(Bloomberg Opinion) -- Attempts to accelerate the shakeup of German banking haven’t had much success in the past year. First, talks to combine two state-owned regional lenders fell apart; then Deutsche Bank AG and Commerzbank AG tried but (for good reason) were unable to find a way to make a merger work. Now a third combination is on the table.
This time too, any real excitement about needed consolidation in a deeply fragmented market is premature. Putting together a regional, public-sector bank, Helaba, with an asset management business, DekaBank, is but a baby step toward the industry’s restructuring. Plus political goodwill appears to be lacking still for the transformational, and expensive, adjustments needed to revive the companies’ profitability.
State-backed lenders control about 25% of the nation’s banking assets and cooperative banks another 10%, creating fierce, low-margin competitors to the third pillar of German banking: private commercial lenders such as Deutsche Bank and Commerzbank. Earning a decent return has become difficult for everybody.
A year ago, Germany’s state-backed lenders considered an ambitious plan to reorganize one part of the country’s public-sector finance sector: the Landesbanken, whose business models were shown to be deeply flawed by the financial crisis. Landesbanken invest money for local savings banks (or Sparkassen) and have ventured out internationally and taken on more risk. Weakened by losses on everything from toxic asset-backed securities to shipping loans, they’ve received several bailouts since the crisis.
Indeed it was a capital shortfall at one Landesbank, NordLB, that encouraged discussions last year to combine it with another, Helaba. Coming just after the first Landesbank privatization, of HSH Nordbank, the deal would have marked an important step in rationalizing these institutions. Ultimately, having one Landesbank catering to the nation’s 380 or so savings banks — rather than half a dozen — is probably sufficient.
Yet the NordLB plan needed the backing of the two federal states that control the lender, and local governments haven’t exactly been jumping at the chance to loosen their grip. Private buyers also walked away from a bid for NorldLB.
It’s no suprise then that the latest attempt at a big German merger goes in a different direction. Helaba is largely controlled by the savings banks rather than directly by local government and Deka is the asset management unit of the savings banks, making a combination easier to achieve (or at least that’s the hope). Having a new, bigger entity with about 260 billion ($286 billion) euros of assets might even attract other Landesbanken to join the club.
Still, this all still leaves the future of the ailing NordLB in the hands of the states of Lower Saxony and Saxony-Anhalt. Worse, the states are about to give it more cash in a rescue that could further distort competition, a violation of European Union state aid rules.
As things stand, the states will inject 1.7 billion euros into NordLB, with another 1.14 billion euros coming from the German Savings Bank Association (DSGV) and publicly owned savings banks. To stop it breaching state aid rules, the recapitalization must pass a so-called private investor test: The overhauled business needs to look like something a normal investor would back.
In fairness, the plan is ambitious. NordLB anticipates shrinking its balance sheet from about 150 billion euros to 95 billion euros, refocusing on its regional business and ultimately cutting its cost to income ratio below 50% by 2024. By European standards that would be an extremely efficient bank. The EU average cost-income ratio is closer to 70%.
The European Commission is still reviewing whether the plan adds up to state aid. It’s a tricky question; Brussels not letting the state entities salvage their own investment might be seen as discriminatory.
But if the greater good of German lending is the motivation, namely pruning an over-banked sector, you have to ask whether it makes sense to keep NordLB afloat at all costs. Berlin has taken a dim view when Italy has done similar with its lenders. A Helaba merger with Deka would be little consolation.
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Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.
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