"With deflation, banks’ bad debts increase and are likely to reinforce the banks’ unwillingness to take risks, curtailing provision of credit." - Manmohan S. Kumar - Deflation The new threat?
A month ago in our conversation "Shipping is a leading deflationary indicator" we argued: "Shipping is in fact an important credit and growth indicator, but, more importantly a clear deflationary indicator."
In fact the surge in the Baltic Dry Index before the start of the financial crisis was a clear indicator of cheap credit fuelling a bubble, which, like housing, eventually burst. In the chart below, you can notice the parabolic surge of the index in 2006 leading to the index peaking in May 2008 at 11,440; with the index touching a low point of 680 in January 2012 - Evolution of Baltic Dry Index from 1990 until today - source Bloomberg:
For us the Baltic Dry Index is another indicator in the deterioration of credit as well as an indicator in deteriorating credit conditions leading to a surge in Non-performing loans on Banks' Balance Sheets.
In fact losses from shipping are increasing, as indicated by Niklas Magnusson in Bloomberg - Commerzbank Losses From Shipping Loans Seen Increasing:
"The Structured Finance business consists in originating, structuring, and financing operations involving large-scale exports and investments in France and abroad, often backed by collateral security (e.g. aircraft, ships, corporate real estate, or commodities), as well as complex and structured loans.
The Structured Finance division comprises nine finance segments: aviation and rail / shipping finance / tax-based leases / natural resources, infrastructure and power / real estate and lodging / export and trade finance / acquisition finance / transactional commodity finance / structured finance advisory."
From the same Bloomberg article:
In our conversation "Money for Nothing", we touched on the impact the Baltic Dry Index was having on the Danish Banking sector given, according to Bloomberg, both Danske Bank (27% share of total Danish lending) and DNB Bank (11% share in syndicated shipping loans) have a large exposure to Shipping Financing. Therefore it wasn't a surprise for us to learn that Danske Bank decided to tap the Danish equivalent of the ECB's LTRO to the tune of 2.7 billion dollars when the facility opened on the 30th of March:
Danske Bank Will Tap $2.7 Billion From Central Bank Facility - Christian Wienberg - Bloomberg:
"Danske Bank A/S, said it will draw 15 billion kroner ($2.7 billion) from the central bank’s first offering of three-year loans today as policy makers try to drag the Nordic economy out of recession.
Danske will use assets from its bond portfolio as collateral for the loan, the Copenhagen-based lender said today by e-mail."
"It is still a game of survival of the fittest", we previously argued.
The consequences of European banks paring back on Structured Finance in particular, and lending in general can been seen in the latest EMEA lending figures which according to IFR (International Financing Review) as indeed fallen from the proverbial cliff - EMEA lending falls off a cliff:
"Syndicated lending in Europe, the Middle East and Africa reached a paltry US$129bn in the first quarter of 2012, according to Thomson Reuters data, as banks shrank their balance sheets and companies remained wary of debt.
It was the lowest first-quarter loan volume in EMEA since 2002, down 47% from the same period last year, and the deal count of just 193 loans was the lowest for a first quarter for 18 years and 49% lower than the 378 loans completed in the first three months of 2011.
The implications of the drop in volume for banks’ revenue and headcount are frightening if low levels of activity persist, bankers said.
Any impact on profitability could start to show up in banks’ first-quarter results, which will be released across Europe in late April and May. The expected hit to income may be mitigated, however, because although banks are lending less they are charging higher fees."
EMEA lending falls off a cliff - source Reuters:
A game changer, as indicated by the IFR article, in the game of "survival of the fittest", leading to a change in the banking pecking order:
"German banks replaced French banks at the top of the league tables after an active first-quarter refinancing round by German companies, including Henkel, HeidelbergCement and Schaeffler. Deutsche Bank headed the first-quarter EMEA bookrunner league table while Commerzbank was third.
This time last year, the top three slots were taken by Credit Agricole, BNP Paribas and Societe Generale respectively. Credit Agricole is now second, BNP is in fifth place and Societe Generale is 10th.
US banks used the market dislocation to increase their market share. Bank of America Merrill Lynch, JP Morgan and Citigroup climbed to fourth, sixth and seventh place respectively."
