HSH Nordbank updates loan loss provision plan

Shipfinance — By on November 6, 2012 at 9:23 PM

Higher loan loss provisions required for legacy loans in the ship-ping business and increasing default rates in the coming years

  • Bank’s Tier 1 capital ratio still above 9 percent
  • Up to EUR 1.3 billion might be drawn down from the second loss guarantee between 2019 and 2025
  • Charges to be paid by the Bank by 2025 will substantially exceed the planned drawdown on the guarantee
  • Main shareholders Hamburg and Schleswig-Holstein reaffirm confidence in the Bank

HAMBURG/KIEL In view of the euro sovereign debt crisis, the global economic downturn and especially the increasingly critical state of the international shipping industry, HSH Nordbank has revised its long-term loan loss provision plan. According to this, the Bank now expects much higher loan loss provisioning than previously planned for the legacy loans in the shipping business as well as increasing default rates in this core segment of its client business. In spite of the higher provisioning requirements resulting from the new loan loss provision plan, at the end of the third quarter HSH Nordbank also boasts a Tier 1 capital ratio exclud-ing hybrid instruments (common equity ratio) above the minimum of 9 percent required by the market. Here the first measures to reduce risk-weighted assets announced by the Bank when presenting its half-year result are already showing their effect. HSH Nordbank will be drawing up further measures to ease pressure on the capital ratio.

When presenting its half-year results, HSH Nordbank had already stated that it no longer believes that the situation on the international shipping markets will improve rapidly and does not expect the sector to bottom out for another 12 to 18 months. Hitherto the with-drawal of HSH Nordbank’s competitors from ship finance has become increasingly noticeable. This has led to a reduction in the number of financing partners to support the maritime sector in its current crisis – a development that is further aggravating the situation for North German shipping companies. By contrast, HSH Nordbank will continue to be a long-term reliable partner for the maritime sector, which is of key importance for Hamburg and the entire North. The Bank’s main shareholders, the federal states of Hamburg and Schles-wig-Holstein, have reaffirmed their confidence in the Bank.

The revised, very conservative loan loss provision plan, which the Bank is today presenting before the Kiel parliament’s sub-committee on equity holdings and the Hamburg state par-liament’s committee on public-sector companies, takes overall account of the state of the shipping industry. In the third quarter individual value allowances formed for restructuring exposures in the shipping portfolio increased significantly. For the rest of the year and into 2014 HSH Nordbank projects much higher loan loss provisioning requirements as well as much higher default rates in this segment than previously planned.

These will mainly stem from the Bank’s legacy loans from the years prior to 2009, which are covered by the second loss guarantee provided by the states of Hamburg and Schleswig-Holstein. This will also involve a much higher utilisation of the second loss guarantee and a reassessment of the total default potential of the exposures covered by the second loss guarantee. When presenting its half-year results, HSH Nordbank had already pointed out that in future actual defaults under the guarantee might exceed the amount of the Bank’s first loss piece and thus result in a drawdown of the guarantee. According to the updated plan, the Bank expects that effective payments from the second loss guarantee provided by the federal states would have to be made in 2019 for the first time.

Allowing for the first loss piece to be borne by the Bank itself, these amount to a maximum of EUR 1.3 billion by 2025. According to the current plan, in the same period the charges to be paid by the Bank for using the guarantee facility, including amounts already paid, will substantially exceed the planned drawdown on the guarantee. The increase in the likelihood of the second loss guarantee being drawndown to more than 50 percent as implied by the new loan loss provision plan results in a once-only impact on the Bank’s earnings in the nine-digit region in the third quarter of 2012 because charges to be expected in the future already have to be included in loan loss provisions. Income from revaluations according to IFRS compensate for these charges. As planned, HSH Nordbank will be publishing its complete nine-month figures for fiscal 2012 on 6 December 2012.

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