Shipping, Offshore Widen DVB’s Allowance for Credit Losses

Germany’s DVB Bank said that its 2016 allowance for credit losses surged to EUR 381.4 million from EUR 141.5 million seen in 2015, mainly driven by legacy exposures in the shipping and offshore businesses.

Due to the persistent downturn in numerous segments of the shipping industry and an ongoing challenging environment for the offshore industry caused by low oil prices, new allowance recognised for credit losses totalled EUR 523.7 million, of which EUR 344.7 million was in shipping finance.

This increase was triggered, in particular, by the market developments in the shipping industry, including high tonnage overcapacity. As further tonnage capacities entered the market, this pushed charter rates down even further.

“During 2016, DVB’s business performance was characterised by challenges as well as by positive developments. Results were burdened by two factors in particular: by an increased allowance for credit losses, and by a decline in the net result from financial instruments in accordance with IAS 39,” Ralf Bedranowsky, CEO and Chairman of DVB Bank SE’s Board of Managing Directors, said.

In the first half of 2016, earnings in the dry bulk shipping markets hit their lowest mark since the shipping crises of the 1980s. Likewise, in container shipping, charter rates slumped during the third quarter of 2016 due to structural overcapacities.

These market distortions persisted throughout the third and fourth quarters of 2016, further burdening the shipping clients’ liquidity cushions, which in turn affected lenders to a higher extent than before, according to DVB Bank.

The bank informed that it plans to undertake “every possible effort” in 2017 to avoid having to record a loss as in 2016.

“We intend to reduce the higher risk costs in shipping finance and offshore finance during 2017 and 2018. This is based on assumptions that the persistent tonnage overcapacity in some shipping segments will not rise beyond existing levels, and that charter rates and asset values will not decline further,” according to DVB.