Commerzbank still at risk of hefty shipping industry loan losses

Nomura have taken a look at banking sector loan exposure to the shipping industry and see Commerzbank and Royal Bank of Scotland as being at risk to further losses in an environment that is likely to remain stressed for at least another year.

Royal Bank of Scotland Group plc (LON:RBS) and Commerzbank have been cited as being most at risk to further losses stemming from loan exposure to the global shipping industry.

According to a report released today by Nomura entitled Banks' shipping problems up to 60% of those shipping companies surveyed by Nomura are unable to cover their interest expenses.

This even as the investment bank says it sees stabilisation in global shipping with freight rates moving back above break-even levels.

Financial headaches for global shipping remain

Despite an improving outlook for global shipping Nomura find that equity/asset ratios have fallen further, thereby eating into buffers.

Losses given default (LGDs) have thus risen at shipping company levels in their simplistic stress tests.

Debt-servicing capacity has also deteriorated while Nomura's mark-to-market (MtM) analysis shows that severity of losses has fallen only modestly.

Bank exposure to shipping industry losses

So who are the winners and losers amongst the big banks when it comes to this still fragile sector?

Analyst Chintan Joshi says DNB and Nordea will best manage shipping asset quality risk as he regards their exposure as better quality in terms of product segments, vintage and type of corporates.

At the other end of the stick is Commerzbank which, "remains the most exposed among the stocks we cover to shipping concerns as it has a
combination of poor product segment, vintage as well as type of corporate exposure."

The problem with Commerzbank is that it is overexposed to the Tanker/Bulk/Container (T/B/C) sector which is the most problematic segment in shipping. This segment forms up to 83% of all Commerzbank's exposure.

Royal Bank of Scotland: Ratings reduced over shipping exposure

Commenting on the exposure of the UK bank with most notable exposure to the sector, Royal Bank of Scotland Group, Joshi says:

"While the exposure to shipping at RBS is less significant than other problem areas, it is worth noting and watching.

"Over GBP 10bn in shipping loans puts the bank at roughly 3% market share and the current NPL ratio of c9.5% is worse than Nordic peers.

"With 79% exposure to the T/B/C shipping segments, RBS is second only to CBK, albeit this exposure is mainly to bulkers and tankers, which continue to be perceived as better quality than the container segment.

"Our Reduce rating on RBS is largely down to the political risk the company with a new CEO faces, the bad-bank review, which has created even further un certainty for staff and we expect the remaining businesses to continue to generate a core ROTE of 7.2% in 2014.

"The shares trade at c0.8x TBV and have recovered some of the earlier YTD losses to near parity with the SX7P."
Source: The Economy News