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Exclusive: ECB pressures German bank HSH to cut bad loans in half - sources

The headquarters of the European Central Bank (ECB) is pictured in Frankfurt, Germany, June 28, 2015. REUTERS/Ralph Orlowski

By Andreas Kröner

FRANKFURT (Reuters) - The European Central Bank (ECB) is pressing German lender HSH Nordbank to cut in half its bad-loan ratio, as the supervisor steps up reform pressure on weak banks, two sources familiar with the matter told Reuters.

The pressure signals how serious the euro zone’s newest and biggest banking supervisor is in restoring health to the region’s banks, which lag far behind U.S. rivals in recovering from the crisis.

HSH, which was rescued in the financial crisis, has some 16 billion euros ($18 billion) in ailing loans that make up some 22.8 percent of its overall loan book. The ECB seeks to have the bank cut that to between 10 and 12 percent in coming years, the sources said, speaking on the condition of anonymity.

HSH and its majority owners, the German states of Hamburg and Schleswig-Holstein, have already said they hope to spin off problem loans into a separate entity, leaving HSH with a clean balance sheet. But the ECB focus on its balance sheet adds to pressure on HSH to complete the process and underscores that its success or otherwise will be scrutinised by the central bank.

Having last year completed the most exhaustive bank stress tests ever conducted in Europe, the ECB is stepping up pressure on banks over issues such as their business models and level of bad loans.

The new banking watchdog has sometimes put more pressure on banks than they had been accustomed to under national regulators, before the ECB donned the mantel of regional supervisor in November 2014.

Targeting the non-performing loan (NPL) ratio in particular would represent a new weapon in the ECB arsenal.

“The ECB Banking Supervision considers non-performing exposures one of the main risks and therefore a supervisory priority for 2015,” a spokeswoman for the regulator said, declining to comment further.

HSH declined to comment.

In June, the ECB’s leading supervisor Daniele Nouy said the large stock of problem assets at some euro-zone banks was a priority and it had the potential to hinder healthy lending.

HSH is still awaiting permission from the ECB for its proposals to purge its books of past problems, such as troubled shipping portfolios, in part so it can cease paying high fees to its state owners for financial support.

That support prompted a wrangle with the European Commission for distorting competition in the financial sector.

The German bank in May urged its owners to approve its proposed restructuring proposals but did not give any details of the structural changes being considered.

Banks can usually sell off problem loan portfolios but only at a steep discount.

(Additional reporting by Thomas Atkins; Editing by Arno Schuetze and David Holmes)