As soaring fuel costs and slumping freight rates leave shipping companies struggling to pay their creditors, Commerzbank AG may face shipping-loan losses of as much as 441 million euros ($588 million) this year.
Commerzbank’s 2008 takeover of Dresdner Bank AG increased its stake in shipping lender Deutsche Schiffsbank to 92 percent, doubling the size of its maritime-loan portfolio, just before the industry entered its biggest crisis since World War II. The loan losses increase the woes of Germany’s second-largest bank, which is already seeking to pare its balance sheet and raise 5.3 billion euros by the end of June.
Shipping loan losses probably will rise to 2.1 percent of such lending at Commerzbank this year, Morgan Stanley analysts Henrik Schmidt and Doug Hayes wrote in a March 20 note. That’s more than the 1.8 percent projection for the U.K.’s Royal Bank of Scotland Group Plc, and the 1.5 percent or less at Norway’s DNB ASA, Italy’s UniCredit SpA and France’s BNP Paribas SA.
“Shipping is one of the reasons behind Commerzbank’s underperformance in the past 12 months,” said Dirk Becker, a Frankfurt-based analyst at Kepler Capital Markets, by phone. “It is a risky business, as risky as many parts of commercial real estate. There’ll be a time of reckoning at some point.”
Commerzbank shares have slumped 60 percent in the past 12 months, partly because of its ties to the shipping industry, Becker said. It’s the 5th worst performance on the 43-member Bloomberg Europe Banks and Financial Services Index.
Buy, Sell, Hold
Of 36 analysts covering Commerzbank, 28 percent advise clients to sell the shares, 28 percent rate them buy and 44 percent have hold recommendations, according to data compiled by Bloomberg. The shares fell as much as 3.4 percent in Frankfurt trading and were down 1.7 percent at 1.82 euros as of 10:33 a.m.
Commerzbank has the world’s third-largest shipping portfolio, at $28 billion, according to Athens-based vessel-finance consultant Petrofin SA. The bank is already scaling back its maritime lending amid rising loan losses in the industry. It may reduce such loans further or even sell assets, said Guido Hoymann, a Frankfurt-based analyst at Bankhaus Metzler. Commerzbank may also have to take writedowns on its shipping portfolio should competitors embark on asset sales, he said.
Container lines A.P. Moeller-Maersk A/S, France’s CMA CGM SA and Hamburg-based Hapag-Lloyd AG all posted losses last year because of soaring fuel costs and falling freight rates, mainly caused by an oversupply of vessels. Many smaller and middle-sized shipping companies in Germany, home to the world’s third-largest water-transport fleet, can’t service their debt and may face insolvency, according to the VDR shipping association.
“This is the industry’s worst crisis since World War II,” said Max Johns, managing director of VDR, based in Hamburg. “A lot of the charter owners can’t pay principal to the banks because of low charter rates. Smaller tonnage is hit especially hard. Markets are really poor and we still have a certain backlog of ships.”
The shipping industry’s troubles, coupled with stricter capital rules for banks, Europe’s debt crisis and concessions lenders had to make for bailouts during the global financial rout, have caused banks to scale back shipping operations or retreat from new lending altogether.
Thirteen of the world’s 19 largest shipping banks stopped new loans to the industry amid an “extreme” vessel surplus that cut cash flows and led to vessel seizures, Dagfinn Lunde, a member of DVB Bank SE’s managing board, said on March 9. Rotterdam-based DVB, which finances 1,500 vessels through 450 loan agreements, is one of only six banks funding shipping. As many as 100 were lending four years ago, Lunde said.
Commerzbank agreed to buy Dresdner from Allianz SE two weeks before the collapse of Lehman Brothers Holdings Inc. in September 2008, in a deal then valued at 9.8 billion euros. The bank received a bailout of more than 18 billion euros from Germany during the financial crisis that followed. Commerzbank is moving to cut its balance sheet to 600 billion euros by the end of the year and will hold off on acquisitions until the end of March 2014 to get approval from the European Union for aid.
The Frankfurt-based bank must also raise 5.3 billion euros by the end of June, following tests by the European Banking Authority last year. Last year it agreed to buy the remaining 8 percent of Deutsche Schiffsbank, which makes all its loans to the maritime industry, from UniCredit.
“After the merger with Dresdner Bank, they doubled their shipping exposure, which is what you could call a cluster risk,” Hoymann said in a March 27 telephone interview. “Commerzbank’s shipping portfolio is quite a big cluster.”
Share of Equity
Commerzbank’s shipping operations as a percentage of its total equity stands at between 75 and 100 percent, according to Fitch Ratings analysts Krista Davies in London and Christian Van Beek in Frankfurt. That puts it ahead of Nordea AB, the Nordic region’s largest lender, BNP Paribas, UniCredit, Bank of China Ltd., Lloyds Banking Group Plc, Royal Bank of Scotland and Mitsubishi UFJ Financial Group Inc., Japan’s biggest lender.
Only Germany’s HSH Nordbank AG, Norddeutsche Landesbank Girozentrale and KfW Group, the state development bank, have bigger exposures among 14 major lenders analyzed by Fitch.
Shipping loan losses of 2.1 percent at Commerzbank, as estimated by Morgan Stanley, would be 378 million euros based on its 18 billion euros of ship finance at the end of last year and 441 million euros based on the total size of its shipping unit, according to Bloomberg calculations.
Company spokesman Maximilian Bicker referred Bloomberg News to the public record for information on shipping loans.
Commerzbank will seek to reduce its shipping portfolio by 5 billion euros,, Chief Executive Officer Martin Blessing told Germany’s Manager Magazin in an article published on March 22. The company’s 2011 annual report said it is cutting back on maritime lending.
Morgan Stanley is “cautious” about European banks’ shipping exposure as freight rates for dry bulk, container and crude tankers “remain below or only just above cash break-even levels,” London-based Schmidt and Hayes wrote.
Net shipping loan losses at Nordea tripled to 135 million euros in 2011 as “weak market conditions in the tanker, dry cargo and containership markets resulted in a general decline in vessel values during the year,” the company said Jan. 24.
While freight rates have been raised and probably will stabilize this year, the increase in bunker fuel prices will be a “challenge” for the container industry this year, Hapag-Lloyd Chief Executive Officer Michael Behrendt said on March 20.
Recent shipping company failures include Korea Line Corp., South Korea’s second-largest operator of dry-bulk ships, which sought U.S. bankruptcy protection in February 2011.
While DNB’s shipping portfolio accounts for 7 percent of all lending, about 22 percent of the non-performing and net doubtful commitments are at its shipping unit. HSH Nordbank’s ship unit accounted for the single biggest portion of the bank’s total loan loss provisions of 654 million euros last year, Torsten Temp, a member of the management board, said March 23.
Still, banks and clients usually find ways to overcome such challenges and banks rarely become shipowners, DNB said in a March 6 presentation in London.
To avoid foreclosure, shipping companies can give more guarantees, raise additional capital, cancel or postpone new-ship construction, scrap vessels, sell assets or cut costs, while lenders can modify, postpone or waive covenants, stretch repayments and provide bridge loans, it said.
Any decision by a bank to sell shipping assets may force rivals to write down the value of their industry portfolios, Bankhaus Metzler’s Hoymann said.
“This might trigger a wave of revaluations at other banks,” Hoymann said. “Every guy in this industry is aware that he could be the driving force for such revaluations at other banks and that they’re all in the same boat.”