Regional Banking

Cutting Shipping Adrift

Shipping DPA
An industry still deep in crisis.
  • Why it matters

    Why it matters

    • NordLB, the third-largest of Germany’s state-owned regional “Landesbanken”, has announced plans to scale back its business with shipping loans as it is no longer anticipating a recovery in the sector.
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  • Facts

    Facts

    • NordLB is currently Germany’s second-largest shipping bank after HSH Nordbank.
    • Nord LB’s shipping portfolio will be pared down from about €19 billion ($21.6 billion) to between €12 billion and €14 billion.
    • NordLB achieved a pre-tax profit of €653 million for 2015, higher than all other Landesbanks that have so far published their figures.
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Gunter Dunkel, the outgoing chief executive of German regional state-owned bank NordLB, used his final curtain call to drop another bombshell. Ahead of his departure from the bank at the end of the year, he announced an unexpected change of strategy.

The bank’s shipping portfolio is to be cut from around €19 billion ($21.6 billion) to between €12 billion and €14 billion. NordLB is currently Germany’s second-largest shipping bank after HSH Nordbank.

Until now, the bank had always insisted that it would be able to maintain business with shipping loans at the current level. But that optimism has clearly not panned out – global shipping remains mired in crisis.

“We had always assumed there would be a significant recovery. We are no longer convinced of this. Now we need to have a rethink,” Mr. Dunkel said.

Sticking with shipping has been costly. NordLB has had to set aside €916 million for problem loans in its shipping business, which has resulted in a €533-million loss for the division.

“We are prepared to have to make further substantial risk provisions for ships in the coming quarters,” Mr. Dunkel said, emphasizing that the crisis in the sector is far from over.

“We had always assumed there would be a significant recovery. We are no longer convinced of this.”

Gunter Dunkel, NordLB Chief Executive

A glut of container ships, combined with a collapse in global trade following the 2008 financial crisis, have conspired to keep the global shipping industry stuck in a downturn.

It’s a sector that northern German banks had come to rely on. The northern city of Hamburg is home to one of Europe’s largest shipping ports.

Northern German is hardly the only one in Germany that has suffered from shipping’s lull.  The more high-profile case of a shipping bank gone bad has been HSH Nordbank, another state-backed regional bank and the country’s largest shipping lender. The bank has been repeatedly bailed out, and this year is being forced to privatize its operations by the European Commission.

Despite these burdens, NordLB by contrast has reported the highest profit for a German state-backed regional bank, known here as as a Landesbank, so far for 2015.

The bank’s pre-tax profit came to €653 million, significantly exceeding the previous year’s figure of €276 million and beating rivals Helaba, which posted earnings of €596 million, and BayernLB, whose profit totaled €640 million. Another regional bank, Landesbank Baden-Württemberg, has yet to publish its results.

“We have a robust business model, and other areas more than made up for the loss in the shipping division,” Mr. Dunkel said.

As the bank’s owners have agreed to waive a dividend, the profit can be used to strengthen the bank’s equity. The core capital ratio will thus rise from 10.66 percent to 13.07 percent.

NordLB’s management board expects profits to fall this year, however, in view of the major challenges faced by the global economy and persistent low interest rates. This is also partly due to the fact that the result for 2015 was positively influenced by non-recurring effects of €200 million.

As previously reported by Handelsblatt, the bank’s supervisory board has appointed chief risk officer Thomas Bürkle as the new chief executive with effect from January 1, 2017. Hinrich Holm, currently in charge of capital markets, will then be promoted to deputy head.

“That’s meant to be a sign that the business model will be maintained,” a supervisory board source has reported.

Shipping is not the only problem spot for NordLB however. Like many financial firms, the bank is still facing allegations that it dabbled in tax evasion.

When asked at the bank’s press conference whether NordLB could be affected by revelations in the Panama papers relating to off-shore tax havens leaked from law firm Mossack Fonseca earlier this week, Mr. Dunkel said firmly, “No, we are not,” insisting there were no indications of this.

However, he did admit that the bank was still having to deal with the legacy of its Luxembourg-based subsidiary, which had apparently assisted customers in setting up shell companies with the aim of avoiding tax.

Mr. Dunkel declined to comment specifically on the status of investigations by the public prosecutor’s office of Cologne in connection with allegations that the bank had aided and abetted tax evasion.

“Proceedings are ongoing and we are on track, but it could still be weeks before the process is concluded.” He said that the subsidiary in Luxembourg had set aside legal provisions of around €13 million.

Irrespective of the amount of the fine, however, the damage to the bank’s reputation could be huge. NordLB ultimately belongs to the German states of Lower Saxony and Saxony-Anhalt and to local and regional state-owned savings banks known as Sparkassen.

Other regional banks are also reviewing potentially illegal transactions with shell companies via former subsidiaries in Luxembourg. BayernLB has announced plans to re-examine dealings at a former subsidiary, while Stuttgart-based LBBW has conducted its own investigations and is now supporting official inquiries. HSH Nordbank has already paid a fine.

 

Frank Drost is a Handelsblatt Editor in Berlin, covering financial supervision and banks. To contact the author: drost@handelsblatt.com

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