Dark Days for German Banks

Commerzbank's latest revelation this week that its shares have fallen to their lowest level in over 20 years has added to the already depressive state of the German banking industry. News of the mass sell-off of shares comes after Standard and Poor's, the credit rating agency, slashed Commerzbank's credit rating due to fears about the bank's finances.

With the top German banks shedding jobs like a sinking ship bails water, the news that the country's third-biggest publicly listed bank has lost the confidence of its shareholders deals yet another blow to the ailing money institutions.

Commerzbank shares fell more than 7 per cent to 5.04 euro this week after creditors said that the fall in the value of the bank's equity reserves would destabilise its financial flexibility.

Signs indicate rival banks are reluctant to do business

The ebbing confidence of its shareholders was mirrored by that of Commerzbank's competitors in the sector as signs emerged that rival banks were becoming less inclined to do business with Commerzbank and the other German banks, especially when it came to dealing with credit derivatives.

Commerzbank maintains that relations with traders of derivatives have not been damaged by the news of falling shares and the current instability in the German money market, despite having lost more than 71 per cent of its stock market value in the past six months.

The bank is also adamant that relations with other banks remain stable in other areas. In the important inter-bank lending market, where overnight loans from one bank to another take place, Commerzbank treasurer Rudi Duttweiler told Reuters news agency that business was continuing as normal.

"I wouldn't say we're being treated differently by other banks. I don't see us being treated differently on the money market side," he said.

The slump in the bank's equity portfolio, the rising cost of maintaining unpaid loans and talk of big trading losses have done little to dispel concerns regarding Commerzbank's operating performance in recent weeks.

It has been a bad year so far for German banks, with radical cost-cutting measures forced upon them by the global economic recession, resulting in drastic reductions in staff numbers.

Job cuts at the top German banks shake the industry

In June, Deutsche Bank announced it would cut 13,000 jobs, meaning one in seven current Deutsche Bank employees would be looking for alternative employment by the end of the year.

At the end of 2001, Deutsche Bank employed some 95,000 people. This year has already seen huge reductions to that number, and by the end of 2003, the workforce will be significantly lower. Germany’s largest bank announced the cuts as part of chairman Josef Ackermann's plan to save 2 billion euro ($1.9 billion) by the end of next year.

Other job losses came at the Dresdner Bank last month after its merger partner, the insurance company Allianz, outlined measures to clean up the under performing bank and recoup some of the losses on its own balance sheet attributed to Dresdner's failings.

The 11,000 job cuts were announced as part of the Munich insurer’s Turnaround 2003 strategy which would bring Dresdner back into the black and shore up its stock price. Dresdner Bank announced losses of 1 billion euro in the first quarter of 2002, 800 million euro of it in its corporate banking sector.

Speaking at a joint presentation with Allianz chief Henning Schulte-Noelle last month, Dresdner Bank Chairman Bernd Fahrholz said of the current climate: "We are dealing with a real crisis. We find ourselves in a very fragile situation."

'Black September' results and news dealt huge blow

Meanwhile, in a month that could by described as 'Black September' by the industry, HypoVereinsbank, the second largest in Germany, was contributing to the unemployment figures by consigning 9,100 members of staff to the dole. The bank also announced the first operating loss in its history

The true extent of the current weakness of the capital markets was highlighted by HypoVereinsbank's presentation of its half-yearly report which showed an operating loss of 89 million euro ($89.4 million) after profits of 330 million in the first quarter and 286 million in the second quarter of 2002. The loss would have been accompanied by a net loss had it not been for the exceptional gains.

Also that month, Sparkasse Berlin added to the general feeling of impending doom in the sector when it announced that it planned to close 21 of its 178 branches. Further losses in the city were reported by the Berliner Bank, which said it had made it own plans to close 20 of its banking facilities.

With trepidation creeping into the banking community with regard to the worrying state of German banks and with shareholders and customers showing clear signs of no confidence, it seems that the long journey to stability is far from over.