More consolidation within Germany’s Landesbanken sector both overdue and welcome

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With a union of Commerzbank and Deutsche Bank still in the ether, the future of NordLB has moved centre-stage. Are Germany’s Landesbanken about to enter a new stage of consolidation as the notion of a public-sector banking behemoth gains traction?

Discussions between potential external investors and NordLB’s regional state owners have been taking place over the past few months as a comprehensive plan takes shape to improve the capital ratios of the bank, which has been beset by shipping NPLs. The market expects NordLB to be borderline in the EU stress tests, or even need more capital.

A takeover by Frankfurt-based Landesbank Hessen-Thüringen (Helaba) seems to have caught the imagination of the market and, according to media reports, of regional officials too. Media reports talk of future additional add-on mergers involving DekaBank, LBBW and Berlin Hyp to form, over time, Germany’s second largest banking group.

Private bidders are also interested in NordLB. Commerzbank has reportedly made a non-binding bid; so, according to reports, have private equity firms Apollo, Cerberus and Advent. “A merger of NordLB into Helaba would be a very positive development indeed,” said Sam Theodore, team leader for financial institutions at Scope Ratings in a short commentary out today. “It would address one of the remaining relative weaknesses within the Landesbanken sector, namely NordLB, which has faced several challenges through the post-crisis years.

“A second wave of consolidation within the public banking sector to include an enlarged Helaba, LBBW, and Deka – and ideally BayernLB as well – may not emerge in the short term, as none of the players is in a particularly weak position financially or with respect to its business model,” Theodore continued. “But the chance of the ultimate ‘one Landesbank to include all Landesbanks’ is far from non-negligible. If a true and more determined process of consolidation were to take place within the German Landesbank sector, it would represent a long-overdue strengthening of the public banking sector in particular, and of the German financial sector in general.”

Theodore says the highly fragmented structure of Germany’s public banking sector – a multitude of regional Landesbanken, regional development banks and cohorts of larger and smaller domestically-focused Sparkassen – has become increasingly obsolete and ill-equipped to support the export-oriented German economy.

“One single very large wholesale institution – encompassing the entire range of activities, from domestic and international corporate lending to capital markets activities and asset management – would significantly strengthen the public-sector pole of Germany’s banks and represent an essential step from the past and positioning for the present,” Theodore said. “And not a moment too soon, as the next step should clearly be to re-position the core entities of the public-sector financial system – the Sparkassen – into the digital era.”

“Ideally, one single all-encompassing wholesale subsidiary (the merged Landesbanken) alongside a smaller number of financially healthy and interconnected Sparkassen would plausibly represent one of the strongest and largest financial groups in Europe – something that Germany has owed the Continent for some time.”