Financial RepoRt 2011 STARK FÜR UNTERNEHMeR STARK FÜR UNTERNEHMER [Strong for entrepreneurs] 3 HSH NORDBANK AG Lagebericht CONTENT MANAGEMENT REPORT OF HSH NORDBANK AG 04 Underlying conditions and business overview 04 Underlying conditions 04 Business overview 06 Business developments 09 Earnings situation 11 Net assets and financial position 14 Outlook 18 Anticipated underlying conditions 18 Anticipated business situation 19 Anticipated refinancing situation 21 Risk Report 21 Risks within HSH Nordbank Group 21 Risk management system 22 Default risk 29 Market risk 37 Liquidity risk 42 Operational risk 49 Strategic risk 52 Summary and outlook 52 Final declaration to the report on relations with affiliated companies 53 ANNUAL ACCOUNTS OF HSH NORDBANK 54 Balance sheet 54 Income statement 58 Notes 60 AUDITOR’S REPORT 120 RESPONSIBILITY STATEMENT BY THE MANAGEMENT BOARD 121 4 HSH NORDBANK AG Management Report UNDERLYING CONDITIONS AND BUSINESS Increased turbulence on the financial markets OVERVIEW The escalation in the European sovereign debt crisis was reflected in the developments on the financial markets. UNDERLYING CONDITIONS Concerns about the developments in Greece and the con- tagion of other member states, especially Italy and Spain, but also about the global economy, led to increased uncer- Global economic growth in a challenging envi- tainty in the financial markets in the summer. Investors ronment The global economy started dynamically last year but was thereupon moved their investments into “safe havens” with slowed down by several shocks during the course of the year. the effect that yields on US Treasuries and German govern- Pressures ranged from the increase in the oil prices caused ment bonds fell to new record lows. At the same time risk by the unrest in some Arab and North African states, the premiums on bonds issued by heavily indebted countries natural and nuclear disaster in Japan to the escalation of the widened. Italian and Spanish bonds came under pressure European sovereign debt crisis. Overall, the global economy due to concerns about the public finances of these countries. grew significantly, but less strongly than in 2010. The brisk Other countries such as France and Austria were also growth in world trade also slowed down. affected. Developing and emerging markets again made a significant European governments endeavoured to restore confidence contribution to global economic growth. China in particular in the development of public finances and the future of the provided strong stimulus, but India, Russia and Brazil also eurozone through the implementation of various measures. grew significantly. Faced with the fears of overheating, In October, a second rescue package for Greece with restrictive economic policies were implemented in several significant participation of private creditors was agreed emerging countries that contributed to the cooling down of together with an increase in the power of the European the economy during the course of the year. Financial Stability Facility (EFSF) and a strengthening of the Euro-pean banks. Furthermore, the governments decided in In contrast to emerging markets, almost all industrialised December to reinforce the stability pact, to introduce debt nations are suffering from a sharp increase in sovereign debt rules and to also strengthen the capacity of the eurozone to as well as structural imbalances. In the US, the high level of act in providing support to the countries in crisis. unemployment, the excessive indebtedness of private households as well as the depression in the real estate The European Central Bank (ECB) reacted to the increased market dampened demand. The weeks spent arguing in the tensions on the financial markets by extending its uncon- summer about the increase in the debt ceiling as well as the ventional measures again in August, thereby facilitating the lack of political unity regarding the measures to be taken to supply of liquidity to the banks. Among other things, it reduce national debt also led to uncertainty. established funding transactions with longer maturities and unrestricted allocation, relaxed its collateral standards, Events in the eurozone were increasingly influenced by the lowered the minimum reserve ratio, lowered its refinancing debt crisis during the course of the year. Economic tender in US dollar and increased its purchases of European development was fairly heterogeneous. Whereas some government bonds and covered bonds. Furthermore, it highly indebted peripheral countries found themselves in reversed in November and December its interest rate hikes recession or only grew by a little, the recovery in Germany of April and July and lowered the base rate to the previous continued, enabling strong growth in gross domestic crisis level of 1%. product to be recorded once again. In contrast to many other countries, the continuing downward trend in In view of the unsatisfactory labour market trend in the US unemployment supported demand, and positive