The sharks are circling the European stricken ship - Wilbur Ross Plans Shipping Expansion as Industry Distress Grows, by Michelle Wiese Bockmann, Bloomberg, 30th March 2012:
Historical 5 year Old Dry Bulk Ship Prices (2006-Present, US$, Millions) - Source Deutsche Bank/Clarkson Research Services:
"Beware of little expenses. A small leak will sink a great ship."
Benjamin Franklin
"Beware of little lending. A small leak will sink a great European ship."
Macronomics
Stay Tuned!
A month ago in our conversation "Shipping is a leading deflationary indicator" we argued: "Shipping is in fact an important credit and growth indicator, but, more importantly a clear deflationary indicator."
In fact the surge in the Baltic Dry Index before the start of the financial crisis was a clear indicator of cheap credit fuelling a bubble, which, like housing, eventually burst. In the chart below, you can notice the parabolic surge of the index in 2006 leading to the index peaking in May 2008 at 11,440; with the index touching a low point of 680 in January 2012 - Evolution of Baltic Dry Index from 1990 until today - source Bloomberg:
For us the Baltic Dry Index is another indicator in the deterioration of credit as well as an indicator in deteriorating credit conditions leading to a surge in Non-performing loans on Banks' Balance Sheets.
In fact losses from shipping are increasing, as indicated by Niklas Magnusson in Bloomberg - Commerzbank Losses From Shipping Loans Seen Increasing:
"As soaring fuel costs and slumping freight rates leave shipping companies struggling to pay their creditors, Commerzbank AG may face shipping-loan losses of as much as 441 million euros ($588 million) this year.
Commerzbank’s 2008 takeover of Dresdner Bank AG increased its stake in shipping lender Deutsche Schiffsbank to 92 percent, doubling the size of its maritime-loan portfolio, just before the industry entered its biggest crisis since World War II. The loan losses increase the woes of Germany’s second-largest bank, which is already seeking to pare its balance sheet and raise 5.3 billion euros by the end of June.
Shipping loan losses probably will rise to 2.1 percent of such lending at Commerzbank this year, Morgan Stanley analysts Henrik Schmidt and Doug Hayes wrote in a March 20 note. That’s more than the 1.8 percent projection for the U.K.’s Royal Bank of Scotland Group Plc, and the 1.5 percent or less at Norway’s DNB ASA, Italy’s UniCredit SpA and France’s BNP Paribas SA.
“Shipping is one of the reasons behind Commerzbank’s underperformance in the past 12 months,” said Dirk Becker, a Frankfurt-based analyst at Kepler Capital Markets, by phone. “It is a risky business, as risky as many parts of commercial real estate. There’ll be a time of reckoning at some point.”
Last year issues surrounding liquidity issues and difficulties in accessing dollar funding mean most European banks are paring back on their Structured Finance Operations:
Definition of Structured Finance business - source Credit Agricole CIB:Last year issues surrounding liquidity issues and difficulties in accessing dollar funding mean most European banks are paring back on their Structured Finance Operations:
"The Structured Finance business consists in originating, structuring, and financing operations involving large-scale exports and investments in France and abroad, often backed by collateral security (e.g. aircraft, ships, corporate real estate, or commodities), as well as complex and structured loans.
The Structured Finance division comprises nine finance segments: aviation and rail / shipping finance / tax-based leases / natural resources, infrastructure and power / real estate and lodging / export and trade finance / acquisition finance / transactional commodity finance / structured finance advisory."
From the same Bloomberg article:
"The shipping industry’s troubles, coupled with stricter capital rules for banks, Europe’s debt crisis and concessions lenders had to make for bailouts during the global financial rout, have caused banks to scale back shipping operations or retreat from new lending altogether.
Thirteen of the world’s 19 largest shipping banks stopped new loans to the industry amid an “extreme” vessel surplus that cut cash flows and led to vessel seizures, Dagfinn Lunde, a member of DVB Bank SE’s managing board, said on March 9. Rotterdam-based DVB, which finances 1,500 vessels through 450 loan agreements, is one of only six banks funding shipping. As many as 100 were lending four years ago, Lunde said."
