The headquarters of Landesbank Hessen-Thueringen, also known as Helaba, stand in Frankfurt, Germany. (Photographer: Hannelore Foerster/Bloomberg)

German Banks Are in Talks to Form Country's No. 2 Lender

(Bloomberg) -- A long-awaited consolidation of Europe’s largest and most fragmented banking market may finally be about to start.

In a move that could create Germany’s second-largest bank with nearly 700 billion euros in assets, the small saving institutions behind several big regional lenders are considering merging them in what could be the sector’s biggest deal in eight years, according to people with knowledge of the matter.

Under the plan, Helaba and NordLB would combine in a first step, and then merge with DekaBank and LBBW at a later stage, the people said. Deka is a central institution for the savings banks, or Sparkassen, that acts mainly as an asset manager. The people asked not to be identified because the deliberations are private.

The initiative comes amid evidence of concern that the country needs stronger banks to serve its export-oriented economy properly. Politicians such as Finance Minister Olaf Scholz have called for them to bulk up and become European champions. While that talk may be aimed more at struggling giants such as Deutsche Bank AG and Commerzbank AG, Germany’s smaller banks -- local co-operatives and state-owned savings banks, or Sparkassen -- are also under pressure to break with tradition and consolidate.

Early Stage

The initiative is being driven by Helmut Schleweis, the Berlin-based head of Germany’s savings banks association DSGV, one of the people said. Schleweis has raised the matter and had positive feedback from banking associations, national politicians, German regulator Bafin and the European Commission, one person with knowledge of the matter said.

He may face more resistance from the Landesbanks themselves, who have traditionally resisted being subsumed into a national organization, often relying on the support of regional and local governments, their co-owners, to defend their independence.

“The process begun by the owners of NordLB to attract investors has caused the DSGV to prepare options and actions that may be needed,” the association said in an emailed statement. “The deliberations are still at their beginning. No decisions have been taken in advance, and the possible results can’t be predicted at the present time.”

See this story for more on Germany’s overbanked market

A fifth and smaller bank, real estate lender Berlin Hyp, may also be combined with the other four, according to Handelsblatt. According to data compiled by Bloomberg, the five banks had total assets of some 682 billion euros at the end of last year. That would make it bigger than Germany’s second-largest listed bank, Commerzbank AG.

Officials for DekaBank, Helaba, LBBW, NordLB and Berlin Hyp declined to comment when contacted by Bloomberg.

Time Pressure

Time is pressing for the Sparkassen, whose small scale and weak profitability makes them particularly vulnerable to disruption from foreign lenders and fintech startups. It has also left them unable to support the Landesbanks, which they mostly own but no longer have the resources to support. HSH Nordbank AG was sold to a group of private equity investors earlier this year, and the much larger NordLB could be the next domino to fall.

NordLB is under particular pressure to raise its capital level because it went into this year’s EU stress test with the weakest balance sheet of any German bank participating. The results of the stress test are due November 2, and people familiar with the matter said they expect NordLB to fall well short of regulatory demands. The deadline for final bids from investors is November 28, one person with knowledge of the matter said.

Under the adverse scenario of the stress test, NordLB’s common equity tier 1 ratio -- a key measure of financial strength -- would fall to about 7 percent in 2020. By comparison, the European Central Bank has required it to keep a CET1 ratio of 9.55 percent this year.

The state of Lower Saxony, NordLB’s majority shareholder, has said it will present a solution for the capital problem by the end of the year. But its courting of outside investors has angered Sparkassen in the eastern German states of Saxony Anhalt and Mecklenburg-Vorpommern, which own 9 percent of NordLB between them.

At an internal event earlier this week, the eastern German Sparkassen branded NordLB’s behavior as “unacceptable”, and a breach of trust with fellow public-sector banks, according to a person familiar with the matter. They support a merger with another Landesbank, the person said.

One bank conspicuously absent from the merger plan is Munich-based BayernLB, the second-largest of Germany’s Landesbanks, with 215 billion euros in assets at the end of last year. That may reflect diverging business priorities: BayernLB owns digital bank DKB, which competes directly with Sparkassen across the country -- and generates nearly half of BayernLB’s profit. BayernLB declined to comment.

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