Bank Bailout Pierced Below The Waterline

The ongoing crisis in container shipping has claimed another victim in Germany’s banking sector: one state-supported bank, NordLB, will fully take over another, Bremer Landesbank, keeping it afloat after heavy shipping loan losses.
The shipping sector has been a headache for German banks.

After months of wrangling, the fate of Bremer Landesbank is sealed. The state-backed bank, which ran into trouble due to high losses from bad shipping loans, will be completely absorbed by its parent company NordLB, another state-controlled bank in northern Germany.

In return for its roughly 41-percent stake in the bank, the city-state and port town Bremen will receive €262 million, or $293 million. The bank’s owners agreed to the deal late Wednesday evening.

Fresh losses on shipping loans, totaling €449 million in the first half year, forced Bremer Landesbank to seek protection under NordLB’s arms, because it was not expected to cope with further losses in the second half and keep its capital position at an adequate level. NordLB, which is six times as large as Bremer Landesbank, can bear this financial risk.

Bremer Landesbank ended the first half of 2016 with a pre-tax loss of €384 million, primarily as a result of €449 million in loss provisions on ship loans at risk for default.

NordLB’s non-executive supervisory board chief, Peter-Jürgen Schneider, told Handelsblatt in June his institution would be willing to take over Bremer Landesbank entirely to ensure the bank’s financial strength to withstand further losses.

Overcapacity in the global container shipping industry since the financial crisis of 2008 has hit shipping companies’ earnings and some have been unable to service their loans, triggering losses at banks. South Korea’s Hanjin Shipping, the world’s seventh-largest container carrier, filed for bankruptcy protection on Wednesday.

The shipping downturn has forced several bailouts of German state-backed peer HSH Nordbank, while Frankfurt-listed Commerzbank, Germany’s second-biggest bank which received state support in 2008, has also suffered losses on shipping loans. Deutsche Bank, HVB and Helaba have all had to set aside plenty of reserves for the same purpose.

The European Union, which supervises bank bailouts in Europe, has ordered the privatization of HSH Nordbank by 2018 in return for approving its bailout.

The NordLB rescue of Bremer Landesbank is not expected to trigger European scrutiny. Bremer Landesbank will keep its own branding, name and operations.


15 p29 State-owned Regional Banks-01 NordLB Bremer Landesbank


The current solution was already in the offing weeks ago. After capital injections were ruled out from the start, a potential alternative considered but rejected was for the city-state of Bremen to acquire a share in NordLB. But that may triggered a state aid investigation by the European Commission which Mr. Schneider, the NordLB supervisory board chairman who is also the finance minister of the state of Lower Saxony, wanted to avoid this at all costs. Lower Saxony owns the majority of NordLB.

The complete transfer of Bremer Landesbank to NordLB will also have staffing consequences. The majority shareholder apparently pushed for a fresh start. Chief Executive Officer Stephan-Andreas Kaulvers and his deputy, Heinrich Engelken, are resigning.

The half-year results presented immediately after the agreement show how serious the situation is at Bremer Landesbank. It ended the first half of 2016 with a pre-tax loss of €384 million, primarily as a result of €449 million in loss provisions on ship loans at risk for default.

There will be no changes to NordLB's bottom line, because Bremer Landesbank had already been fully consolidated into the parent company's balance sheet. NordLB anticipates a loss for the entire year. However, the purchase price is likely to reduce NordLB's core capital ratio. NordLB is not providing any information on the subject at this point.


02 p31 BremerLB The Loss-making State Bank-01


On balance, all parties are pleased to have reached the end of a months-long impasse with Bremer Landesbank. "We are satisfied with the result. But I don’t want to make a secret of the fact that this is a loss for Bremen," said Karoline Linnert, a member of the Green Party and Bremen's finance senator.

NordLB Chief Executive Officer Gunter Dunkel stressed that this is a difficult but justifiable outcome for NordLB. The third owner, Sparkassenverband Niedersachsen, announced that it would sell its roughly 4-percent stake in Bremer Landesbank to NordLB.

Bremer Landesbank intends to continue to adjust its ship portfolio in a "value-preserving" manner. By 2020, Bremer Landesbank wants to reduce its ship loan portfolio by €2.5 billion to €4 billion, down from the current volume of €6.5 billion. Since 2008, the bank has reduced its portfolio from about 1,000 to 650 ships.

There was a hard-fought battle over the price of the 41-percent share held by the city-state of Bremen in the last few months. Bremen's center-right Christian Democratic Union (CDU) opposition had set a minimum limit of €480 million. This was the amount Bremen paid in 2012 to increase its share from 7.5 percent to 41.2 percent. The SPD, on the other hand, had applied a benchmark of €290 million.

The European Central Bank, which supervises financial stability in the euro zone, is paying close attention to the situation among banks that specialize in ship lending. It recently asked them to provide extensive data on their involvement in the sector and their reserves for bad loans. The ECB told Bremer Landesbank in March to write down €700 million worth of shipping loans, which triggered the rescue concluded on Wednesday.


Handelsblatt's Frank Drost covers financial supervision and banks. Gilbert Kreijger, an editor with Handelsblatt Global Edition, contributed to this article. To contact the author: [email protected]