Before the financial crisis, lending to the shipping industry was big business for many German banks. During the past eight years, however, those maritime exposures have assumed a nightmarish quality.
The most prominent German victim of the crisis in global shipping, which has been hit by a toxic combination of sluggish trade and ill-timed investments in larger vessels, has long been HSH Nordbank. The north German Landesbank racked up huge losses, presided over a botched rescue, and has now been told by the EU that it has until February 2018 to sell itself off or be wound down.
In recent months however, two other German shipping lenders have been in the spotlight. In June, Bremer Landesbank warned of losses on its portfolio of shipping loans that would threaten its capital position. The news prompted a scramble to shore up the lender, which was resolved this month when its bigger peer, NordLB — which is also expecting a shipping-driven loss this year — said it would fully take over Bremer, in which it already owned 54.8 per cent.
With the strains on the maritime industry mounting elsewhere — Hanjin Shipping of South Korea filed for bankruptcy protection on August 31 — the question occupying German bankers is whether a renewed spell of heavy weather is in the offing.
Some observers hope the market may be close to bottoming out. The idle fleet of container ships to which German banks are particularly exposed has been decreasing after hitting a peak this year. But bankers warn that even if conditions improve, the pressure on the lenders is unlikely to abate. “The market is finding the bottom. But if it stays flat that also causes problems as it requires more provisioning,” says Stefan Ermisch, chief executive of HSH.
Shrink the ship to fit the world
Shipping companies such as Hanjin have not been through a crisis quite as intense in their history
“The fleet growth is beginning to come down so there is light somewhere. But it will take a while before this is visible in banks’ balance sheets. We have a rocky 2016 ahead of us.”
Traditional big shipping lenders, which include the likes of Commerzbank and KfW as well as HSH and NordLB, have already cut back their shipping portfolios substantially. In 2010, German lenders had $154.4bn of maritime loans on their books, according to Petrofin, a research group. By last November, they had just $93bn.
However, given the distressed state of many shipping groups and close scrutiny from regulators — the European Central Bank is looking very closely at banks’ shipping books, say bankers — further disposals are on the cards. NordLB aims to cut its shipping book from €18bn to between €14bn and €12bn. And HSH is set to sell another €3.2bn of bad loans, including shipping assets, by the middle of next year.
The problem is that in selling, banks are likely to have to crystallise losses. When HSH sold a €5bn portfolio of non-performing loans to the two German states that own it at the end of June, it was forced to sell them at a €2.6bn loss. Mr Ermisch says the 52 per cent discount, which was offset by HSH’s guarantee from Hamburg and Schleswig-Holstein, was set to comply with EU anti-state aid rules, and was below broader market prices at the time. But he concedes that prices have since fallen again.
Shipping lines in crisis
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“The problem is that the vessels that were easy to offload have already been offloaded,” says Basil Karatzas, chief executive of Karatzas Marine Advisors. “For vessels that were poorly built from the beginning or where their owners could not afford proper maintenance any more due to weak freight markets, those are primarily the vessels remaining in the banks’ current portfolios. The poor quality of such assets both entails lower pricing and complicates any efforts to offload them.”
In an effort to ease the pain, banks have been exploring whether it would be possible to structure asset sales in such a way that haircuts can be staggered rather than made upfront, said one person familiar with such discussions. But doing so is difficult to reconcile with accounting rules, he says.
Neil Smith, a banking analyst at Bankhaus Lampe in Düsseldorf, says that although the deterioration of the shipping market could pose a “real problem” for the north German Landesbanken, it is not a “threat to the system overall”.
Others are less optimistic. “There are no easy solutions. At the end of the day, banks will have to take a lot of losses. The optimal scenario in which freight rates and the value of vessels go up is also the least likely scenario,” says Mr Karatzas. “I think there’s still a long way to go. I’m not sure we are done with the fireworks yet in the industry or with the shipping banks.”