Bad Bank HSH Nordbank sold to private equity group, ending sad chapter in German banking

The sale of the state-backed bank that foundered on shipping loans highlights once again the weakness of the sector in Germany.

Hamburg and Schleswig-Holstein got in just under the wire to meet a European Union deadline for selling the troubled HSH Nordbank to a group of US investors, but the sale represents a bittersweet ending for a sad saga that shows German banking in a bad light.

The €1 billion purchase price was more than the state owners could have hoped for a year ago. But it hardly makes up for the €10 billion-plus the two governments have poured into the bank to bail it out after an ill-advised foray into shipping loans that made HSH Nordbank the global leader in maritime finance but nearly sunk it when the sector went into a slump. Total losses could reach €14 billion depending on whether the state has to pay off guarantees.

The investor group, headed by private equity funds Cerberus and J.C. Flowers, are acquiring a bank that will effectively be cleansed of remaining bad loans. Bank management under CEO Stefan Ermisch has worked successfully over the past year to reduce the number of bad loans with those remaining transferred to a holding company that remains in state ownership.

We were able to keep the losses for the states as low as possible. Olaf Scholz, Hamburg mayor

“With the privatization, we were able to keep the losses for the states caused by the irresponsible expansion strategy of the bank in the years 2003 to 2008 as low as possible,” Hamburg Mayor Olaf Scholz said, putting the sale in the proper perspective. Mr. Scholz is the acting chairman of the national Social Democratic Party and is reportedly in line to become finance minister and deputy chancellor in Chancellor Angela Merkel’s new government.

The unhappy saga of HSH Nordbank, created through the 2003 merger of two state banks, fits all too well into the troubled history of German banks. There is the chronic weakness of the “Landesbanken,” the state-backed banks that act as lenders to the states and clearers for local savings banks, which has left a trail of wreckage over the past several decades (WestLB, Helaba, BayernLB all had their brushes with scandal and insolvency).

But there is also the weakness of the country’s largest private sector banks, Deutsche Bank and Commerzbank, the two survivors of a proud “big bank” tradition that crumbled once they ventured outside of their cosseted market into global competition. The financial crisis of 2008 exposed the also-ran deficiencies of their international expansion and their weak capital bases. They both remain hobbled by past mistakes and involved in never-ending reorganizations.

Nonetheless, the private equity investors clearly see opportunities tapping into the financial sector of Europe’s biggest economy. Cerberus has also taken stakes in Deutsche and Commerzbank, as well as acquiring and restructuring Austria’s Bawag bank and using it to buy Südwestbank in Stuttgart. J.C. Flowers paid €1.25 billion for a 27-percent stake in HSH Nordbank in 2006 and watched it shrink to 5 percent with the subsequent bailout. Golden Tree, Centaurus Capital and Bawag are also part of the buyout group.

For his part, Mr. Ermisch put a positive spin on the sale. “A new era is beginning for our bank,” he said. “Our future owners belong to some of the experienced financial investors in the banking sector.”

The deal requires approval of the two state parliaments as well as German and EU authorities. Assuming all goes as planned, HSH Nordbank will vanish from the face of the earth: As a condition for not pulling the plug on the bank before the February deadline, the EU said it must change its name within three months of the sale.

Frank Dorst covers banks for Handelsblatt from Berlin. Michael Maisch is deputy finance editor based in Frankfurt. Darrell Delamaide is a writer and editor for Handelsblatt Global based in Washington, DC. To contact the authors: [email protected], [email protected], and [email protected].