NordLB Loss

Don’t count on shipping

An employee oversees the ground transportation of Hamburg Sud shipping containers at the Cia Siderurgica Nacional SA (CSN) Sepetiba Tecon terminal inside the Port of Itaguai in Rio de Janeiro, Brazil, on Friday, Aug. 19, 2016. Brazil's government will launch a PR campaign following the Olympics in Rio to create an image of "credibility" after prolonged economic and political crisis, country's chief export official says in interview. Photographer: Dado Galdieri/Bloomberg
Global shipping and ports have yet to recover from the 2008 financial crisis.
  • Why it matters

    Why it matters

    A number of German banks have been unable to shake their exposure to a nearly decades-long crisis in the global shipping industry.

  • Facts

    Facts

    • NordLB, a state-backed bank in northern Germany, posted a net loss of €406 million in the first half of 2016 due to massive write-downs of shipping loans.
    • The bank still has about €18 billion in exposure to the shipping industry. It’s trying to cut that down to between €12 billion and €14 billion in the next three years.
    • In total, Germany’s banks are trying to rid themselves of about €50 billion in outstanding loans to the shipping industry.
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    Audio

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It’s been nearly a decade since the global shipping industry came crashing to a halt, and yet the post-financial crisis collapse is still producing new victims.

NordLB, Germany’s third-largest state-backed bank and the largest bank in northern Germany, was hit by a pre-tax loss of €364 million in the first six months of the year, compared to a profit of €314 million a year earlier, the Hanover-based lender said Thursday. Its net loss came in at €406 million.

“The shipping crisis, which further intensified in the first half of the year, has necessitated impairments that were higher than planned,” NordLB Chief Executive Gunter Dunkel said, adding that the bank now projected a considerable loss for the whole of 2016.

The annual loss would put NordLB in the red for the first time since 2009.

Mr. Dunkel said the lender will be able to cope with the loss entirely on its own, a message likely aimed at skeptical investors and politicians who have seen many state-backed banks in Germany get bailed out in the years after the financial crisis.

The shipping sector was suffering from overcapacities that were exposed following the 2008 crisis. It’s taken another ugly turn since the start of this year, fueled by weak growth in China and the parlous state of the world economy.

For banks that bet big on shipping, the latest downturn means they have to set aside many more millions to offset non-performing loans. A big reason for NordLB’s latest loss is that risk provisioning for its loan business in the first six months of 2016 has skyrocketed by almost fivefold to around €1 billion, attributed mainly to the bad shipping loans.

For banks that bet big on shipping, the latest downturn means they have to set aside many more millions to offset non-performing loans.

It’s not just the Hanover-based NordLB that has been hard-hit by the crisis. The shipping downturn has forced repeated bailouts of its northern German state-backed peer HSH Nordbank, which the European Commission is forcing state authorities to privatize in exchange for the bailout funds.

Commerzbank has also long been under pressure, while major rivals like Deutsche Bank, HVB and Helaba have all had to set aside plenty of reserves for the same purpose.

The increasing risk of default means Germany’s banks are all busy trying to reduce their exposure to the struggling sector. NordLB has said it wants to reduce its shipping loans to between €14 billion and €12 billion in the next three years. The shipping financing portfolio has already been cut to €17.9 billion from €19 billion since the start of 2016.

Earlier this week, the lender announced a deal to dispose of a €1.3-billion shipping-loan portfolio to U.S. financial investor KKR and a sovereign wealth fund. More such transactions are expected to follow in the near future.

HSH Nordbank, which is also releasing financial results this week, and Deutsche Bank are likewise working hard to get rid of their shipping-loan portfolios.

The decline in the shipping sector has spread its tentacles across a number of Germany’s northern states over the past few years, with some of them already having to step in to support their state-backed banks, known as Landesbanken. The state-backed, regionally-organized lenders are active mainly as retail and commercial banks and one of the core pillars of the country’s financial system.

The decline in the shipping sector has spread its tentacles across a number of Germany’s northern states over the past few years.

The states of Hamburg and Schleswig-Holstein have indirectly become the biggest ship-owners in Germany. They had to take over shipping loans of HSH Nordbank worth €5 billion in order to strip the lender of its toxic assets and make it attractive for sale. The banks have offered some 256 ships – container ships, tankers and bulk cargo transporters – as collateral for the state taking on the loans.

According to Paul Slater, head of financial consultancy First National and one of the top experts in shipping financing in the country, German banks still have some $50 billion in non-performing shipping loans on their balance sheets.

With the help of creative instruments such as deferrals, extensions, additional contributions or interest rate payment breaks, banks and ship-owners have so far managed to avoid a wave of insolvencies sweeping the sector. The German fleet is however shrinking and lenders are nowadays hardly granting any new loans.

And the crisis could claim its first banking scalp in the coming months. The shipping downturn could force NordLB to take full control of another loss-making northern lender, the Bremer Landesbank, in which it already owns a majority stake.

 

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The city-state of Bremen, which owns the other 41 percent of the bank, is considering either selling its entire stake to NordLB or exchanging shares in the Bremen bank for shares in NordLB itself, according to financial sources. NordLB is pushing for full control of BremenLB’s future risk management in return for bailing out the struggling bank.

It’s a complicated negotiation. A possible future stake the city of Bremen holds in NordLB might actually trigger state aid probes by the European Commission – a situation that the parent, according to sources close to it, wishes to avoid at all costs.

So Bremen is now considering selling its stake in return for a purchase price in the mid-hundreds of millions, financial sources said. Such a full takeover would however not go unnoticed by its employees, as 10 percent of the 1,000 jobs are expected to be cut for synergy effects.

Just like its majority owner, Bremer Landesbank has been a victim of the shipping sector turmoil. The European Central Bank has called on the bank to set aside additional provisions of €700 million to guard against defaults, which would be beyond its own financial strength. NordLB, for its part, has decided against offering support in the form of a direct capital injection.

The strong engagement of German banks in the field is actually based on success stories from the past. Up until 2008, the shipping sector was booming and Germany’s ship-owners at one point had more than 3,500 vessels on their hands. Tax benefits for investors and the support of banks made the sector flourish in Germany.

However, the situation has thoroughly reversed itself since 2009 – many shipping firms haven’t been able to cover even their operating costs, let alone serve their loans and interest rate payments. Thus, the price of used vessels has declined, making them more or less worthless as collateral for credits.

 

A number of reporters including Frank Drost of Handelsblatt and Christopher Cermak of Handelsblatt Global Edition contributed to this article. To contact the authors: drost@handelsblatt.com and cermak@handelsblatt.com

 

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