In our conversation "Money for Nothing", we touched on the impact the Baltic Dry Index was having on the Danish Banking sector given, according to Bloomberg, both Danske Bank (27% share of total Danish lending) and DNB Bank (11% share in syndicated shipping loans) have a large exposure to Shipping Financing. Therefore it wasn't a surprise for us to learn that Danske Bank decided to tap the Danish equivalent of the ECB's LTRO to the tune of 2.7 billion dollars when the facility opened on the 30th of March:
Danske Bank Will Tap $2.7 Billion From Central Bank Facility - Christian Wienberg - Bloomberg:
"Danske Bank A/S, said it will draw 15 billion kroner ($2.7 billion) from the central bank’s first offering of three-year loans today as policy makers try to drag the Nordic economy out of recession.
Danske will use assets from its bond portfolio as collateral for the loan, the Copenhagen-based lender said today by e-mail."
"It is still a game of survival of the fittest", we previously argued.
The consequences of European banks paring back on Structured Finance in particular, and lending in general can been seen in the latest EMEA lending figures which according to IFR (International Financing Review) as indeed fallen from the proverbial cliff - EMEA lending falls off a cliff:
"Syndicated lending in Europe, the Middle East and Africa reached a paltry US$129bn in the first quarter of 2012, according to Thomson Reuters data, as banks shrank their balance sheets and companies remained wary of debt.
It was the lowest first-quarter loan volume in EMEA since 2002, down 47% from the same period last year, and the deal count of just 193 loans was the lowest for a first quarter for 18 years and 49% lower than the 378 loans completed in the first three months of 2011.
The implications of the drop in volume for banks’ revenue and headcount are frightening if low levels of activity persist, bankers said.
Any impact on profitability could start to show up in banks’ first-quarter results, which will be released across Europe in late April and May. The expected hit to income may be mitigated, however, because although banks are lending less they are charging higher fees."
EMEA lending falls off a cliff - source Reuters:
A game changer, as indicated by the IFR article, in the game of "survival of the fittest", leading to a change in the banking pecking order:
"German banks replaced French banks at the top of the league tables after an active first-quarter refinancing round by German companies, including Henkel, HeidelbergCement and Schaeffler. Deutsche Bank headed the first-quarter EMEA bookrunner league table while Commerzbank was third.
This time last year, the top three slots were taken by Credit Agricole, BNP Paribas and Societe Generale respectively. Credit Agricole is now second, BNP is in fifth place and Societe Generale is 10th.
US banks used the market dislocation to increase their market share. Bank of America Merrill Lynch, JP Morgan and Citigroup climbed to fourth, sixth and seventh place respectively."
The sharks are circling the European stricken ship - Wilbur Ross Plans Shipping Expansion as Industry Distress Grows, by Michelle Wiese Bockmann, Bloomberg, 30th March 2012:
"Billionaire Wilbur Ross said he’s considering further investments in shipping as financial distress within the maritime industry intensifies.
The chairman and founder of WL Ross and Co., who manages about $10 billion, is evaluating further purchases of oil-product tankers after last year participating in the acquisition of 30 of the vessels through Greenwich, Connecticut-based Diamond S Shipping. He’s also considering liquefied natural gas and liquefied petroleum gas carriers, he said by e-mail
yesterday.
“The number of distressed shipping deals grows daily, mostly from individual owners of small numbers of ships,” Ross said. “We do expect further opportunities over the next 12 months. You never know where the exact bottom is until after the recovery has begun, but it is clear that we are already much closer to the bottom than the top.”
The combined market value of the world’s 80 biggest publicly traded shipping companies plunged by $101.7 billion in the four years to March 23, figures compiled by Bloomberg show. A glut of vessels cut earnings below levels that cover operating costs, triggering bankruptcies and loan breaches."
Historical 5 year Old Dry Bulk Ship Prices (2006-Present, US$, Millions) - Source Deutsche Bank/Clarkson Research Services:
"Beware of little expenses. A small leak will sink a great ship."
Benjamin Franklin
"Beware of little lending. A small leak will sink a great European ship."
Macronomics
Stay Tuned!
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