The five biggest German shipping banks face towering difficulties as the scope of their non-performing loans to ships is growing, notes rating bureau Moody's in a report based on the banks' published annual reports for 2016.
The five shipping banks had a combined exposure to shipping of EUR 59 billion by the end of 2016, writes Moody's, projecting additional problems for the banks going forward.
The shipping banks' problematic shipping loans grew on average to 37 percent of their total loans in 2016 from 28 percent the year before. This forced several of the banks to dig into their reserves and book losses in 2016.
"Despite measures taken by individual banks in recent years, some German lenders to the shipping industry will face incrementally higher credit costs as long as the industry fundamentals remain weak and supply outstrips demand," says Michael Rohr, Vice President, Moody's, and author of the report about the five major German shipping banks.
DVB Bank and Norddeutsche Landesbank (NordLB) face the biggest risks of being hit by net losses and a watering down of their capital base through 2017, says Moody's, which is reviewing both banks ahead of a potential downgrading of their credit rating.
Even though the downward trend has leveled out in several shipping segments, Moody's believes that overcapacity, persistent low freight rates, and low vessel utilization rates will continue to challenge carriers' cash flow from operations and their chances of servicing debt.
Together these factors will put additional pressure on the shipping-exposed banks and their profitability this year and perhaps longer.
"Further improving the level of reserves will necessarily come at a significant cost to earnings. During 2015 and 2016, the five banks in our peer group charged an aggregate EUR 6 billion of loan-loss provisions through their income statements, of which we estimate at least 80 percent was shipping-related. This compares with 37 percent of their aggregate pre-provision profits of EUR 16.4 billion over the same period," writes Moody's:
"In light of these profit pressures, several banks are seeking to reduce their ailing exposures more quickly. We consider that a coverage ratio of at least 60 percent is necessary for banks to be able to sell problem exposures effectively to the market and – in case the exposures are intended to stay with the bank – adequately provision for potential losses from remaining shipping loans."
Moody's stresses that the European Central Bank (ECB) announced plans last month to conduct a thorough review of the shipping-exposed banks – on-site inspections – during the next 18 months in order to verify the need for possible precautions.
The announced ECB review comes after the five German shipping banks have published their results for 2016, which were worse than expected – and this reaffirms that the downward trend in shipping has happened faster than expected, writes Moody's.
English Edit: Daniel Logan Berg-Munch