Germany's NordLB Bank: "40% Of Our Shipping Loan Book Is Non-Performing"

The challenges facing Germany's second-largest shipping lender, German Landersbank NordLB first emerged this summer, when we reported that the bank was considering taking full control of its smaller, distressed peer, Bremer Landesbank (BLB), which was struggling under the weight of a portfolio of bad shipping loans in what effectively constituted a state-backed bailout. BLB, of which NordLB already owns 54.8%, had warned that it would have to take a €400m writedown on its shipping portfolio, and that as a result it was facing a “mid-triple-digit million loss” this year. As Germany's Handelsblatt wrote back in July, "shipping loans have brought Bremer LB into distress and the bank can not survive without government help, but a direct capital injection from Lower Saxony now looks unlikey."

The situation was ultimately "resolved", when NordLB said in September that it would take full control of Bremer Landesbank (the transaction is expected to close in January 1 2017), with BLB's balance sheet being absorbed by that of its bigger Landesbank peer, however it also meant that NordLB would wind up holding even more impaired shipping loans.

Then, the full extent of NordLB's problem shipping exposure was revealed today, when during a call with reporters, designated CEO Thomas Buerkle said that a whopping €8 billion, or 40%, of its shipping loan book was non-performing and that NordLB wants provisions to cover 50% of NPLs by year-end, vs 44% now, to limit balance sheet risks.

The revelation came amidst a broader warning that NordLB was facing a loss of “more than €1bn” this year, as a result of the latest shoring up of reserves against losses on its portfolio of shipping loans.

NordLB also said it had increased its loan loss provisions by €648m in Q3, having set aside €568m in the second quarter and €435m in the first, and that this had pushed it to a net loss of €330m in the three months to September. The CEO tried to calm the market, saying that the bank's “capital ratios remain at a high level, and have a sufficient buffer to meet all regulatory requirements. That also applies after taking into account the negative result for 2016, and the complete takeover of Bremer Landesbank.”

Total NordLB Loan loss provisions – predominantly in ship financing – surged to €1.65 billion in the first nine months, from €367 million in the same period last year. More than half of that (about €1 billion) falls upon its affiliate Bremer Landesbank which warned in a separate announcement on Thursday that its write-downs on shipping loans would reach €1 billion this year.

In total, Nord LB expects loan loss provisions for the whole group to exceed €2 billion by the end of the year, resulting in a net loss of more than €1 billion. The Q3 loss brought NordLB’s net loss for the first nine months of the year to €736m, down from a net profit of €539m in the same period a year earlier.

NordLB said in April that it intended to cut its portfolio of shipping loans, which stood at €19bn at the beginning of the year, to between €12bn and €14bn by the end of 2018.

The huge write-downs it takes this year pave the way for the planned reduction of its shipping loan book, the bank said. It means that loan accelerations, foreclosures and portfolio sales will not have to cause the bank any more losses, so its restructuring and workout teams can act more flexibly.

The portfolio stands at close to €17bn, however by the end of this year, it is expected to drop to €16 billion if a major portfolio securitisation with PE investor KKR and an unnamed sovereign state fund can be closed.

Meanwhile, as IHS notes, the financial situation at the acquired Bremer Landesbank has become so dramatic that it will have to be fully integrated into Nord LB through signing of a controlling agreement probably at the end of next week.

As explained previously, while in previous years when commodity prices were surging, German bank lending to the shipping industry was a major profit center for many German banks, ever since the financial crisis, and especially following the recent commodity bust, German banks suffered huge losses, as the global shipping industry buckled under the weight of chronic overcapacity, mistimed investments and cooling growth in China.

And, as the FT adds, while there have recently been tentative signs that the brutal market conditions are belatedly spurring consolidation — Japan’s big three shipping conglomerates said last month that they would launch a joint venture for their container shipping businesses — maritime lenders are still suffering. Case in point, the recent unprecedented bankruptcy of South Korean logistics and container transport company Hanjin, whose bankruptcy in the late summer shocked the peace within global supply logistics.

Port of Hamburg

And now that we have a benchmark for just how severe shipping loan deterioration currently is, we wonder just how impaired the loan book at that "other" German lender, Deutsche Bank is. Recall that as also reported in early July, Deutsche Bank was looking to sell at least $1 billion of shipping loans to lighten its exposure to the sector. As Reuters noted then, "banking and finance sources familiar with the matter said Germany's biggest lender was initially looking to offload at least $1 billion.

"They are looking to lighten their portfolio and this includes toxic debt. It makes commercial sense to try and sell off some of their book," one finance source said. "They are not looking to exit shipping."

Assuming DB concluded the sale successfully, it means the largest German bank still has roughly $5 billion in shipping loans on its books: as of July, Deutsche Bank, had between $5 billion and $6 billion worth of total exposure to the shipping sector. Assuming the NordLB's 40% bad debt ratio, it means that Deutsche Bank may have over $2 billion in nonperforming loans on its books. One wonders at what "Mark to Model" value the Frankfurt-based bank is keeping these loans on its books?