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NordLB makes progress with restructuring in Q1, but state rescue still uncertain

Germany's Norddeutsche Landesbank Girozentrale, or NordLB, further reduced costs and total assets over the first quarter, in line with its ongoing restructuring, but is still waiting on final regulatory approval for its state-backed recapitalzation.

The troubled state-owned bank needs the capital injection urgently in order to boost its common equity Tier 1 ratio, which has plummeted because of an accelerated disposal of bad shipping loans. The first-quarter CET1 ratio was 6.75%, down from 6.76% as of 2018-end and well below the regulatory minimum requirement of 10.6%.

Having booked high loan loss provisions on its rapidly deteriorating shipping portfolio since 2016, NordLB decided to speed up the reduction of its shipping book in 2018. In April, the bank announced its decision to exit ship financing entirely.

NordLB has received approval from the German regulator to maintain a CET1 ratio below the minimum requirement on a temporary basis but needs to bring the ratio to 14% by the end of 2019. To do that, it needs the €3.6 billion recapitalization package its owners agreed upon earlier this year.

Recap delay

Despite agreeing to the package, the federal savings banks association DSGV had misgivings just before the transaction was notarized May 10 and requested a delay, Handelsblatt reported May 28.

The reason for the DSGV's request was the association's concern that NordLB may need a further capital injection as the German bank supervisory authority had discovered deficiencies in one of the bank's securitization deals. The securitization was supposed to add 1.25 percentage points to its capital ratio, corresponding to a three-digit million euro amount. If this deal is not recognized by the regulator, NordLB would need to raise more capital.

In addition to the issues at home, NordLB's recapitalization is still undergoing a review by the European Commission, and without EU approval NordLB cannot receive the capital injection from its owners and the DSGV.

NordLB has had a good start to the year, having reduced costs and total assets without hurting new business and client relationships, CEO Thomas Bürkle said in a statement.

It reduced its total assets to €148.2 billion in the first quarter, and thus below the €150-billion mark for the first time ever. A year ago, the bank's total assets stood at €154 billion. NordLB's first-quarter administrative expenses fell 9% year over year to €265 million.

'Great challenge'

However, the ongoing restructuring of the bank remains "a great challenge" and restructuring costs are set to spike over the second half of this year, Bürkle said, reiterating the previous projection for an annual loss in 2019. NordLB booked €10 million in costs for restructuring and reorganization in the first quarter.

"The successful repositioning of the bank is currently a higher priority than the 2019 annual results," Bürkle noted.

The success of that repositioning remains fairly uncertain given the savings banks' unwillingness to provide more capital for the ailing lender. Although it has not come to that yet, even the possibility of another capital injection makes savings banks nervous and some are concerned that the current solution had been premature, a savings banks manager told Handelsblatt.

The state-backed recapitalization was said to be the preferred option of NordLB's majority owner, the state of Lower Saxony, as partial privatization would lessen its control over the bank, which would also have to exit the public banks' deposit guarantee scheme supervised by the DSGV.

The agreement on the state package ended a joint bid by Cerberus Capital Management LP and Centerbridge Partners LP for a stake in NordLB.