Bank lending to the shipping industry is set to shrink in the coming months as low freight rates and the euro zone crisis will prompt a number of players to reduce their exposure to the seaborne sector, Citigroup's shipping chief said on Friday.
Many European banks are restructuring and are under pressure to shrink their balance sheets in response to tougher regulations requiring them to hold more capital against their loans. Shipping companies especially in the crude oil tanker and dry bulk sectors, hit by weak earnings and an oversupply of vessels, have already found it hard to find financing.
"The primary lenders to the shipping industry are the European banks who are in one form of difficulty or the other with funding issues or capital issues," said Michael Parker, Citi's global head of shipping. "A number of them are likely to cut back their shipping exposure and some are looking to exit altogether," he told Reuters in an interview.
Major lenders to the shipping sector include DnB NOR , Royal Bank of Scotland and Deutsche Bank. Parker said conditions in the crude tanker market would remain poor next year with the dry freight sector set to stay pressured for the next two to three years.
"I think bank capital for shipping will shrink in the next 12 months probably by more than people expect it," Parker said. "There will still be some banks like the Scandinavian banks that have been less impacted by the euro zone crisis and others like Citi willing to commit capital as well."
Analysts say Europe's banks could ditch up to 3 trillion euros ($4.12 trillion) of loans to raise capital ratios and meet new rules with the biggest shake-up in areas including project finance, shipping finance, aviation and infrastructure as they cut their risk-weighted assets and rethink client relationships.
"Overall capital will shrink which will put more onus on the capital markets which are hardly open for any but the very credit worthy shipping companies at the moment," Parker said. "So raising money for those who need it may have to come through asset sales." Global syndicated loan financing so far in the fourth quarter has reached $1.03 billion, versus $3.09 billion in the first quarter of 2011 and $3.72 billion in the full fourth quarter last year, Thomson Reuters LPC data showed.
"If you do not have a fairy god mother willing to put in more cash, you are going to have to sell your ships and pay off your banks and if there is anything left, the equity owners can have that," Parker said. Dnb NOR was ranked as the top global lead arranger on syndicated loans in the year to date followed by Nordea Bank , ABN Amro and then Citi, Thomson Reuters LPC data showed.
Parker said Citigroup was committed to meeting Basel III capital rules by the end of 2012 "That obviously is going to have an impact on what capital is available to support various industries," he said. Parker said Citi remained very active in ship finance.
"We plan to grow our business in line with what our clients are doing. In the broader area, we are looking at new things. If you look at the offshore and LNG sectors there is a need for a lot of capital," he said. "So we will look to expand our portfolio on the basis of not putting the overall portfolio to any greater risks. It will be quality risks."
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