A restructuring of the German banking system, particularly of the landesbanken, is increasingly being discussed, and the European Commission recently made a critical intervention. In a decision revealed Oct. 19, the EC deemed that HSH Nordbank AG can receive further state support but must be privatized by its majority state owners, the länder of Hamburg and Schleswig-Holstein, by 2018.
If a purchaser is not found, HSH Nordbank would have to follow the earlier example of WestLB and move into runoff.Handelsblatt suggested that the likeliest purchaser would be another landesbank, perhaps sparking a wider consolidation of the sector.
Speaking to SNL Financial, Neil Smith, a bank analyst at Bankhaus Lampe, and Christian Harmann, an analyst at Hamburger Sparkasse, expressed concern about the long-term profitability of the landesbanken. The issue is borne out by figures from the Bundesbank and SNL.
From 2010 to 2014, the landesbanken recorded a positive post-tax ROE just once, managing 2.8% in 2012. In 2014, the aggregate post-tax return was negative 1.5%, and 2008 and 2009 were awe-inspiringly bad. By contrast, the raiffeisenbanken, or credit cooperatives, have managed double-digit returns in three of the past five years and were above 8% in the other two. Over the past decade, by contrast, the landesbanken have come close to double figures just once.
Germany has long given industry precedence over bank profits, and the landesbanken look to be the most egregious example of this approach. It was particularly true when the landesbanken enjoyed a state guarantee that gave them triple-A ratings, yet their poor interest margins suggest that they are still driving down the cost of credit.
Landesbanken are regionally structured and based, acting as the centralized wholesale and commercial banking arm of the sparkassen to which they sometimes partially belong. The landesbanken are significant lenders, accounting for around one-fifth of loans in Germany. Increasingly, however, they are entering each other’s regions, not least in commercial lending. This competition keeps credit costs very low.
