pte. Ltd. leaving the scope of consolidation. Shareholder structure - The liquidation of 2200 Victory LLC in the third quarter of 2018 and the liquidations of Castellum ABF S.A. and Following the sale of the Bank by HSH Beteiligungs Manage- Stratus ABF S.A., which were used as refinancing vehicles, ment GmbH (94.9 % of the shares) and the nine trusts initiated in the fourth quarter of 2018. by J.C. Flowers & Co. LLC (5.1 % of the shares), Hamburg - The closing of the portfolio transaction in the fourth quar- Commercial Bank has been owned since 28 November 2018 ter of 2018, which led to a loss of control over a total of by renowned, globally active institutional private investors that 15 subsidiaries. In addition to the investments in GODAN have a high level of expertise in the banking business, in GmbH and Ilex Integra GmbH, this involved five single ship particular. The shareholder structure is as follows: companies, four single-purpose companies from the aviation sector, the Life Insurance Group (three compa- nies) and Senior Preferred Investments S.A. Restructuring of the Management Board and Deposit guarantee fund Supervisory Board With the successful closing of the privatisation process for In the context of the Bank’s privatisation, the following HSH Nordbank AG on 28 November 2018, the legal require- changes were made to the Management Board and ments for Hamburg Commercial Bank's membership of the Supervisory Board. Since 1 January 2019, the Management German Savings Bank Association (DSGV) ceased to apply and Board of Hamburg Commercial Bank has consisted of Stefan its membership subsequently expired (Section 5 of the DSGV Ermisch (CEO), Ulrik Lackschewitz (CRO), Oliver Gatzke Articles of Association). (CFO) and Nicolas Blanchard (CCO), who has been responsi- Pursuant to the agreement concluded on the basis of ble for all client business and products since December 2018. Section 94 (4a) of the Framework Statute, membership of the At the same time, Torsten Temp, the long-standing Manage- guarantee scheme of the German Savings Banks Finance ment Board member responsible for the Market divisions, re- Group (SFG) will continue for a further three years until signed from his position at the end of 2018. Ulrik Lackschewitz 31 December 2021. All issues of HSH Nordbank AG (excluding is the Deputy Chair of the Management Board. Juan equity/instruments with equity characteristics, notably under Rodríguez Inciarte