Many Germans feel that whoever wins Sunday’s election, they should not fund any more bailouts of fellow European countries, whose errant banks are a particular bugbear for Berlin.
But a cornerstone of Germany’s own banking system, which has already received state bailouts, is facing fresh challenges, increasing the need for reforms which will be very hard for any new government to deliver.
Founded in the 19th century to promote regional development, the publicly-owned Landesbanken play a hallowed role as low cost lenders to local projects and the ‘Mittelstand’, the small and midsized firms central to the Euro zone’s most resilient economy.
With combined assets of a trillion Euros, they account for 12 percent of the country’s total banking assets, and 3 percent of Europe’s as measured by the European Central Bank (ECB).
The Euro zone’s steps towards banking union have triggered the toughest stress tests banks have ever faced and new global regulations impose higher capital demands particularly difficult for low-margin banks like the Landesbanken to achieve.
At the same time, their core business is threatened by increasing competition from international banks like France’s BNP Paribas, which want a bigger part of the action in Europe’s economic powerhouse.
Experts from the Organisation for Economic Cooperation and Development (OECD), ratings agencies and German academia say the best Landesbanken solution is restructuring to leave as few as two players with well-defined businesses.
The prospect appears remote, undermining Berlin’s reputation as the driver of European banking reform.
None of the five main Landesbanken – Hanover’s Nord LB, Munich’s Bayern LB, Stuttgart’s LBBW, Hamburg and Kiel based HSH Nordbank and Frankfurt’s Helaba – said they thought industry consolidation likely when asked by Reuters for this article.
As Gunter Dunkel, head of Nord LB and president of the Association of German Public Banks put it in comments to Frankfurter Allgemeine Zeitung: “I offer you a bet: neither in my working life or yours will someone take the immense economic and political risks of such a merger.”
The risks stem from the Landesbanken’s tradition of serving the savings banks and local authorities that own them.
For the municipality-owned savings banks, they provide wholesale banking services and investment products to sell on to customers. For the Laender, they support local businesses and regional projects, accounting for 15 percent of all German corporate lending.
Officials in the German administration say Landesbanken are not a source of major concern; where once their woes were a talking point at European finance ministers meetings, a source familiar with their discussions told Reuters the Landesbanken had not arisen recently.
Their top line numbers are comparatively strong, with capital ratios above the international average and four of the five biggest showing higher profits in the first half of 2013.
But experts say the figures belie a more complex reality. Return on equity – a key measure of a bank’s profitability – is lower for the Landesbanken than international peers.
More international competition could make margins even slimmer, as banks like Barclays and BNP look to Germany for growth that is lacking elsewhere in the eurozone.
Earlier this year, BNP Paribas’s corporate bank lowered its client threshold from companies with 500 million euros of annual sales to those with 250 million euros, putting them further into the Landesbanken’s core market
BNP’s sweet spot – and an area attractive to other foreign banks – is exporters with cross-border banking needs.
“It’s the largest economy by far in Europe, and the country with the highest share of exports in terms of GDP,” the head of BNP’s German corporate and investment bank business, Torsten Murke, said.
Fitch Ratings analyst Christian van Beek noted the Landesbanken’s public ownership means they do not need the high double-digit returns sought by other banks, so they can do lower margin business.
But low earnings power carries risks. In its 2012 Economic Survey of Germany, the OECD noted Landesbanken “remain vulnerable due to their low capitalisation and profitability and will be especially affected by the regulatory increases in capital requirements”.
One of its major sources of strategic investment is drying up. Several sources in savings banks, including Michael Auge, spokesman for Helaba’s 69 percent owner the Savings banks and Giro Association Hesse and Thuringia, told Reuters they would not invest further in the Landesbanken.
“There is a problem with the business model of Landesbanken in general, they often compete with private banks and it’s not obvious what public service function they provide, why they should be publicly-owned banks,” said Andres Fuentes, a senior economist with the OECD who is working on the 2014 Economic Survey of Germany.
His concerns are echoed by ratings agencies and analyst Montague, who said investors doubt Landesbanken’s purpose in life. “They need to restructure,” he added.
Announcing their results for the first half of 2013, the chief executives of HSH, Helaba, Nord LB, LBBW and Bayern LB all said their business models were sustainable and their efforts to cut costs and restructure were paying off, albeit against a difficult backdrop.
Several experts point to the differences between banks. The southern banks, LBBW, Bayern LB and Helaba are broadly seen as healthier than their northern rivals.
Sources in the Landesbanken sector insist the sector has not stood still as their crises unfolded.
When they hit problems, Landesbanken could have turned to a Joint Liability Scheme run by the Deutsche Sparkassen und Giroverband (DSGV), the umbrella group which includes the savings banks and Landesbanken and argues for consolidation.
But taking bailouts from the DSGV would have allowed it to change Landesbanken’s management and merge institutions. Instead, the states footed the bill for the bailouts themselves.
“There has been some restructuring, balance sheets have been reduced, the number of institutions has been reduced, but we think it’s not quite enough,” said the OECD’s Fuentes.
“We think there could be more consolidation to keep decreasing the risk of influence of individual states in the management of these banks.”