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FT.com / Home UK / UK - Germany's Landesbanken face obstacles on path to consolidation

Germany's Landesbanken face obstacles on path to consolidation
By Ivar Simensen in Frankfurt

Published: August 27 2007 03:00 | Last updated: August 27 2007 03:00

LBBW's takeover of Sachsen LB will likely be followed by more consolidation in Germany's public bank sector, but power games among their owners are bound to complicate the process.

The liquidity squeeze in the capital markets has already had a lasting impact on the German banking sector. The rescue of Sachsen LB, after it was unable to provide credit facilities it had pledged to one of its investment funds, yesterday led to the Landesbank for the state of Saxony being sold to LBBW, its bigger peer.

Many banks have come under pressure to merge, after the most recent market turmoil has unveiled that they are too small and unprofitable on their own.

"I am convinced that we need a further consolidation in the Landesbanken," said Peer Steinbrück, finance minister, at the end of last week.

The Landesbanken have changed dramatically from their 19th century roots, when they were founded to support local business. For decades, the Landesbank was a cornerstone in the region's economy, acting as the core corporate lender and central bank to the local savings banks. But a few years ago the banks' position started to wane.

The banks were already facing rising competition from private and co-operative banks, the two other pillars of Germany's three-pillar banking system, when the economic downturn in 2002 sent bad loans surging. Two years ago the banks lost their state guarantees, which had allowed them to borrow at cheaper rates than their commercial rivals, creating savings they could pass on to their customers.

Falling profits at home forced the Landesbanken to change their business models and seek new revenue sources. Each bank chose a different strategy, but all started investing more in the capital markets, via investment vehicles that required little capital.

"It all stems from the end of the state guarantees," said a senior executive at one Landesbank, who declined to be named. "It changed the way they behaved. They went into more risky funds. It was a pattern across all Landesbanken, but some did it irresponsibly."

The varying degrees of success in establishing a new business model will dictate who dominates the consolidation process in the future. The largest players, Landesbank Baden-Würtemberg and Bayern LB, have clearly expressed their desire to consolidate.

The takeover of Sachsen LB will be followed by at least one deal.

WestLB is working on finding a partner, after its attempts to build a presence in investment banking have brought it into severe difficulties more than once.

Politicians in North-Rhine Westphalia had already decided to divest the state's stake in the bank when it lost more than €200m this year on failed speculation in the stock market.

As the deadline for potential M&A advisers to audition for WestLB expired at midday on Friday (August 24), Stuttgart's LBBW will again line up in the front line of suitors.

However, unlike in commercial takeovers, which are by and large decided by price, based on synergies, takeovers in the public banking sector are complicated by the diverging motives of the owners.

Political sensitivities and local history also make synergies hard to achieve. A merged WestLB-LBBW would have five corporate headquarters - in Düsseldorf, Münster, Stuttgart, Mannheim and Karlsruhe. Talks of a deal have already triggered protests by politicians worried their town will lose influence and jobs.

"The history of the Landesbanken sector has been about the battle between the local politicians and the savings banks associations," said a banker in Frankfurt.

In North-Rhine Westphalia, the situation is further complicated by an apparent power struggle between the two savings bank associations that together with the state own WestLB.

The Landesbanken can not even count on the support of its own trade association.

Despite all being members of the German savings banks association (DSGV), thesavings banks and Landesbanken are "far from a happy family," said another senior advisor to German banks.

"The savings banks associations are worried that LBBW could become too powerful," said a Landesbank executive.

Indeed Heinrich Haasis, president of DSGV, and Siegfried Jaschinski, chief executive of LBBW, have already clashed once this year, in the auction for Landesbank Berlin.

Copyright The Financial Times Limited 2007