German state bank KfW is considering expanding its lending to the shipping industry, stepping into a gap left by other European banks which have cut exposure to a sector struggling with one of the worst slumps on record.

“I can imagine increasing the volume of our ship business - if the risk-return profile is right,” Chief Financial Officer Bernd Loewen said at the sidelines of the bank’s annual press conference.

KfW, Germany’s third largest bank by balance sheet, already ranks among the top ten shipping financiers worldwide with a book of ship loans worth 14.5 billion euros ($19 billion). Last year the bank underwrote 2.5 billion euros in new shipping loans, up from 2 billion in 2011.

The shipping industry is facing difficult times because of the economic downturn and a glut of new ships ordered during the boom years before 2008. Charter rates have fallen below break-even levels. The tough conditions have already bankrupted several shipping firms and forced others to restructure.

A number of banks including Commerzbank, Lloyds and UniCredit have pulled back from the business, while others such as Germany’s HSH Nordbank aim to shrink their exposure.

Loewen said KfW would not buy shipping loan portfolios of other banks but could expand its financing of high-tech ships for the offshore wind and the oil and gas industries.

“I can also imagine underwriting more new loans if they are ECA (Export Credit Agency) covered,” he said.

ECAs are government-backed bodies that supply state guarantees for transport financing and facilitate loans to customers in certain countries that commercial banks often shun.

KfW, which mainly focuses on financing government programs, made a net profit of 2.4 billion euros in 2012 but is expecting to see earnings drop to about 1 billion this year, in part due to new provisions for bad ship loans.

Loewen said in a “stress scenario” KfW could face another 400 million euros in ship-related provisions. He said that in 2012 KfW put aside 384 million euros to cover those risks.

The bulk of the risks stem from a 1.5 billion euro exposure to closed investment funds—so-called KG funds—that buy ships and then lease them to big shipping companies.

“It will take another 2-3 years to clean up the KG fund sector,” Loewen said. He said efforts to pool ailing ships into larger units substantially increased the chance of recovering loans. (Reuters)