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Moody’s Sees Bad Shipping Loans Increasing at German Banks

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December 10, 2013

Dec. 10 (Bloomberg) — Germany’s top shipping lenders, including Commerzbank AG and HSH Nordbank AG, face rising credit default risks next year as banks come under increasing scrutiny from regulators, according to Moody’s Investors Service.

The eight banks under review, which had 105 billion euros ($144 billion) in loans to the crisis-hit industry in 2012, are increasing their loan-loss provisions as an “extended downward shipping cycle” will cause “rising problem loans,” Moody’s said in a report published yesterday.

“Struggling shipping companies are finding it hard to service their loans, and consequently non-performing shipping loans will likely continue to rise at the eight German banking groups examined in the report,” the ratings firm 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.

That has prompted Commerzbank and HSH Nordbank’s inclusion in the group of about 130 banks deemed to carry systemic risk for the European sector as a whole and selected to undergo an assessment by the European Central Bank to measure the quality of their assets and the strength of their balance sheets in stress scenarios.

The ECB 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.

Risk Provisions

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.

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.

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.

Market Recovering

“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 did not immediately 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.

‘Positive Signs’

Dagfinn Lunde, a board member at DVB Bank SE, said with reference to the JPMorgan report that “the DVB shipping portfolio is very similar to that of Nordea and DNB and very different from the other German banks.” DVB also sees “positive signs” in some markets, Lunde said in an e-mail.

Moody’s said “less diversified banks with significant shipping sector concentrations are the most exposed to persistent stress in the sector.” Of rated German lenders, DVB, HSH, and NordLB are among the “most vulnerable,” it said.

While the eight lenders reviewed have so far managed to keep liquidations at bay, the shipping loans relative to their capital positions is rising, representing 137 percent of their combined Tier 1 capital, Moody’s said.

European Union finance ministers are meeting in Brussels today in an attempt to break a deadlock over a single resolution mechanism for banks on the continent that fail.

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