After years of very nearly slipping beneath the waves, it seems that the ship-financing sector of the maritime loan specialist NordLB Bank is buoyant again. For the first time in three years, it has made a positive contribution to the overall balance sheet of the struggling lender.
But the possible sighting of dry land may be premature. Experts warn that an end to the years-long crisis in the shipping industry, which was badly holed by the dip in trade caused by the 2008 financial crisis, is nowhere in sight. Battered banks may yet face additional burdens.
“Most of the major shipping markets are still in crisis,” said Burkhard Lemper of the Institute of Shipping Economics and Logistics in Bremen, northern Germany. “There is still an overcapacity in almost every area.” This is true for container ships, tankers and bulk carriers.
But the fallout has hit major shipping lenders, such as NordLB, one of the giants of the industry, HSH Nordbank, DVB Bank and KfW Ipex, in different ways.
Banks involved in shipping traditionally play a major role in Germany, which is deeply reliant on import and export, and is particularly dependent on capacity as most international trade is carried by sea.
The industry has suffered for years from the ebb and flow of ships being full in boom times and empty during downturns.
The industry has suffered for years from the ebb and flow of ships being full in boom times and empty during downturns. The market hasn’t made a sustained recovery since 2008.
“The structural surplus supply continues to have an influence on ship values and charter rates and also continues to exist within the three particularly affected sectors, container ships, bulk carriers and crude oil tankers,” Ralf Bedranowsky, the chief executive designate of DVB Bank, told Handelsblatt.
Overcapacity has triggered a vicious circle. When supply is greater than demand, pressure is put on charter and freight rates. When rates are consistently low, ship owners find it harder to afford interest payments and amortization. Banks are then forced to increase their ability to accommodate non-performing loans, or completely write them off.
HSH Nordbank, a major rival of NordLB, continues to be the leading maritime financer in Germany, and second-biggest in the world behind DNB ASA of Norway. But the Hamburg-based finance house is still in the process of restructuring after receiving a bailout in 2009.
It currently has a ship-lending volume of €23 billion ($26 billion). As part of the shakeup, two thirds of that amount, or €16 billion, consists of loans allotted to the core bank that will be continued. But the remaining third will be allocated to a bad bank, whose portfolio will be scaled back.
In the first quarter of 2015, HSH further boosted its reserves for impaired ship loans with net appropriations of about €210 million.
As 80 percent of the shipping portfolio is covered by an accounts warranty from the bank’s majority owners, the German states of Hamburg and Schleswig-Holstein, the shipping segment lost only €4 million in the first quarter. Just last year, HSH increased its provisions for shipping loans by €1.14 billion.
HSH remains cautious in its forecast, assuming a “continuingly difficult development in shipping.” The recovery is slowing down.
While rivals such as Commerzbank plan to exit the ship financing business for strategic reasons, HSH wants only to rid itself of its bad bank portfolio. Overall, HSH’s shipping loan segment will become considerably smaller.
“Especially hard hit by the weak income situation when compared internationally are the medium-sized German shipping companies.”
That isn’t true at NordLB, which, with a volume of €19.5 billion, is Germany’s second largest financer of shipping. “We want to cut back the relative exposure a bit,” Gunter Dunkel, the bank’s president said, suggesting that only small changes will be made.
The shipping business has been heavily scrutinized at NordLB, but investors have a clear opinion. According to Mr. Dunkel, they see the segment as highly attractive. The bank is striving to add €1 billion in new business this year, which would put it at the same level as 2014.
Since shipping loans are mostly invoiced in dollars, which has made strong gains against the euro, the currency driven increase in volume alone was almost €2 billion at NordLB. At HSH Nordbank, the dollar drove shipping loans up by almost €3 billion.
NordLB hasn’t escaped unscathed. About 37 percent, or more than €7 billion of shipping loans, weren’t properly serviced. Thomas Bürkle, the bank’s chief risk officer, estimates losses from this business since the financial crisis to be more than €500 million so far, including €150 million in 2014. To protect against risks, the bank put in reserve €742 million in 2013 and €768 million in 2014.
DVB Bank, one of the institutions belonging to the cooperative banking sector, has come through the crisis with relatively little damage. Risk provisions were reduced by almost half to €38 million in 2014 compared to the previous year. Opportunities for new business were also embraced as €2.6 billion in shipping loans were approved. The bank expects comparable volume in 2015.
KfW Ipex-Bank is also aggressively chasing new business, but without focusing on container ships or tankers. Of the €2.9 billion it has lent, 61 percent of loans were for cruise ships. Still, the bank doesn’t envision a long-term recovery for the industry and predicts problems will continue to exist “as long as the historically low interest rates and investor capital result in ship building orders that are speculatively targeting a future demand.”
It is clear who the biggest losers are. “Especially hard hit by the weak income situation when compared internationally are the medium-sized German shipping companies, whose fleets usually consist of ships that belong to individual closed ship funds,” a KfW Ipex Bank spokesperson said.
The tax saving models of the past still cast long shadows.