Germany holds 25% of global shipping loans as industry collapses.
When Commerzbank, Germany’s second largest bank, reported earnings on Thursday, it made another groan in direction of the collapsing maritime shipping industry. It raised its loan loss provisions to €900 million, as it said, “in timely response to the deterioration in the shipping markets.” It warned that its losses on shipping loans alone could reach €600 million in 2017 after having nearly doubled to €559 million last year.
At one point, Commerzbank had €18 billion in shipping loans. Over the years, as the shipping crisis worsened, it has whittled down its shipping loan portfolio to €5 billion.
But Commerzbank is neither alone nor the biggest player among German lenders. Before the Financial Crisis, German lenders went on a wild binge and became the world’s biggest issuers of shipping loans that ended up funding horrendous overcapacity of ships, just when global trade would face enormous challenges. Of the $400 billion in maritime loans issued by large banks, German banks hold nearly $100 billion.
Bankruptcies have cascaded through the shipping industry, starting with bulk carriers during the Financial Crisis then converging on container carriers. In August last year it sunk Hanjin, the sixth largest container carrier in the world. In Germany, these bankruptcies have created a financial bloodbath that has led to serial bank bailouts with much more pain to come.
German banks are also exposed to closed investment funds, called KG funds. They’ve been lovingly called “the dentist ship fund,” because these funds were offered to retail investors seeking low-risk returns over a long period. These funds bought ships and leased them to big shipping companies, like Hanjin. What could go wrong?
These funds now own ships that are rusting away off-shore somewhere, waiting for better days.
“For German shipowners, Hanjin is bad news as for them a large company falls away with which they can charter their ships,” Oliver Faak, global head ship and aircraft finance at Nord Landesbank, one of the banks steeped in this fiasco, told Reuters.
And it’s complicated. Commerzbank might end up getting more shipping loans despite its efforts the cut its exposure to them. They’re nearly everywhere in the German banking system: the bank is bidding to acquire Oldenburgische Landesbank from insurer Allianz. Alas, there are shipping loans on the balance sheet. Sources of the Handelsblatt said that this has become “an important sticking point” in the deal.
Last week, Deutsche Bank warned that its expected shipping loan losses nearly tripled from a year earlier, to €346 million. Last July, it emerged that it was trying to offload at least $1 billion of its $5 billion to $6 billion of loans tied to the shipping industry.
The largest player globally in the global shipping-loan fiasco is HSH Nordbank, with €23 billion in shipping loans as of last summer. Its two main owners are the German states of Hamburg and Schleswig-Holstein. It had already been bailed out in 2008, re-collapsed, and was re-bailed out, including with €10 billion in loan guarantees by the states.
EU regulators determined the most recent bailout to be illegal state aid and ordered the bank to be privatized by February 2018 or be liquidated. Now everything is up in the air.
The states of Hamburg and Schleswig-Holstein are trying to sell their 85% stake in HSH. Since no one will touch a collapsed bank with a ten-foot pole, it will have to be sanitized. So it created a “bad bank” which in 2016 took ownership of 253 container ships. These shipping loans will have to be sold at huge discounts, which will likely use up the €10 billion in state guarantees, HSH CEO Stefan Ermisch recently told staff in a memo.
Finance sources told Reuters last December that offers received for these loans so far amounted to 25 to 35 cents on the dollar (or euro).
HSH is currently being marketed to investors in Asia. Taxpayers in Hamburg and Schleswig-Holstein grapple with losses of up to €15 billion, or about €3,000 per person.
“It’s a catastrophe,” Rainer Kerstin, head of the taxpayer’s association in Schleswig-Holstein, told the Wall Street Journal.
This fiasco has been so deep and so complex that Andreas Dombret, member of the Executive Board of the Bundesbank, highlighted them in a speech in 2013 as a risk to overall financial stability in Germany.
He identified two causes: plunging freight rates and overbuilding of ships of ever larger sizes, driven by “cheaply available financial means” – a direct reference to pandemic easy-money policies.
He detailed the financial bloodbath in Germany: shipping-loan retail funds (the KG funds) that blew up and were shuttered, banks whose shipping portfolios suffered heavy hits, and an industry that was breaking down. The Bundesbank was looking at it from a “broader perspective,” he said, with an eye “on the stability of the entire financial system.”
Other banks tangled up in the shipping loan fiasco include Nord Landesbank (NordLB). In 2016, it said it was trying to cut its shipping exposure to €12 billion to €14 billion within three years, from €19 billion at the end of 2015. And to that effect, it sold a €1.5-billion portfolio of shipping loans to US private equity firm KKR and a sovereign wealth fund.
NordLB already got a bailout via state guarantees. Without those guarantees, its bad loan provisions would have more than tripled to almost €1 billion in the first nine months of 2016 due to bad shipping loans. After the guarantees absorbed some of the losses, the loan loss provisions still came to €520 million. Its subsidiary Bremer Landesbank, reeking with bad shipping loans, announced that it would slash one in five jobs.
Among other banks tangled up in this: DekaBank, which in the first two quarters set aside an “unexpectedly large amount,” as the Handelsblatt put it, for bad shipping loans issued before 2009; Helaba (Landesbank Hessen-Thüringen); KFW, and DVB Bank (“The leading specialist in international transport finance,” it says).
“The plight of shipping continues, because world trade has not developed as positively as hoped,” Burkhard Lemper, managing director of the Institute of Shipping Economics and Logistics at the University of Bremen, told the Handelsblatt:
“The year 2017 is also unlikely to provide reasons for euphoria, because shipping continues to suffer from large excess capacities,” he said Mr. Lemper. “The long crisis affects ship values for banks.” These values are derived from long-term revenue averages. “After eight years of crisis, more and more weak years are now reflected in the average values.” Because, he added, fire sales at low prices are also beginning to affect the market values banks need to calculate ship values.
The pain continues to spread. German banks, notoriously reluctant to allow sunshine to illuminate the muck on their balance sheets, continue to drag this out, dealing with it only when they have to, and only in the smallest possible increments. But there are more challenges facing the industry. Read… World’s Largest Container Carrier “Unexpectedly” Has Big Loss in Crushed Industry. Now Trade War with China Looms
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