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Asian ship lending picks up as German banks continue to cut exposure

Ship financing is gradually shifting towards Asia from Europe, as traditional German lenders are now pulling back, rating agency Moody's said Oct. 11.

Deleveraging by German banks was the main driver for the overall decline in European lending to the shipping sector, which fell to about €200 billion at the end of 2017 from more than €300 billion in 2012, Moody's said. Meanwhile, the global demand for ship financing has not changed much over that period and the global shipping fleet has expanded by 11%. Global ship lending has hovered around $460 billion since 2012.

Asian banks have picked up much of the slack, increasing the amount of their shipping loans to $125 billion at 2017-end, from $90 billion in 2012. Leasing companies and export credit agencies from the region have also expanded their exposure to shipping, a sector considered to be of high strategic value in Asia, Moody's said.

Asset quality risks

Although German banks have managed to reduce their exposure to a level that no longer poses a risk to the country's financial system, they are still burdened by the poor quality of legacy loans.

As many as 60% of all nonperforming loans held by a sample of large German banks at the end of 2017 were from the shipping sector, Moody's estimated. The German banks' shipping books had a nonperforming loan ratio of 40% in 2017, compared to a total NPL ratio of 4.7%.

Most of the shipping exposure in the German banking sector is concentrated within four institutions, including DVB Bank SE, owned by the German association of cooperative banks, recently-privatized regional bank HSH Nordbank AG, Norddeutsche Landesbank Girozentrale, which is majority-owned by the state of Lower Saxony, and KfW IPEX-Bank GmbH, a subsidiary of development bank KfW. Together, they account for 83% of the €39 billion aggregate shipping exposure held by German banks as of June 30, Moody's said.

NORD/LB is the most exposed with €11.5 billion in shipping loans still on its books as of June 30, closely followed by DVB with €11.3 billion. HSH Nordbank and KfW IPEX held €5.3 billion and €5.2 billion, respectively, at June-end.

Higher provisions

Given the low quality of most of their shipping assets, German banks have had to boost loan loss provisioning. The German banking sector's aggregate reserves for impaired shipping loans jumped to €12.5 billion in 2016, from €1.3 billion in 2011, Moody's said.

Loan loss provisions at the end of 2017 were somewhat lower, at €8.7 billion, likely because of exposure reductions at HSH Nordbank, NORD/LB and Commerzbank AG, Moody's added.

NORD/LB alone set aside €2.94 billion for ship financing risks in 2016, which resulted in a €1.96 billion annual loss. High loan loss provisions have also been weighing on the bank's profitability over the first half of 2018 when it booked a profit drop of 82% year over year.

Although German banks have increased shipping loan provisioning, the aggregate coverage ratio is still low, according to Moody's. The ratio was 48% at the end of 2017, down from 51% a year earlier. Moody's analysts believe a ratio of 60% is necessary in order for banks to be adequately shielded against shipping loan losses.