The curtain is about to come down on one of the most dominant ship finance franchises in banking history: the Royal Bank of Scotland (RBS) has put its entire maritime book up for sale. As discussed in a recent book, The Bank and the Sea, the association of RBS with maritime finance goes back to the eighteenth century. Now, the theatre moves to a smaller stage, with fewer players. The British government, having bailed out RBS, has decided that RBS should leave the ship finance business to others. Stringent regulations after the crisis that began in 2008 have forced banks to conserve capital, and eliminate what are seen to be unprofitable businesses. Never mind that these businesses may be profitable in years to come.
While the placement on sale of RBS’ shipping portfolio is not related to the crisis in Greece, it could not come at a worst time. While RBS’ plan is to focus on lending in the United Kingdom, the perception is that pruning is easier than a business plan based upon being a global player in all markets.
Yet, the RBS/British government decision has profound implications for shipping. It will leave the United Kingdom without a global shipping finance competitor. While London has flourished as an international financial services capital, the banking crisis, coupled with that of shipping, that began with the collapse of Lehman, can be seen to have marked a move toward US-style investment banking. By doing so, the City of London has disposed of its long-cherished traditions of prudence, careful risk management and patience. Maritime finance is now in the hands of venture capitalists, investment bankers and big bets.
This can be seen in the recent alleged rise in tanker futures. The supply of VLCCs under construction has fallen to about 15% of the 640-strong fleet. While banks will put up the money for only 60% of a newbuilding, venture capital is available for virtually the whole enchilada.
There is a long record of building too many ships at the wrong time; caution is warranted by the return – soon – of the large Iranian super tanker fleet, not to mention unanswered questions about the Chinese economy.
In other words, the disappearance of traditional British lenders, and particularly the selloff of RBS’ $5bn Greek shipping portfolio, at a time when Greek banks have closed their own mortgage windows, is a danger sign. While there are many other respectable lending institutions, the tanker market in particular is both dangerous and vulnerable. It is driven by demand for oil, the distance between producing and consuming regions, and the supply of new ships. Since 2008, the alignment of these three factors has been out of joint; the chances are that things will get better in the short run, and then rapidly get worse.