July 27th, 2010
German Landesbanks under stress
German Landesbanks under stress: Reuters 21.07.10
Hit hard by the credit crisis, Germany's eight landesbanks are a focus of concern in the run-up to European stress tests of lenders' financial strength, although huge state bailouts many already got will likely help them pass. Nestled in the heart of the Rhineland far from London or New York, WestLB came to symbolize the bold strategy that converted many of the state-controlled regional lenders into sprawling groups with ambitions to be global players.
Owned by states, municipalities and local savings banks, landesbanks are now struggling to find a viable business model as they seek to reshape themselves for a more modest future. "The landesbank sector remains under intense pressure to adapt," Voigtlaender, an industrial engineer, had said in May. "We have done our homework and will contribute to making the landesbank sector fit for the future," he added.
Voigtlaender, who climbed the ladder at the DZ Bank cooperative, has spent months cutting down WestLB's risk positions and transferring 77 billion euros ($99.5 billion) in toxic assets to an off-balance-sheet "bad bank." The goal is to make the Duesseldorf-based lender stable, predictable and far less flashy than it has been in the past. The bank's slow demise followed years of mismanagement and shoddy risk oversight as Voigtlaeder's predecessors amassed billions in losses through risky deals which led to the departure of a raft of chief executives. Landesbanks for years were able to take high-risk bets on international markets, relying on state guarantees to borrow cheaply and backstop potential losses. But in 2005 the landesbank groups -- which at the time supplied nearly a quarter of business loans in Germany -- lost this valuable backstop as the European Union intervened. The result -- higher lending costs, lower margins and more competition -- forced them to alter their business model. In WestLB's case that meant taking even more risks, but this time without a safety net. The provincial bank pushed into investment banking after the breakdown of the "Deutschland AG" system of corporate governance that had let landesbanks become fiefdoms for a cabal of local politicians and executives in postwar Germany.
Friedel Neuber, who headed WestLB in 1981 and stayed at the helm for 20 years, was known in his home state of North Rhine-Westphalia as "the puppetmaster" for his ability to pull strings in business and political circles. The influential banker also served as supervisory board chairman at utility RWE (RWEG.DE), tourism and logistics group TUI AG (TUIGn.DE) and engineering outfit Babcock Boersig. He backed the merger that created ThyssenKrupp (TKAG.DE), and helped turn RWE into an international player. Under Neuber WestLB transformed itself as well from a lender providing cheap financing to the local economy into a global player active in investment banking and private equity.
INVESTMENT BANKING PUSH
WestLB bought the old-school U.K. brokerage house Panmure in 1996 as part of an expansion into investment banking. It marked the start of a tradition of hiring star bankers and taking outsized bets, but also of falling down on risk management. WestLB bankers such as Robin Saunders became celebrities in their own right, and began making waves internationally. The glamorous female banker and trained dancer made waves by spending 400,000 pounds ($611,500) on her 40th birthday party in a Florentine palace. Lauded as a "hot-shot blonde financier" by an adoring British press, she pursued a string of exotic international deals, including a high-risk loan to U.K. television rental company Boxclever. The loan turned sour, costing WestLB 400 million euros in 2003 and proved a key factor leading to the dismissal of Juergen Sengera, who had by that time become WestLB's chief. In 2007, WestLB traders lost 600 million euros on a proprietary trading bet speculating on the price spread between Volkswagen (VOWG_p.DE) preferred and ordinary shares.
And at the height of the credit crisis in 2008, WestLB's owners -- local savings banks and the state of North Rhine-Westphalia -- were forced to shoulder a 3 billion euro rescue after subprime-related assets began to crater in value. Voigtlaender, who is from the sleepy medieval market town of Hildesheim, believes he is on the right track toward taming WestLB's dependence on high-level risk taking. "WestLB now is a profitable bank with a stable earnings basis from the business with its clients," he said.
UNDER STRESS
The landesbanks were originally set up with a public-sector mandate to promote regional development. But WestLB, SachsenLB, LBBW LBBW.UL, BayernLB BAYLB.UL and HSH HSH.UL stumbled between 2007 and 2009, each requiring billions of euros in bailout funds after getting into trouble investing in risky products tied to subprime mortgages. The European Commission has ordered the rescued landesbanks to overhaul themselves by abandoning high-risk businesses and shrinking their balance sheets. In WestLB's case, the EU even ordered a change of ownership by 2011. The landesbank sector still has some heavy lifting to do.
Barclays Capital credit analysts said Spanish cajas, German landesbanks and Greek banks are most likely to fail the stress test, or to be forced to raise new capital. Analysts at Credit Suisse estimate the landesbanks will require 31 billion euros of fresh funding. In addition to setting up its bad bank, WestLB is seeking to sell further assets including property lender Westimmo. But WestLB may have to be quietly wound down unless a buyer is found, bankers close to the matter have said.
(Editing by Michael Shields)