Bloomberg News

DNB, Nordea See Gain in Commerzbank Shipping Exit

June 28, 2012

DNB, Nordea See Gain in Commerzbank Shipping Exit

Nordea is sticking to a plan of keeping its shipping portfolio “fairly stable” for the next two years, with the payment stream from its existing book providing enough capital for new loans. Photographer: Tomm W. Christiansen/Bloomberg

DNB ASA (DNB), the world’s second-largest shipping bank, and Nordea Bank AB (NDA) will be targeting wider loan margins in the shipping industry after Commerzbank AG (CBK)’s decision to abandon the business.

“This is clearly positive for Nordea and DNB, as it removes capacity, which is better for pricing,” said Nick Anderson, a London-based analyst at Berenberg Bank. “While this doesn’t necessarily mean that DNB and Nordea will go out there and try to get more business, it does mean they will be able to demand better terms and pricing on their new shipping loans.”

DNB, based in Oslo, and Stockholm-based Nordea, the world’s No. 4 shipping bank, are sticking it out in an industry hurt by soaring fuel costs and slumping freight rates and asset values, even as other European banks have scaled back or left the business. Commerzbank, the world’s third-largest maritime lender, said June 26 that it will close its ship finance unit amid Europe’s debt crisis to focus on “business that is sustainably profitable.”

“Whenever a substantial participant exits a business, it creates opportunities for those who remain,” Hans Christian Kjelsrud, head of shipping, offshore and oil services at Nordea, said by phone from Oslo. “There’s a scarcity of capital from the bank market, which means that banks can really pick and choose what businesses they want to do.”

The yield on Nordea’s five-year 3.125 percent dollar denominated note slid four basis points to 2.94 percent as of 1:28 p.m. in Stockholm. The yield on DNB’s 4.5 percent two-year euro note fell five basis points to 1.27 percent.

Margin Improvement

Nordea is sticking to a plan of keeping its shipping portfolio “fairly stable” for the next two years, with the payment stream from its existing book providing enough capital for new loans. Kjelsrud’s unit’s 19.7 billion-euro ($24.6 billion) portfolio includes tankers, container ships, oil services and drilling rigs.

DNB is seeing improving margins for lenders, Harald Serck- Hanssen, head of shipping, offshore and logistics at DNB, said in a telephone interview.

“We’ve seen margins coming up on shipping loans and I think they’ve now come up to a level where it’ll be interesting to see if new banks will be attracted to the market,” he said. “You clearly have some signs of American banks coming back and I also think we’ll see Australian, Asian and Canadian banks -- banks from areas where the banking industry is less affected by the downturn -- coming in.”

Stricter Regulation

Peter Sand, an analyst at Danish shipping association BIMCO, which accounts for 65 percent of global tonnage, said stricter regulation for banks is likely to make loans more expensive for shipping companies in the future. Commerzbank’s decision to exit ship financing is also likely to give banks still lending to the shipping industry more business, he said.

“In the longer-term this will bring around more business to those banks still active in the market as the number of ship owners looking for a new bank or who want to increase the involvement with an existing one is bound to increase,” Sand said. “Nordea and DNB are large and important players, as they have in recent years proven to be around to solve the financial challenges together with the owners, with the future in sight.”

Shares Drop

Nordea fell 1.6 percent to 56.40 kronor in Stockholm trading at 1:20 p.m. local time, while DNB declined 0.4 percent to 55.25 kroner in Oslo. Nordea has lost 13 percent over the past 12 months while DNB has lost 24 percent. Commerzbank, down 6.1 percent at 1.26 euros in Frankfurt today, has slumped 56 percent since the end of June last year while the 43-member Bloomberg Banks (BEBANKS) and Financial Services Index has decreased 29 percent.

Soaring fuel costs, dropping freight rates and an overcapacity of vessels have hurt profits and led to losses at shipping lines, while stricter lending criteria at banks and falling asset values have made it difficult for many to get new credit or pay their interest.

Container lines A.P. Moeller-Maersk A/S, CMA CGM SA and Hapag-Lloyd AG all posted losses last year because of high fuel costs and falling freight rates.

Net shipping loan losses at Nordea, the Nordic region’s largest lender, tripled to 135 million euros last year, the bank said on Jan. 24. Loan losses more than quadrupled to 60 million euros in the three months through March.

New Entrants

Lloyds Banking Group Plc and Societe Generale SA (GLE) have also exited ship finance as the industry struggles, new banking regulation require lenders to increase capital buffers and reduce risk and amid losses stemming from Europe’s debt crisis. More banks may follow because of the capital-intensity of ship finance and high dollar funding costs, Kjelsrud said.

“Ship finance has historically been dominated by European banks and right now we are in a period where bank capacity and ship finance capacity among European banks is declining,” he said. “This is a trend that started one to two years ago and continues right now. It probably means the shipping industry will have to diversify its sources of capital away from bank funding and I believe that export financing agencies and the bond market will be increasingly important in the future.”

Maersk, the world’s largest container shipping company, this year raised 3 billion kroner ($496 million) through selling bonds in Norway, its first debt sale since 2010.

Other lenders still active in ship finance are also likely to benefit from Commerzbank’s exit through better pricing and more business opportunities, Dagfinn Lunde, a member of DVB Bank SE (DVB)’s managing board, said. Still, the decision to pull out is “a blow” and “extends the negative sentiment in the shipping industry.”

Debt Exposure

DNB and Nordea have avoided the worst of the fall-out from Europe’s debt crisis, having little exposure to countries such as Greece, Spain and Portugal. Commerzbank had 8.4 billion euros in Italian sovereign debt, 2.9 billion euros in Spanish holdings and 0.8 billion euros of Portuguese debt on its books on March 31 this year, it said in its first-quarter report on May 9.

The bank on June 6 had its credit rating cut one level to A3 by Moody’s Investors Service, which cited “the increased risks of further shocks emanating from the euro area debt crisis, in combination with the banks’ limited loss-absorption capacity” as it downgraded seven German banks. Moody’s rates Nordea Aa3, three steps above Commerzbank, while DNB has an A1 rating, one level below Nordea.

‘Radical Move’

“This radical move by Commerzbank shows that the bank is preparing for an escalation of the debt crisis and prepares for further write downs in their public finance portfolio,” Konrad Becker, a Munich-based analyst at Merck Finck & Co., said.

Commerzbank, based in Frankfurt, became the world’s third- largest shipping lender after acquiring Dresdner Bank AG in 2008, doubling the size of its maritime-loan portfolio just before the industry entered its biggest crisis since World War II. At $28 billion, the bank’s shipping portfolio is smaller than only the books of HSH Nordbank AG and DNB, according to Athens-based vessel-finance consultant Petrofin SA.

HSH Nordbank, based in Hamburg, said shipping will remain a “core” business, according to an e-mailed response to questions by Rune Hoffmann, a bank spokesman. The bank is evaluating the potential consequences of Commerzbank’s decision, he said.

DnB and Nordea have coped better than most rivals because their ship finance divisions are more conservative and have stricter lending criteria, Anderson of Berenberg bank said.

“Nordic banks are much more sensible and much more conservative in their underwriting decisions and they also typically lend against cash flow, not against asset values,” Anderson said. “If you have funding and liquidity, you can consider all lending opportunities.” Nordea and DNB “are happy to stay in ship finance; they can make money in that market.”

To contact the reporters on this story: Niklas Magnusson in Hamburg at nmagnusson1@bloomberg.net; Stephen Treloar in Oslo at streloar1@bloomberg.net

To contact the editor responsible for this story: Jonas Bergman at jbergman@bloomberg.net


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