trending Market Intelligence /marketintelligence/en/news-insights/trending/QCGViRbTY-1gb9rR8lgZjQ2 content
Log in to other products

Login to Market Intelligence Platform

 /


Looking for more?

Contact Us
In This List

Bank M&A to be key theme in Germany in 2019, amid talk of 'super landesbank'

Banking Essentials Newsletter - November Edition

University Essentials | COVID-19 Economic Outlook in Banking: Rates and Long-Term Expectations: Q&A with the Experts

Estimating Credit Losses Under COVID-19 and the Post-Crisis Recovery

StreetTalk – Episode 70: Banks' Liquidity Conundrum Could Fuel M&A Activity


Bank M&A to be key theme in Germany in 2019, amid talk of 'super landesbank'

Mergers are set to be a central issue in the German banking sector in 2019, with talk persistent about possible large-scale tie-ups among the privately owned giants such as Deutsche Bank AG and Commerzbank AG as well as the state-owned landesbanken.

The sector is highly fragmented, and the number of domestic credit institutions is far higher than in other European countries. ECB data shows that Germany had 1,584 banks as of Nov. 30, 2018, followed by Poland with 646 and Austria with 547.

"There is a misalignment between the strength of the German economy and the relatively weak, fragmented structure of the banking system," Sam Theodore, managing director at Scope Ratings, said in an interview.

SNL Image

Consolidation has been an ongoing theme, but has become more prominent over the past two years. Deutsche and Commerzbank have frequently been tipped as potential acquisition targets due to their weak market capitalization, and in 2018 there has been much speculation about the fate of Norddeutsche Landesbank Girozentrale, or NordLB.

NordLB

Hanover-based NordLB is looking for some €3 billion in fresh capital as it struggles to maintain a huge shipping debt portfolio riddled with nonperforming loans, and a partial sale of the bank is planned. Peer landesbanken such as Landesbank Hessen-Thüringen Girozentrale, or Helaba, and Landesbank Baden-Württemberg, or LBBW, were supposed to come to NordLB's rescue to fend off private equity bidders and keep the group within the public bank sector.

The landesbanken act as central institutions for domestic public banks, and are partly owned by the German states and regional savings bank associations. The latter are organized and represented by the German Savings Banks Finance Group and the German Savings Banks Association, DSGV.

The finance group has a deposit guarantee scheme that covers all savings banks, or sparkassen, and the landesbanken. Private ownership of a landesbank would mean taking it out of the scheme, which is considerably larger than the deposit insurance scheme of the German private commercial bank association BdB.

Furthermore, the main objective of savings banks is to ensure their services are available to all citizens across the country and not chase higher profits. Under a private owner, this objective will change. Even though the privatization of HSH Nordbank AG in early 2018 was successful, many believe it is not a desirable option for other sector institutions.

Losing NordLB and other landesbanken to the private sector is an ongoing concern for the DSGV, as it would reflect the organization's inability to manage the savings banks sector and ensure its profitability in the future, according to Theodore. DSGV would prefer to keep NordLB in the public sector even though its shareholders are not in a position to participate in its recapitalization and need to find external funding, he said.

A majority private ownership is a possibility for NordLB, as the only remaining bidders for the bank are private equity funds, including Cerberus Capital Management LP and Centerbridge Capital Partners LP. Initially, the state of Lower Saxony insisted on keeping a majority stake in the bank, but later on it said the sale of a bigger stake to a private investor is not out of the question.

'Super landesbank'

This increased the push for another bank and particularly, a landesbank, to buy part of NordLB. Frankfurt-based Helaba entered the bidding for its northern peer in late October, which triggered talk of a potential so-called "super landesbank."

The discussion revolved around the gradual merger of NordLB, Helaba and LBBW with state-owned asset manager DekaBank Deutsche Girozentrale and public mortgage group Berlin Hyp AG, which would create a new domestic retail banking giant and the second-largest German bank by total assets.

The combined total of assets of NordLB, Helaba, LBBW, DekaBank and Berlin Hyp stood at €711.1 billion as of Sept. 30, compared to Commerzbank's €493.2 billion and Deutsche Bank's €1.38 trillion.

Helmut Schleweis, president of the DSGV, confirmed in a Dec. 13, 2018 interview with Bloomberg that talks about various options for a landesbank super-merger are still ongoing, although other reports suggest that talks between NordLB and Helaba have broken off.

SNL Image

Pros and cons

Creating one large wholesale arm of the Savings Banks Finance Group would be an optimal option as it would support further consolidation within the public banks sector of the German system, and would create a large, stable retail bank in Germany, Theodore said.

The key barrier to the merger is political interest, as some of the federal states will have to relinquish their control of the landesbanken.

Some states have already reacted negatively to the plan. A finance ministry spokesman in Baden-Württemberg, the home state of LBBW, told German media at the end of October that the state does not like the idea at all.

One of the reasons for the states' cautiousness could be the sheer size of the merged entity, which would be a "too big to fail" institution and thus a bigger burden for its state owners if it runs into trouble, German economist Markus Demary said in an interview with n.tv.de on Dec. 1, 2018.

A complicated ownership structure could also cause problems, according to Elisabeth Rudman, managing director and head of the EU financial institutions group at rating agency DBRS.

On the other hand, a key driver would be efficiency gains as the larger entity could provide services in a cost-effective, low-risk way, Rudman said.

"A bigger balance sheet would allow a merged entity to take on bigger single creditor or sector exposures without necessarily increasing risk," she said in an emailed comment.

SNL Image

See a section dedicated to financial highlights for your bank. To do so, search the company in the top search box and go to the "Financial Highlights" section, housed under the Templated Financials on the left-hand panel. Here is an example for Bayerische Landesbank AöR.

Click here to set-up real-time alerts for data-driven articles on any region of interest.