11-01-2017

Shipping loans weigh down banks

ShippingA

Bad loans in the ship industry, which has been in distress for years, are weighing on Germanys banks, according to a Handelsblatt analysis of the balance sheets of large financial institutions. Virtually all banks involved in the ship business set aside significantly higher provisions for bad loans last year.

Maritime shipping has become one of the biggest problems for German banks and it does not only affect the usual northern, coastal-based suspects like HSH Nordbank and NordLB. Dekabank, for example, trimmed its business outlook for 2016 by a fifth because the bank set aside an unexpectedly large amount for bad ship loans in the first two quarters.

Helaba, which has its core businesses in central, landlocked Germany, also attributed its elevated need for reserves to bad ship loans. And even Germany’s largest bank, Deutsche Bank, attributed its 50-percent increase in risk provisions to value adjustments, which became necessary “primarily because of the ongoing market weakness in the shipping sector and lower prices in the metal and mining sector.”

The traditional providers of ship finance are especially hard-hit by the crisis in the industry. At NordLB, for example, risk provisions increased about fourfold in the first nine months of 2016 for this reason.

In the past, only relatively small ships could fit through the Panama Canal, but the critical trade artery was widened this year.
The NordLB subsidiary Bremer Landesbank will cut one in five jobs after running into problems over shipping loans.

At HSH Nordbank, once the world’s largest ship financer, risk provisions would have more than tripled, to €966 million ($1 billion), in the first nine months of 2016 if it hadn’t been for a generous government guarantee. Thanks to the guarantee, the risk provisions only increased to €520 million.

A country report by the International Monetary Fund also warns that German banks still face challenges from legacies from the financial crisis, “especially for banks involved in the ship industry.”

The matter has grabbed the attention of the European Central Bank which intends to turn its attention to ship loans this year. One of the priorities for 2017 is the “investigation of excessive concentrations of credit risks in certain asset classes, such as ship loans.” Although German banks are not mentioned specifically, they are among the most important providers of ship financing in Europe.

Developments in the ship lending sector contrast sharply with the general trend with bad loans. Thanks to strong economic development, the share of bad loans in Germany is extremely low. Second quarter ECB statistics show that problem loans only account 2.55 percent of all loans issued by German banks. This is a little more than a third of the European average. And the risk provisions of banks that were never significantly involved in maritime shipping, such as LBBW and BayernLB, are at an extremely low level.

But banks that are exposed to the shipping industry face choppy waters ahead. “The plight of shipping continues, because world trade has not developed as positively as hoped,” said Burkhard Lemper, managing director of the Institute of Shipping Economics and Logistics at the University of Bremen. Mr. Lemper points out that world trade and, consequently, shipping are feeling the restrictions of trade, because of such factors as the sanctions against Russia and weak economic development in China.

The financial crisis has been raging for eight years. One of its casualties this year was ship loan provider DVB Bank, a subsidiary of major cooperative bank DZ Bank. DVB Bank had successfully navigated its way through the banking crisis for years, but this year it was so hard hit that it is now expected to receive a roughly €150 million capital injection from its parent company.

There has been no sign of relief yet. “The year 2017 is also unlikely to provide reasons for euphoria, because shipping continues to suffer from large excess capacities,” said Mr. Lemper. “The long crisis affects ship values for banks.” These values are derived from long-term revenue averages. “After eight years of crisis, more and more weak years are now reflected in the average values.” Because, he added, fire sales at low prices are also beginning to affect the market values banks need to calculate ship values.

The problems in shipping are complex. One issue is excess capacity, which has hit the industry since 2008. For years there have been too many ships in the market because orders made by ship owners in previous years were pushing into a market already in crisis, forcing down freight rates for existing ships.

The problem was exarcebated by a fashion for ever bigger container ships. This provided cost benefits, but exarcebated the problem of over capacity.

New problems have also arisen. In the past, only relatively small ships could fit through the Panama Canal, but the critical trade artery was widened this year. NordLB describes the consequences of this action in its quarterly report: “The share of the global container fleet that could navigate this passage has risen significantly since July 2016, and it was increased even further by considerable competitive pressure.”

According to NordLB, by the end of the year “new records can be expected in the number of unemployed ships” in the market for containers. These radical changes reduce the value of older ships. At Dekabank, it was primarily ship loans from the period prior to 2009 that were responsible for a tripling of value adjustments.

Not surprisingly, lenders like Commerzbank are trying to reduce their portfolios as quickly as possible. Although the bank has now eliminated most of its formerly €18-billion portfolio, maritime loans were responsible for about half of company-wide risk provisions in the first nine months of 2016. The portfolio has since shrunk to €5 billion.

Paradoxically, Commerzbank’s ship loan inventory could still grow in the near future. The bank has submitted a bid for Oldenburgische Landesbank, which insurance group Allianz is thinking of selling. But the Allianz subsidiary’s balance sheet still contains a largest ship portfolio. Although OLB is unwilling to provide exact figures on the size of the portfolio, a spokeswoman said: “The previous volume of about €700 million was reduced by almost half, to significantly less than €400 million.”

OLB is convinced that it has sufficiently cushioned the portfolio with risk provisioning, and the risk provision did remain stable in the first half of the year. However, Commerzbank is apparently not pleased with OLB’s dowry and sources said this is an important sticking point in the talks between Allianz and Commerzbank.

Source: Handelsblatt

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