The death knell has been sounded many times before: Germany’s unique and myriad network of regional, state-owned banks (Landesbanken) has been brought to its knees several times since the 2008 financial crisis.
Bad loans led to the collapse of two of them and to the bailout of many more. Those that survived have been struggling ever since, with critics, including the Organisation for Economic Co-operation and Development, calling for major consolidation.
The banks' fight for survival will only get harder this year. Their cozy relationship with Germany’s states, which founded the Landesbanken in the 19th century to foster regional development, could be coming to an end.
So will 2015 be the year that finally breaks the Landesbanken?
HSH Nordbank, a regional lender in northern Germany, could be a test case. The bank barely survived 2014, scraping through the stress tests of the European Central Bank – a comprehensive examination of the health of Europe’s banks. It only passed because of an increased balance sheet guarantee from its majority owners, the states of Hamburg and Schleswig-Holstein.
A worst-case scenario for HSH is liquidation.
Now, the European Union’s competition watchdogs are about to examine whether the bank’s business model passes muster. The question facing Brussels is whether the state guarantees are an unfair competitive advantage.
A worst-case scenario for HSH is liquidation. In a bid to become leaner, the bank has already decided to cut a fifth of its workforce, about 500 jobs.
But there is another reason for HSH to be on edge – its debts.
"In the year 2015, €18 billion ($21.5 billion) of default guaranteed bonds will mature," HSH boss Constantin von Oesterreich recently told Handelsblatt.
Mr. von Oesterreich said this is a major strain at a time when banks are struggling to make ends meet because of extremely low interest rates. He promised that the bank would be “maintaining corresponding liquidity reserves" to make the payments.
HSH is not the only state-owned bank that has to come up with enormous sums this year. Moody's, the rating agency, recently estimated that guaranteed debt securities of €175 billion were due across the public banking sector in 2014 and 2015.
In the year 2015, €18 billion ($21.5 billion) of default guaranteed bonds will mature. Constantin von Oesterreich, HSH Nordbank chief
It is a legacy stemming from the turn of the millennium, with the debt a result of the end of comfortable default guarantees for bonds. It marks a final farewell to the old style of regional banking in Germany.
Up until July 2005, the regional banks were able to issue securities that were guaranteed by the federal states, their co-owners, along with Germany’s savings and loan banks. The E.U. Commission regarded this as unfair and ruled the default guarantees illegal in 2001. It gave banks a four-year transition period to sort the problem out.
The consequence: During the period the regional banks continued to raise billions on the capital market, as their bonds were still protected against default. The bonds carried a maximum term of 10 years – the final due date was therefore 2015.
This glut of borrowing was also the main reason for the ensuing difficulties of many institutions: In many cases they invested the money in complex securities and credits, including in the U.S. subprime mortgage market, only to find the values of these securities collapse in the 2008 financial crisis.
Taxpayer money was needed to rescue HSH, as well as the Regional Bank of Baden-Württemberg, or LBBW, in southern Germany, and the southern German Bayerische Landesbank. The Westdeutsche Landesbank, or WestLB, based in Düsseldorf, was put into liquidation.
A substantial part of the default guaranteed securities are maturing in 2015. For LBBW alone, Moody's puts the sum at about €30 billion.
Despite the high sums involved, industry observers think the regional banks have the repayment situation under control. Moody's sees no refinancing gaps, and nor does LBBW, which declined to specify the exact amount of bonds outstanding.
"At first glance, the amounts look very high in comparison with the balance sheet total," said Roger Schneider, director and bank analyst of the rating agency Fitch. "But they are counterbalanced by receivables, which are also due.”
Jörg Birkmeyer, an analyst at the Frankfurt-based cooperative bank DZ-Bank, said: "The regional banks are well prepared. They also invested most of the capital they raised to mature at the same time."
One question remains interesting for 2015, however: Just how supportive of the institutions will their principal owners – the states - remain?
"It will be interesting to see if the federal states are just as ready in the future to throw a lifeline to regional banks which get into difficulties," said Mr. Birkmeyer. "Investors will be looking at that very closely and asking if the support of the federal states is likely to be less.”
It will be interesting to see if the federal states are just as ready in the future to throw a lifeline to regional banks which get into difficulties. Jörg Birkmeyer, Analyst, DZ-Bank
Investors are particularly focused on the HSH, which, being based in the port city of Hamburg, has been most affected by an ongoing crisis in the global shipping industry.
Still, according to Moody’s, the loss of state guarantees does not necessarily mean it will be more expensive for the regional banks to refinance themselves.
Low interest rates are one reason for this. It is also helpful that the regional banks have reduced the size of their balance sheets. Instead of buying up complex securities, many have now gone back to traditional business models – financing companies, real estate and other projects.
This focus also has its risks, though. Unlike other banks, the Landesbanken are mostly restricted to doing business in the specific states that back them. In particular, the highly competitive business loan market also makes the banks more vulnerable.
"Regional banks are now more dependent on the development of the German economy than in the past,” Mr. Schneider said. "Unlike many competitors, they can’t just avoid difficulties by doing more business abroad." A problem could arise for some banks "if big companies are hit by a crisis.”
This is not a problem just yet as most banks have been able to manage well in the weak but still growing economy.
But Mr. Birkmeyer warned: "If there is an acute recession in Germany, then those banks with a high proportion of their credit portfolio in Germany will have a problem – and that includes the regional banks.”
Elisabeth Atzler is Handelsblatt's banking correspondent, Chris Cermak is an editor at Handelsblatt Global Edition with a background in bank reporting. To contact the authors: [email protected], [email protected]