Analysis of the Cyclical Behaviour of Lending Banks in the Offshore and Shipping Industries

Abstract

Traditional bank lending has always been the major source of capital to shipping and offshore. These industries being some of the most capital intensive, the need for financing is obvious. However, due to their cyclical nature there is greater risk associated with lending to the industries. Bank lending as a form of debt financing has evolved during the last 20 years, and with fluctuating markets the banks applied new strategies to both mitigate risks and align with new regulatory framework. After the financial crisis, several banks incurred significant losses due to their high exposure to the volatile shipping and offshore industries. As a result, many have downsized their involvement in these sectors, leading to a noticeable contraction in lending. The shipping and offshore sectors have weathered a challenging period, characterized by low freight rates, asset values, and oil price. Lower cash flow and revenues have posed challenges for companies within these sectors, impeding their ability to sustain operations and secure bank financing. Recent upturn in freight rates and oil price might stimulate investments and the launch of promising ventures. The latter raises an important question, have banks altered their lending strategies, or are they continuing to exhibit cyclical lending patterns? The data used in this thesis is collected from three Nordic banks quarterly reports over the past 20 years. These banks have maintained a substantial presence in the shipping and offshore sectors, particularly in the Nordic region. Their financial backing and commitment have played a pivotal role in strengthening these sectors, thereby contributing to the growth of the region’s energy exports and the development of a modern merchant shipping fleet. Our methodology involved a mixed-method approach. A quantitative analysis of the banks’ lending portfolios and qualitative interviews with representatives from the banks. The implications of the findings suggest that banks demonstrate cyclical lending behavior, which is natural when cash flow and contracts are a key consideration for them. Furthermore, our research indicates that banks have reformed their asset evaluation processes and are also placing more emphasis on their relationship with clients. Nevertheless, banks remain receptive to good investment opportunities, which emerge in a booming market.