German mega-merger would create a banking juggernaut

Skyline of financial district of Frankfurt

As Europe’s commercial bankers puzzle over consolidating their overbanked landscape, their grassroots brethren in Germany may yet show them how it’s done. The country’s cash-heavy savings banks are said to be sounding out a huge merger of five institutions that would create a financial juggernaut worth around €700 billion ($797 billion), heralding the industry’s biggest shake-up in over a decade.

The new entity, which would form Germany’s second-largest lender, would absorb the regional state banks Helaba, NordLB, and LBBW, as well as fund manager Deka and real-estate bank Berlin Hyp, industry sources told Handelsblatt. In the medium-term, the combined balance sheet is seen shrinking to around €500 billion, still making it the country’s No. 3 after Deutsche Bank and DZ Bank. But the sources emphasized that there are “high hurdles” to a merger, without providing further details.

The savings-bank association, DSGV, confirmed that general talks on the future of the sector had taken place, but stressed that discussions are still in their infancy. The state banks, also known as Landesbanks, act as head banking institutions of the local and regional Sparkassen, or savings banks. “There have been no preliminary decisions, nor can any results be predicted at this stage,” a DSGV spokesman said.

According to Handelsblatt, the merger would happen in stages. Helaba and NordLB would be the first to tie the knot, followed by a later marriage to Deka, LBBW and Berlin Hyp. For the time being BayernLB, Bavaria’s regional Landesbank, which would surely benefit from joining the group, is not part of the discussion.

G S38 Banks-01

The savings banks would become majority shareholders in a “super-Landesbank,” with the institutions in Baden-Württemberg, Hesse, and Thuringia holding significant stakes, the newspaper’s sources said. The new bank’s headquarters will probably be located in Frankfurt, the nation’s banking capital and home to Helaba and Deka.

The driving force behind the merger plan is Helmut Schleweis, head of the German savings banks association. Mr. Schleweis has repeatedly called for a restructuring of the sector, which has been savaged by low interest rates and rising regulatory costs. Last February, he said the savings bank group was “not sustainable” in its current form.

Now might be the right time to change that. Several previous attempts to consolidate Germany’s fragmented public banking sector failed due to conflicting interests. But on Wednesday, talk of a Landesbanks merger rekindled after Commerzbank launched a surprise bid for NordLB, the troubled northern German bank that is shackled with dud loans to the shipping industry.

The Landesbanks have seen a shakeout in recent years, mostly as a result of their own financial missteps. WestLB, once the country’s largest Landesbank, was split up in 2012 after losing billions in speculative derivatives deals during the financial crisis. HSH Nordbank, originally a Landesbank owned by Hamburg and Schleswig-Holstein, is currently being sold to a group of financial investors; the EU Commission may yet force its privatization.

Less is more, maybe

Some analysts see Germany’s cooperative Volksbanks and Raiffeisenbanks as a role model for the savings banks. The two groups vie largely for the same customers: the Mittelstand, the country’s rich vein of small and medium-sized companies. Unlike the savings banks, which are organized into regional fiefdoms under the Landesbanks, Germany’s cooperative lenders get by with a single central institution, DZ Bank.

If the savings banks move in the same direction, they could save lots of money at their top institutions, especially in administration and IT. Moreover, a public mega-bank could also handle much larger transactions than the individual banks did previously — a solution that both bankers and politicians will find easy to warm to.

There is, of course, no guarantee that the new bank will be successful. Germany’s last banking mega-merger, the 2008 acquisition of Dresdner Bank by Commerzbank, failed to turn around the fortunes of the latter, which itself is now seen as a takeover candidate of another beleaguered German lender, Deutsche Bank.