Commerzbank U-Turn on Ship Finance Shows Crisis Escalation Fears

Commerzbank AG’s about-face on plans to form a new real estate and ship-finance unit turns the spotlight on the German lender’s Spanish debt holdings as the sovereign crisis escalates.

Commerzbank, which spent three years freeing itself from government aid needed to survive the 2008 financial crisis, yesterday announced plans to close the divisions, reversing a March decision by the Frankfurt-based lender to continue scaled-down activities in those fields. It’s also conducting a “rigorous review” of all business areas, it said in a statement yesterday.

European leaders are struggling to contain a debt crisis that this week resulted in Spain becoming the fourth country to request aid after Greece, Ireland and Portugal. Commerzbank, which wrote down its Greek debt portfolio in the first quarter, had 2.9 billion euros ($3.6 billion) in Spanish holdings on its books at the end of March, according to a May 9 presentation.

“By exiting the shipping and real estate business, the bank wants to build a capital buffer as a shield against more writedowns on their sovereign-debt portfolio,” Konrad Becker, a bank analyst with Merck Finck & Co. said by phone from Munich today. “It’s a bad sign as it shows that Commerzbank is clearly preparing for an escalation of the crisis, including further writedowns on their debt holdings.”

Maritime Portfolio

Commerzbank became the world’s third-largest shipping lender after acquiring Dresdner Bank AG in 2008, doubling the size of its maritime-loan portfolio just before the industry entered its biggest crisis since World War II. Its Eurohypo unit, once Europe’s biggest state finance and real estate lender, is being wound down to meet European Union conditions for aid from the German government during the crisis that followed the 2008 collapse of Lehman Brothers Holdings Inc.

While exports to countries outside the euro area have helped Germany to weather the crisis, recent data show growth is weakening as austerity measures across the region curb demand. A survey of purchasing managers published June 21 shows German manufacturing is contracting at the fastest pace in three years.

German business confidence fell to the lowest in more than two years in June as the worsening debt crisis clouded the economic outlook, according to the Ifo economic institute.

European Union leaders will convene in Brussels on June 28 to June 29 for their 19th summit since the debt crisis broke out in early 2010. Talks will focus on a 10-year road map released yesterday by four officials led by EU President Herman Van Rompuy.

Banking Supervision

The plan centers on common banking supervision and deposit insurance and a “criteria-based and phased” move toward joint debt issuance. It also suggests the EU could impose upper limits on annual budgets and debt levels of nations that use the euro.

“A swift end to the euro crisis is not in sight,” Martin Blessing, Commerzbank’s chief executive officer, said in an internal document sent to employees yesterday, a copy of which was obtained by Bloomberg News. “For this reason we have to further reduce risks in a consistent manner and focus on the business that is sustainably profitable.”

Commerzbank shares rose 0.5 percent to 1.34 euros as of 3:03 p.m. in Frankfurt. The lender has a market capitalization of 7.5 billion euros. That compares with the 25.8 billion-euro valuation for Deutsche Bank AG, Germany’s largest bank.

Bad Loans

Commerzbank surpassed the European Banking Authority’s target of raising 5.3 billion euros, the biggest assigned to six German lenders, by 1.1 billion euros at the end of March, ahead of the EBA’s June 30 deadline by reducing risk-weighted assets, retaining profits and selling assets.

The bank may need to raise more capital as bad loans increase, Switzerland’s Independent Credit View said in a report yesterday.

Commerzbank has the world’s third-largest shipping portfolio, at $28 billion, after HSH Nordbank AG and DNB ASA, according to Athens-based vessel-finance consultant Petrofin SA.

The bank had begun to scale back its maritime lending amid rising loan losses in the industry, and said on May 9 that it “is continuing to rigorously manage down” its ship-finance portfolio as well as its commercial real estate business.

Of the group’s total loan loss provisions of 212 million euros in the first quarter, 179 million euros were booked at its asset-based finance division, which includes shipping and commercial real estate.

A “tighter risk situation in the shipping markets required significant valuation allowances of 114 million euros in this business area,” the bank said May 9, referring to its shipping unit.

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.

Container lines A.P. Moeller-Maersk A/S, CMA CGM SA and Hapag-Lloyd AG all posted losses last year because of soaring fuel costs and falling freight rates, mainly caused by an oversupply of vessels.