Let’s start with four graphs from Nomura. Click to enlarge.
With the Baltic Dry index down circa 58 per cent so far this year, Chintan Joshi and team at Nomura have been looking at the possible impact of bad shipping loans on Europe’s banks.
And while the results are not necessarily alarming, neither are they pretty: a full-blooded mark-to-market of shipping loans might throw up losses of close to $50bn, but Nomura has settled instead on a figure of $13bn to reflect likely refinancings, workouts and the like.
Meanwhile, Andrew Lee, Nomura’s specialist in Asian shipping, suggests his own sector is actually nuts:
The shipping sector continues to be driven by irrational behaviour with focus historically on market share at the expense of profitability. Although the order book as a percentage of fleet has declined significantly from the peak, we believe supply could remain a problem if shipping companies continue this irrational behaviour, especially as we estimate current spot freight rates are at loss-making levels (irrespective if container, dry bulk or tanker). More importantly, new building orders have slowed owing to overordering, but this could be temporary. If one shipping line decides to order aggressively, other shipping lines would follow despite irrespective of where freight rates are.
With spot freight rates at loss-making levels, questions continue to be raised about bankruptcies. From an Asian shipping perspective and the stocks under coverage, only Korea Line has filed for Chapter 15 (mismatch of capacity from expensive long-term chartered-in vessels, but operated in spot market, and spot rates declined sharply). Although the sector gearing levels are increasing as a result of capex and earnings (whether losses or profits), we do not expect the remaining stocks under coverage to be bankrupt unless freight rates continue to be depressed for the next two years. Furthermore, gearing levels are still below previous highs owing to previous record profits. For example, we expect NOL’s gearing to rise to 67% by 2013, but this is still historically lower than the 446% in 2002. Also, the majority of Asian shipping companies have a strong major shareholder.
The total size of the global shipping fleet is put at $841bn at end-2011 prices, carrying total bank funding of $430bn.
So which European banks are exposed to this madness?
Here are the names on Nomura’s radar, with the important caveat that types of exposure are important when assessing vulnerability. Indeed, Nomura have a “buy” rating on DNB…
Related link:
Freight rates go negative – FT Alphaville