DVB Bank SE, a subsidiary of German cooperative group DZ BANK AG, and Norddeutsche Landesbank Girozentrale are most at risk of further net losses and capital reductions as a result of their shipping-loan exposures, according to Moody's.
The rating agency expects the shipping sector-related woes of Germany's five largest shipping lenders to continue this year and even beyond. According to Moody's, a minimum ratio of 60% is necessary to provide enough provisions for potential losses. The top five shipping banks in Germany, including DVB, NORD/LB, HSH Nordbank AG, KfW IPEX-Bank GmbH and Commerzbank AG, had a 51% aggregate coverage ratio for nonperforming loans in their shipping portfolios as of Dec. 31, 2016, compared to 45% at 2015-end, according to Moody's.
Yet given that both DVB's and NORD/LB's earnings capacity is most sensitive to rising shipping-related credit costs and that their shipping loans exceed their capital, Moody's believes improving that ratio will be harder for them compared to the other shipping lenders.
Despite an improvement in the shipping sector performance since the beginning of 2017, Moody's believes it will remain weak. Shipping companies will continue to struggle with overcapacity, low freight rates and usage levels, and this will impair their ability to increase operating cash flows and repay debts. A planned in-depth review of all EU banks still holding shipping loans in 2017 is likely to result in higher loan-loss provisioning at most of the banks and thus add further pressure on their profitability this year, according to Moody's.
The top five German shipping lenders had €59 billion in outstanding shipping loans at the end of 2016, an overall portfolio reduction of some 29% since 2012. However, the reduction rate varies considerably at individual banks.
DVB's loan exposure actually increased to €14.3 billion at the end of last year from €11.9 billion in 2012. NORD/LB has managed to reduce its shipping portfolio somewhat, but its exposure is still very high, at €16.7 billion, compared to €18.9 billion in 2012. Furthermore, the ship leverage, which is the ratio of shipping exposure relative to Tier 1 capital, has increased markedly at DVB and NORD/LB, which makes both banks more susceptible to potential risks related to their shipping loans.
Commerzbank and HSH Nordbank, on the other hand, have made very good progress with lowering their noncore shipping assets, the agency noted in its June 6 comment on the sector. Commerzbank has achieved a 75% reduction rate since 2012, cutting its shipping-loan book to just €4.8 billion at the end of 2016, while HSH managed to reduce its book by 41% to €17.0 billion over the same period.