(Adds provisions, total capital need)
By Jonathan Saul, Arno Schuetze and Maiya Keidan
LONDON/FRANKFURT, Nov 9 (Reuters) - NordLB is trying to shed almost all of its non-performing shipping loans this year, much earlier than publicly indicated, as the German bank steps up efforts to clean up its balance sheet, sources close to the matter said.
The public sector bank scored worst among German lenders in last week’s European Union stress tests and its majority owner, the German state of Lower Saxony, has said it was working on strengthening its capital buffers.
NordLB had already decided to sell most of its non-performing loan (NPL) shipping portfolio ahead of the stress test of the EU’s biggest banks as part of a wider overhaul of its loans to financing companies, real estate, infrastructure and transport, the sources said.
Although there are talks with potential buyers for the shipping loans, any deal is conditional on separate negotiations NordLB is holding over the sale of a stake in the bank as it needs fresh capital from this to shore up its balance sheet and cover writedowns on the value of any NPLs it sells.
Bidders for a stake in the bank have been asked to submit final offers in late November, with public sector bank Helaba, Germany’s second-largest listed lender Commerzbank and private equity investors shortlisted in the sale.
The bank and its shareholders, which include regional savings banks, want to restructure NordLB in a way that avoids breaching EU state aid rules which could force a complete sale.
NordLB, which said in a statement last week that it is cutting its risk assets and capital consumption, is offering packages of non-performing shipping loans with a face value of 2.5 billion euros and almost 4 billion euros, the sources said.
The price that NordLB can attract for the combined 6.5 billion euros in sour ship loans will determine the amount of capital it needs and the size of the stake in the bank a new investor will get.
A NordLB spokesman said on Thursday that the bank’s target of cutting its portfolio from 7.7 billion euros ($8.8 billion) to less than 5 billion euros by the end of 2019 was likely to be hit well ahead of schedule, but declined further comment.
If successful, a sale of the two portfolios could leave the bank with non-performing shipping loans totalling just 1.2 billion euros, based on the figures it has made public.
The sources said NordLB had earlier been marketing NPLs totalling 2 billion euros, on which it is expected to recover 30-40 percent of face value, the sources said.
“While the bank is keen to offload, much of what is on offer is toxic loans, so that will be factored into any sale price,” one of the sources said.
Selling at such discounts, which reflect the impact of the shipping industry’s worst slump on record, would mean NordLB would incur writedowns of 4.0 billion-4.5 billion euros.
NordLB, however, has already made loan loss provisions of 3.4 billion euros for its ship portfolio, which means it needs around 1 billion from the loans sale to cover losses, one of the sources said.
To bolster its balance sheet, NordLB wants to add a total of 3 billion-3.5 billion euros in capital, sources close to the matter have said previously.
NordLB has already received final bids for the first ship loan portfolio from private equity firms Cerberus, Apollo and a third investor and has asked for final bids for the second tranche by next week, one of the sources said.
Bids for the second portfolio were expected from the same groups, the source said, while other possible bidders included Goldman Sachs’ investment unit ESSG and U.S. buyout firm Lone Star, as well as hedge fund Och-Ziff.
All these investors declined to comment, apart from Och-Ziff which did not immediately respond to requests for comment.
$1 = 0.8755 euro Additional reporting by Klaus Lauer in Berlin Editing by Alexander Smith/Jane Merriman/Susan Fenton