German Banks Grapple With Change

The planned merger of Italy's Unicredito with Hypovereinsbank, Germany's second-largest bank, created a stir in banking circles in Germany.

Josef Ackermann, head of Deutsche Bank, stressed recently on German public television that a takeover of the German banking star was out of the question. Instead, Germany needs at least one strong bank with global success, Ackermann said, adding that it be might worth while for Deutsche Bank to aim for a takeover itself.

There's little doubt that speculation is growing after the HVB-Unicredito merger, fuelled by the fact that the German banking sector will face dramatic changes starting mid July this year.

According to a European Commission banking decree that will take effect next month, state guarantees for public banks that allow them to enjoy relatively inexpensive borrowing costs and generally give their bonds AAA ratings, will be abolished. Brussels maintains that the state guarantees violate the EU's fair-competition regulations. Thus, federal states and municipalities in Germany will in future no longer be obliged to act as guarantors for public banks in the event of default.

Landesbanken face unsure future

Professor Thomas Hartmann-Wendels, a banking expert at the University of Cologne, said that while the change will hardly dent savings banks or Sparkassen and Landesbanken, which fall into the second tier of the savings bank group, will be badly hit by the decree.

"The abolition of state guarantees certainly makes sense because there was an element of distorted competition in some areas," Hartmann-Wendels said. "It will hardly have any consequences for the normal savings banks but it definitely will for the Landesbanken, which don't have a retail branching system and don't refinance themselves through savings or deposits of the customers but rather through a high degree of foreign capital from international capital markets."

"They (the Landesbanken) will have to pay significantly more to borrow money because this first-class credit rating that they had thanks to the state guarantees will no longer be valid in the future," he added, but rejected the idea that the separation of individual sectors in the German banking landscape was no longer in synch with the era of globalization.

"I think that even in the globalization era there is a need for local presence and local knowledge of things at hand," he said. "And that can be especially well represented through the savings banks and cooperative banks that are anchored in regional areas. This local presence definitely has its own value and makes sense even today."

There are fears too that without the protective cover of state guarantees, Landesbanken may flounder and be forced to seek merger partners. This week the Hanover-based Nord LB Landesbank is reported to be creating a joint banking venture with Norway's DnB NOR ASA with a Baltic Sea focus.

German banks not attractive to foreign ones

However, the banking expert sees no danger of a repeat of HVB's recent takeover in the German banking landscape despite mounting concerns about mergers and sales.

"I don't see German banks endangered by takeovers," he said. "HVB was a special case -- it had big problems and was squeezed into a corner. Besides, the business models of both the banks (HVB and Unicredito) complemented each other.

"But I don't see that danger with other banks. The German banking market is not at all attractive for foreign banks because there are relatively slim margins here due to tough competition."