A German Lender’s Woes Could Ripple Through the Banking System
(Bloomberg) -- German efforts to recapitalize one of the country’s largest public-sector lenders have hit an impasse that threatens to send ripples through a key pillar of the banking system.
NordLB, a wholesale lender controlled by the state of Lower Saxony, has been trying to raise at least 3 billion euros ($3.4 billion) to replenish capital eroded by soured shipping loans. But peers have shied away and private equity bidders are driving a hard bargain, said people familiar with the process. Lower Saxony’s options to help are limited by European rules constricting state aid.
That’s put a spotlight on a system of mutual guarantees that the public-sector banks have used for decades to win clients -- and concessions from regulators. Their pitch: Should one of them ever get into trouble, the others would throw their weight behind it. But with many of the lenders suffering from low profitability after years of zero interest rates, the local savings banks that own part of NordLB have already signaled they don’t want to chip in. And that could put their backstop system to the test.
“NordLB is an important test case for the institutional protection scheme,” said Klaus Fleischer, a professor specializing in finance at Munich University of Applied Sciences. “It would be a huge problem for the scheme if some savings banks were to pull out of it to avoid payment.”
Officials for NordLB and the German Savings Bank Association DSGV declined to comment. A spokesman for Lower Saxony’s finance ministry said the state is currently reviewing bids and discussing remaining issues with investors.
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NordLB is one of the biggest so-called Landesbanks -- wholesale lenders that cater to the almost 400 local savings banks known as Sparkassen. It survived the financial crisis without aid but has been weighed down for years by soured shipping loans. The problem was made worse by its full takeover of Bremer Landesbank in 2016. In all, NordLB had 7.3 billion euros in bad loans at the end of September.
The bank is trying to sell the loans to private investors including Cerberus Capital Management, but the terms offered by bidders threaten to make the capital shortfall worse. While private investors have also offered to take a stake in NordLB to help with capital, the concessions some ask for -- such as guarantees that they will be shielded from future losses -- have cast doubt over whether a deal is possible at all, said the people.
After initially promising to present a "viable concept" to address its capital needs by the end of 2018, the lender now says a decision may not be made until the beginning of next year. Moody’s on Tuesday placed NordLB’s long-term debt ratings on review, saying it “expects clarity on the success of planned measures to stabilize and recapitalize the bank within several weeks.”
Should talks with private investors fail, NordLB could ask other public-sector banks to help stabilize it. In fact, some senior lawmakers, regulators and bank executives are so concerned, they’re urging peers to prepare to earmark billions of euros to inject into NordLB should the talks fail, said the people, asking not to be identified because the discussions are private.
The problem is, the local savings banks that own part of NordLB already indicated they don’t want to participate in a capital increase. That in turn put off other public-sector lenders, who argue the local banks should take the first hit. While people close to the discussions say they believe the savings banks would eventually come around if need be, a refusal to help NordLB would reverberate throughout the system.
The promise of mutual support -- a second pillar in the savings banks’ safety net, in addition to the German mandatory deposit insurance -- has been a key feature in their success. Lenders proudly advertise that no member of their mutual support system ever became insolvent. The arrangement is also a reason why regulators require them to hold less capital than they would have to as standalone firm.
Their reputation as safe lenders, focused on the development of the local economy, helped the group grow into a dominant force in the German banking market, with more than 500 institutions, over 300,000 employees and some 18,000 branches. But low interest rates have eroded profitability, forcing smaller savings banks to merge.
Ultimately, the lenders would likely support NordLB should an investment by private investors not work out, said Marco Diamantini, an analyst with Fitch Ratings. The alternative -- a wind-down -- would cost billion of euros, according to calculations that are being floated among lawmakers, regulators and executives. The debt ratings on the entire group could be hurt if they let NordLB default on its senior debt in such a case.
“That would set a damaging precedent,” said Fleischer, the finance professor. For now, “everyone’s playing poker because no one wants to pay for it.”
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