By Arno Schuetze and Andreas Kröner
FRANKFURT, Jan 30 (Reuters) – As the European Central Bank prepares to test the resilience of the region’s lenders, few look as exposed as Germany’s shipping banks.
Before the financial crisis, many German banks pushed into the business of lending to the companies transporting the world’s burgeoning trade in goods and raw materials, propelling Germany to the top spot in ship lending worldwide.
But the global economic downturn of the past five years has crimped trade flows, even as the supply of ships ordered during the boom years continued to rise, wiping out the profits that shippers need to pay off their loans and punching holes in the balance sheets of the banks that made them.
The ECB will reveal its method for the asset quality review (AQR) on Monday before it takes over European banking supervision later this year, and is preparing to home in on ship financing as a weak spot among German lenders.
The ECB’s asset inspectors may send them scrambling to plug gaps in loan-loss provisions in the next few months, well before it wraps up its overall assessment of the health of euro zone lenders and the European Banking Authority launches its bank stress tests.
While listed banks such as Commerzbank could tap equity markets, regional banks like HSH or NordLB would have to ask their state owners for capital. Such a move would face scrutiny by the European Commision, which has already forced WestLB out of business for asking its state owners for help too often.
“There is a lot of uncertainty how ship loans will be treated in the AQR and stress tests and how granular the approach will be regarding ship types and sizes, which perform extremely differently,” the CEO of a major ship bank said.
Credit rating agency Moody’s pointed out that eight German banks have more than 100 billion euros ($136 billion) of ship loans on their books, with one in five being seen as problem loans in 2012. Loss provisions will stay high in 2014, it predicted.
Moody’s said DZ Bank’s DVB, HSH Nordbank, KfW IPEX Bank and NordLB were the most exposed to shipping sector stress.
But potential losses at DekaBank, Helaba , Commerzbank and Italy’s Unicredit were small relative to their other banking activities and capital, Moody’s said.
The shipping banks themselves are putting on a brave face, despite a nagging suspicion that the ECB will be severe.
“We will do fine in the asset quality review and stress test,” Constantin von Oesterreich, the chief executive of troubled German public-sector shipping lender HSH, said late last year.
His bank, Germany’s largest ship financier, still holds 23 billion euros in ship loans, of which it believes one third is non-performing – meaning the loans have either been written down or the debtors are 90 days behind in servicing them.
Altogether, HSH has made provisions of roughly 3 billion euros for its shipping portfolio.
The Hamburg-based bank expects to post a core tier-1 capital ratio of 10 percent at the end of 2013 under Basel III capital adequacy rules, broadly in line with the 9.7 percent posted by Deutsche Bank and ahead of Commerzbank, whose capital ratio stood at 8.6 percent in the first nine months of 2013.
Executives at the ship banks say the auditors helping the ECB to carry out the asset quality review will employ the same criteria as those auditors who approved their accounts, minimizing the risk of nasty surprises.
“Their assumptions on issues like future freight rates or ship values will have to be according to current accounting standards, so differences will not be huge,” the CEO of a large German ship bank said.
But the ECB has lots of variables to play with, not least of which is the prospect for improvement in the sector. Some bankers say an upturn is at hand, whereas Moody’s argues the current crisis could take up to 10 years to resolve.
Such contrasting views of the industry outlook could lead to conflicting assumptions of which loans are at risk.
Carsten Wiebers, head of ship financing at KfW IPEX, said easy credit was spurring more building of large, efficient ships that deprive older vessels of profitable employment.
“As long as money is cheap, nothing in that will change,” Wiebers said of the intense competition in the sector.
MADE TO FAIL?
Even small changes to the ECB’s parameters for loss assumptions could make a big difference for banks with large portfolios, S&P analyst Harm Semder said.
“If the outcome of the AQR is that the bank is potentially under-reserved, we do believe that this would require immediate action by the banks or their owners,” he said.
For now, banks are reviewing their own “what if?” scenarios in anticipation of the tests.
“We do our internal stress tests regularly and they show we would have to reserve 5-7 percent of extra capital” under one stress scenario, another executive of a German ship bank said.
Lenders know the ECB is under pressure to make the AQR and stress tests more thorough and believable than their predecessors run by the EBA in the aftermath of the financial crisis. Those tests gave a clean bill of health to banks that later collapsed.
ECB President Mario Draghi has said that, to rebuild confidence, some banks may have to be seen to fail.
The head of German bank lobby group BDB said he feared “political reasons” would prompt the ECB to find capital holes.
“Some countries could see the stress test as an opportunity to kick ‘model student’ Germany in the shins,” Michael Kemmer said.
(c) 2014 Thomson Reuters, All Rights Reserved
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