ULRIK LACKSCHEWITZ IN CONVERSATION
“Extremely rapid wind-down of legacy assets successful”
Non-performing loans – many of them from shipping – have been a burden on the Bank for many years. How did the wind-down progress in 2017?
Ulrik Lackschewitz: Very well! Within the space of twelve months we have cut the volume of non-performing exposures (NPEs) within the Bank in half: from 14.6 billion euros at the end of 2016 to 7.5 billion euros at end 2017. We have thus been able to scale down our legacy assets very quickly. This reduction has made a crucial contribution to our successful privatisation. The volume of the entire Non-Core bank – which in addition to non-performing exposures has always included non-strategic portfolios – has been reduced by more than half within the space of a year: from 21.4 billion euros to 9.8 billion euros.
Why was the wind-down so fast?
Ulrik Lackschewitz: There are several reasons for this. The rather positive shipping market – many non-performing exposures are in shipping – together with a slightly weaker US dollar but also our own restructuring successes, thanks to which exposures are restored to health and no longer form part of the NPE portfolio. All these factors have a role to play. But almost as importantly: we have changed our approach.
What do you mean?
Ulrik Lackschewitz: We set ourselves even clearer principles during restructuring and recovery and were willing – to an even greater extent than previously – to accept tough cutbacks. At the same time, we were always guided by what is best for the Bank and the guarantors.
Can you be more specific?
Ulrik Lackschewitz: If we recover or restructure a non-performing exposure, it must be restored to health for good because we simply do not want to shift the problem to sometime in the future. In 2017, there was a slight uptrend involving container ships and general cargo carriers. Because we do not know how long this trend will last, we took advantage of the window of opportunity to reduce our NPE portfolio as extensively as possible – we definitely did not want to miss the chance to exit our portfolio. But it is very important for me to stress: the rapid wind-down was only made possible by the fact that our entire organisation worked together extremely well. This was an outstanding team effort.
What impact does the privatisation have on legacy assets?
Ulrik Lackschewitz: In the wake of the change in ownership, we disposed of almost all non-performing exposures from the Non-Core Bank, mostly ship finance, with a volume of 6.3 billion euros to a special-purpose entity set up by the investors. This portfolio transaction is, however, subject to the condition precedent of the privatisation being successfully completed, which will happen once the transaction closes. This is expected to be the case in the second or third quarter. To enable the sale of the 6.3 billion euro portfolio and thus enable the important release from the legacy assets, we had to make additional, non-recurring write-downs totalling 1.1 billion euros. We had already set aside very extensive loan loss provisions of 2.8 billion euros for the portfolio.
So why is the additional write-down so large?
Ulrik Lackschewitz: It corresponds to the difference between the net carrying amount and the purchase price. The portfolio includes highly problematic assets - they are simply of poor quality.
But why doesn't the purchase price correspond with the accounting approach?
Ulrik Lackschewitz: Unfortunately, it is not quite as simple as that. In some cases it is very difficult to establish the present fair value of such a large portfolio on the tight shipping market. We must not forget one thing: although the shipping markets have recovered from their historical lows, they remain at a very low level.
The federal states’ guarantee has been fully utilised in balance-sheet terms. What does this write-down mean for the Group net result?
Ulrik Lackschewitz: We are showing this loan loss provision in our income statement, which was the main reason for our loss of -528 million euros after taxes in 2017. This was a tough but necessary caesura. The portfolio sale means that the Bank has divested almost all its legacy assets. The NPE ratio of the Bank as a whole – which is the only one we will be referring to in the future – will thereafter fall to less than two percent. This is a good figure compared with the competition. Freed from our legacy assets, our prospects are good.