stimuli also the US Federal Reserve promised in August to hold the base emanated from the real estate market. However, this rate at the current low level at least until the middle of 2013. momentum eased noticeably towards the end of the year – At the end of January 2012 the Fed published a base rate not least as a result of the deteriorating environment in prediction for the first time. This suggested that interest foreign trade. rates could even stay at the current low level until the end of 2014. In order to reduce the long-term yield level, the cen- 5 HSH NORDBANK AG Management Report tral bank also announced in September the restructuring of contrary to what analysts had forecasted in many cases. The its government bonds in favour of longer maturities. Dow Jones Industrial gained about 6% for the year. The S&P 500 closed the year almost unchanged. The picture in Eu- The euro appreciated significantly against the US dollar rope is considerably more negative. The DAX lost 15%, the until the spring in light of the tightening of monetary policy EURO STOXX 50 as much as 17%. by the ECB. However, as the European sovereign debt crisis came to a head, the euro trended lower again in the second Banking sector is feeling the impact of the sov- half of the year. On balance, the euro closed against the USD ereign debt crisis at the year end only slightly below the rate prevailing at the The banking sector was dominated in the 2011 reporting beginning of the year. Improved economic data for the euro- period by the deepening of the European sovereign debt zone and the emerging agreement on the second rescue crisis and its effect on the financial markets. Nevertheless package for Greece as well as the prospect of an expansion- the Deutsche Bundesbank states in its Financial Stability ary monetary policy being applied in the US on a long-term Review of November 2011 that the German financial system basis again boosted the euro against the US dollar from mid- has a higher risk-bearing capacity as a result of the January 2012. improvement in the capitalisation of the banks and reduced frailty in its refinancing activities. The buoyant economy had also driven down the level of loan loss provisions in the Movement in the EUR/USD exchange rate lending business. However, the risks for the German banking system would have increased with the spreading of the European sover- 1.6 eign debt crisis given the fact that amounts due from the Greek government will have to be written down. It is also to 1.5 be assumed that tensions in the financial markets and the 1.4 more subdued economic growth would negatively affect the earnings of banks. 1.3 In order to counteract the loss of confidence within and vis- 1.2 à-vis the European banking sector, the European govern- ments agreed in October on a strengthening of the capitali- sation of European banks and the re-introduction of the EUR/USD option to issue public guarantees for longer-term bank bonds. The European Banking Authority (EBA) estimated by means of a stress test published in December that the capital shortfall is around € 115 billion with respect to the major The USD/EUR exchange rate affects the market values of European banks, of which German banks account for about derivatives used by most European banks for refinancing € 13 billion. The market value of the total amount of loans their US dollar transacti ons (basis swaps). Fluctuations in and advances to countries in the eurozone as at 30 Septem- the market value of these derivatives therefore impact the ber 2011 was used as the basis for determining the capital refinancing costs as well as the measurement results requirement. Following the measurement of the government recognised in the income statement of banks. bonds at fair value the banks will have to achieve a Tier 1 capital ratio excluding hybrids of 9% by 30 June 2012. It is The year-end position on equity markets is comparatively planned to make a public capital injection available in the heterogeneous on both sides of the Atlantic. Whereas the event that banks are unable to close any capital shortfalls performance was largely positive in the US in the year 2011 through the retention of profits, contributions made by their due to the pleasing trend in company profitability accompa- owners or from the market. The Financial Market Stabilisa- nied by signs of an economy still growing, European stock tion Fund (SoFFin) created during the financial crisis was exchanges were in crisis mode. The decline in the prices of reinstated in Germany for this purpose. dividend-bearing instruments in the eurozone implied the expectation of a rapidly falling level of company profits, 6 HSH NORDBANK AG Management Report BUSINESS OVERVIEW Total Group assets have already been substantially reduced from € 208 billion at the 2008 year end to € 136 billion at HSH Nordbank has made decisive progress in 2011 towards the 2011 year end as part of the realignment carried out over sustainable successful business development.