Fitch: NordLB to Face Execution Risks if It Cuts Shipping Loans

The German shipping bank Norddeutsche Landesbank (Nord/LB) could encounter high execution risks if it goes through with the plan to decrease its shipping exposures by EUR 4 billion to 6 billion (USD 4.4 billion to 6.7 billion) over the next three years, according to Fitch Ratings.

Planned disposals, representing up to one-third of the bank’s total shipping exposures, are large, but the shipping markets are not yet showing signs of sustainable recovery and “there is a risk that disposal markets could become overcrowded.”

Currently, a number of lenders are attempting to sell ships, including HSH Nordbank AG, which plans to sell up to EUR 3.2 billion of ships over the next two years.

“In our view, ship financing, which represents around 10% of NORD/LB’s credit volumes, continues to pose the most significant source of risk for the bank. Cutting its exposure to the shipping sector represents an important step in trying to address asset quality weakness at NORD/LB,” Fitch Ratings said.

Impaired shipping exposures are not fully reserved. But the expected loss shortfall against the shipping portfolio, which, according to Fitch Ratings estimates, reached around EUR 650 million at the end of March 2016, is already deducted from the bank’s 12.6% phased-in common equity tier capital ratio.

“In our opinion, NORD/LB’s capitalisation is still sufficiently robust to absorb a reasonable level of unexpected losses arising from planned disposals.”

However, additional ships could become non-performing if charter rates fall further. Exchange rate movements could also push up reported levels of non-performing shipping loans.

“We expect loan loss provisions to remain high in the next few quarters,” Fitch Ratings added.

Earlier in May, the bank said that its consolidated net loss was at EUR 84 million for the first quarter of the year and issued a profit warning for the year. Further deterioration in the shipping markets led to more provision requirements, and management said this trend is likely to continue.

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