Germany’s KfW sees long-term finance drought

•  KfW should try not to grow too fast
• New investor types needed for infrastructure
• Bank business to shrink under regulation, capital requirements

FRANKFURT, (Reuters): German state bank KfW predicts a credit crunch due to a shortage of long-term project financing partly due to a retreat by major banks from such capital-intensive businesses.

KfW, which specialises in long-term finance, is not in a position to fill the gap and there will be some funding shortages.

“KfW is not capable of plugging all gaps (left behind by other banks),” Chief Executive Ulrich Schroeder told Reuters in an interview, adding that, in his view, this was the appropriate role for a state-backed bank.

“A bank which is state-backed is well advised in not trying to bridge all gaps that open up in the market,” Schroeder said, adding the bank’s growth was already fast and he was trying to limit its speed.

KfW, effectively a government-backed agency, provides funding for a whole range of projects as well as export and shipping finance, a business lots of commercial banks have pulled back from because of funding difficulties and a need to conserve capital to meet new regulations.

Last month, Germany’s second biggest lender Commerzbank said it would wind up its ship finance unit as stricter liquidity requirements force it to cut back on capital-intensive activities. Commerzbank is following in the footsteps of other banks such as Societe Generale, BNP Paribas or UniCredit.

Prospects are uncertain for the shipping industry, where a glut of vessels and a credit squeeze is making life difficult for even the strongest shipping groups.

KfW’s Schroeder expects new groups of investors like insurers, pension and infrastructure funds to come in as lenders in the future and take a greater share of the market for long-term project financing.

While he expects enough funds to be available for financing real estate and infrastructure projects, he believes that a credit crunch in certain sectors could evolve.

“In many areas, we will see a shortage of long-term loans,” Schroeder said. He added that this was a result of the difficulty of banks to secure long-term refinancing for themselves.

Project financing, which is usually secured by the project assets and repaid from their cash flow, is commonly used in the transport, energy, mining and telecommunications industries.

Schroeder also expects a flurry of banks to withdraw from investment and retail banking.

“I believe that short-term, say five years from now, the number of globally active investment banks will have decreased”, Schroeder said, echoing similar remarks by Deutsche Bank co-CEO Anshu Jain. KfW, which has a shipping book of 14 billion euros ($17.14 billion), is also wary of attracting criticism from the private sector if it moves into shipping in a big way.

Commercial banks have already criticised the high level of state interference the aircraft financing business. Bertrand Grabowski, head of the aircraft financing unit of Germany’s DVB Bank one of the world’s top five banks of the industry, told Reuters: “There is an element of permanent (state) support that should not exist.”

“In my view, ECAs (government-backed export credit agencies) should fill a gap, when banks or capital markets cannot supply enough loans. That amount can go up in times of crisis but should go down to a minimum in normal years. But that’s not the case at present”, he said. ($1= 0.8170 euros)