Bremer Landesbanken

The Bad Shipping News

A pedestrian looks across the water as gulls fly at Hamburg port in Hamburg, Germany, on Thursday, Jan. 14, 2016. German exports rose 5.4 percent while imports were up 5.7 percent in 2015, the statistics office said. Photographer: Krisztian Bocsi/Bloomberg
Bad shipping loans have led to substantial losses at Bremen's savings bank.
  • Why it matters

    Why it matters

    The ongoing slump in the shipping industry, along with excess capacity, has created a difficult environment for banks with large ship loan portfolios. One of these banks, Bremer Landesbank, expects to report a substantial loss in 2016.

  • Facts

    Facts

    • The partly state owned bank Bremer Landesbank has taken a hit on loans provided to the shipping industry.
    • The city-state of Bremen, which owns a 41 percent stake in BLB, is financially ailing and in position to inject cash into the bank.
    • Other banks including NordLB and HSH Nordbank have been hit by the shipping crisis.
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    Audio

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The city of Bremen and the small, state-owned bank Bremer Landesbank are the latest victims of the downturn in the global shipping industry.

Its troubles focus on one particular cargo ship, the MV Hudson River.

Bremer Landesbank, partly owned by the city of Bremen itself, has repeatedly accommodated the owner of the MV Hudson River and five identical sister ships when it had problems servicing its debt.

But this patience was not rewarded and in the spring of 2015, the cargo ships, each capable of carrying 1,100 containers, were handed over to a restructuring firm.

Bremer Landesbank expects adjustments on shipping loans to come in at high nine-digit figures this year.

On Wednesday, ratings agency Moody’s downgraded one of Bremer Landesbank’s ratings by four grades from B1 to Caa2. The bank, however, has not had a contractual relationship with Moody’s since the start of 2014. The bank has not commented on the move.

Even hard-boiled industry insiders, who have already endured several cycles, are uneasy about the current state of affairs. “We need to face the facts. The shipping crisis is entering its eighth year, and there is no end in sight,” the head of a German private bank also active in the ship financing business told Handelsblatt. He preferred to remain anonymous.

A glut of container ships, combined with a collapse in global trade following the 2008 financial crisis, has hit shipping companies, and the banks that lend to them, hard.

The consequences are especially drastic for small German banks, part-owned by northern towns clustered round the country’s main ports.

As well as Bremer Landesbank, NordLB and HSH Nordbank, banks where the ship loan portfolio makes up a relatively large share of total assets, are also suffering.

Commerzbank was also once one of Germany’s largest ship financiers, but it withdrew from the business years ago and is now merely liquidating its inventories of about €8 billion ($9.1 billion).

All shipping lenders have created large reserves in the past for ailing ship loans. But they have repeatedly had to increase these reserves when the expected recovery of the shipping markets failed to materialize.

Because of loan loss provisions, Bremer Landesbank anticipates a loss in the triple-digit millions in 2016. Insiders estimate a capital requirement of about €300 million. The bank is majority owned by NordLB and is therefore part of the NordLB Group. But as an autonomous institution, Bremer Landesbank has had to fulfill its capital ratio independently of NordLB until now.

In light of the foreseeable loss, Bremer Landesbank has already announced “measures to strengthen equity capital,” but no details have been provided.

Bremen, a financially ailing city-state that owns 41 percent of the bank, is hardly in a position to provide a capital injection. Besides, an intervention by the city could trigger a European Union state aid investigation.

This is why an insider believes the following scenario is realistic: NordLB fully acquires BLB, while retaining the brand name, and in return the city-state of Bremen receives a stake in the NordLB Group. “Only the group’s risk-bearing capacity can safeguard BLB in the long term,” said an insider. Politically speaking, however, the loss of BLB’s independence will be a hard pill to swallow for Bremen.

NordLB itself has already drawn lessons from the ongoing malaise in the shipping industry and will shrink its ship loan portfolio from €19 billion to €12-14 billion. Of this amount, about €2 billion apply to BLB. The growing loan loss provision will mean that the group will be in the red in 2016.

All shipping lenders have created large reserves in the past for ailing ship loans. But they have repeatedly had to increase these reserves when the expected recovery of the shipping markets failed to materialize.

The industry still suffers from excess capacity. Ships that were ordered when business was booming are crowding into the market. The growing transport capacities in the container segment, for example, are encountering weak demand, leading to declining freight rates.

In this situation, a dangerous spiral is being set into motion. Declining freight and charter rates lead to ship owners being unable to service and certainly not pay off their loans. The Baltic Dry Index, an indicator of the costs of shipping commodities, has been moving in only one direction since July 2015: down. Banks must prepare for more losses.

If the shipping crisis continues, the privatization of HSH Nordbank could be in jeopardy. Under an agreement with the European Commission, the bank is required to find a new owner by early 2018. Until then, the bank plans to have cut its volume of ship loans, currently €21 billion, in half. And that could still be too much.

 

08 p28 Losses Through Shipping Loans-01

Handelsblatt’s Frank Drost covers financial supervision and banks. To contact the author: drost@handelsblatt.com

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