Germany’s top shipping lenders, including Commerzbank AG and HSH Nordbank AG, face rising credit default risks next year as bad debt from clients struggling to emerge from the industry crisis mounts, according to Moody’s Investors Service.
The eight banks under review, which had 105 billion euros ($144 billion) in shipping loans in 2012, are increasing their valuation reserves as an “extended downward shipping cycle” will cause “rising problem loans,” Moody’s said in a report published yesterday.
Almost three-quarters of the loans held by German banks are in “the three worst-hit segments -- container ships, tankers and bulkers,” Moody’s said.
The shipping industry has yet to recover from a global trade slump triggered by the collapse of Lehman Brothers Holdings Inc. in September 2008 and the ensuing sovereign-debt crisis in the euro area. Banks are increasing the loan-loss provisions as regulators step up their scrutiny of euro-area financial institutions and the European Central Bank prepares to assume the role of banking supervisor at the end of next year.
The shipping crisis has prompted Commerzbank and HSH Nordbank’s inclusion in the group of about 130 banks deemed to pose a systemic risk to the European sector as a whole and selected to undergo an assessment by the ECB to measure the quality of their assets and the strength of their balance sheets in stress scenarios.
The Frankfurt-based central bank is running the three-stage review as a condition for taking over supervision of euro-area banks at the end of 2014 as Europe’s leaders attempt to sever the link between fragile lenders and debt-laden states.
Moody’s said it expects the ECB’s review and new guidelines by the European Banking Authority, or EBA, to lead to increasing bad debt provisions. “Restructured loans and loans where repayments have been postponed will have to be re-classified as non-performing and will thus require provisioning to cover the risk of losses,” it said.
German lenders had an almost 30 percent share of the $475-billion global ship-finance market at the end of 2012, according to Moody’s. “While global ship lending declined by 9.5 percent year-on-year in 2012, German banks’ exposure declined by only 7 percent,” it said.
While Moody’s expects the shipping downturn to continue for several more years as new vessels exacerbate the chronic overcapacity, analysts at JPMorgan Cazenove see improvements ahead.
“Latest data suggest the shipping market is recovering as rates are improving, net demand is turning positive and vessel values are picking up, which should be positive for the banks with shipping exposure,” they said in e-mailed note today.
The ClarkSea Index, a measure of earnings across the maritime industry, averaged $12,318 a day so far this quarter, heading for the highest in two years, according to data from Clarkson Plc, the biggest shipbroker.
JPMorgan said it expects the improvement in the shipping market “to translate into lower cost of risks” particularly for the Nordic banks, including DNB ASA, Nordea Bank AB and Danske Bank A/S. For Commerzbank it continues to see high shipping losses, the analysts said.
Commerzbank declined to comment on the reports. HSH Nordbank expects loan-loss provisions to decline significantly in 2014 after as much as 1.3 billion euros this year, spokesman Rune Hoffmann said in an e-mailed reaction to the Moody’s report.
Norddeutsche Landesbank Girozentrale, known as NordLB, said profits in other areas of lending such as real estate and renewable energy projects will “overcompensate” the expected high risk provisions in ship financing in 2014. The bank still sees “a relatively low number of actual credit defaults,” spokesman Thomas Klodt said in an e-mail. NordLB is “well prepared” for European banking supervision, he said.