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Germany’s Helaba to the Rescue
Frankfurt-based bank generates steady profits from conservative lending. Now it wants to consolidate the country’s troubled landesbanks.


By contrast, Landesbank Berlin Holding posted a loss of 28 million in the first nine months of 2011, compared with net income of 181 million a year earlier, largely because of losses on its 232 million Greek bond portfolio. Greece sank our results, CEO Johannes Evers said when he announced the third-quarter numbers in November.
THE SYMBIOTIC TIES AMONG GERMANY'S LANDESBANKS, savings banks and state governments date to the early 19th century. Well before chancellor Otto von Bismarck unified the nation in 1871, each of the old independent German states had created a state bank to act as the treasury for savings banks and to help finance local businesses and public projects. A strong tradition of federalism continues to underpin the landesbanks today. Defenders assert that a large, locally headquartered bank supports companies and keeps them from moving elsewhere. NordLBs presence in Lower Saxony has been essential to make sure that Volkswagen stays in the state, the banks CEO, Gunter Dunkel, insists. If there were no landesbanks, he adds, Hamburg, Hanover and even Berlin would have no major banks of their own. Critics, however, have long contended that the landesbanks state support gives them an unfair advantage and distorts competition. State politicians sit as prominent board members of the landesbanks and often press the banks to bid for local infrastructure projects. Germany has the most fragmented banking market in Europe,
BayernLB, the second-largest landesbank, also stumbled badly in its effort to expand. Eager to get into the fast-growing Central and Eastern European market, BayernLB paid 1.625 billion for a 50.01 percent stake in Austrian banking group Hypo Alpe-Adria Bank International in May 2007, just weeks before the financial crisis started and caused liquidity to dry up in CEE markets. In early 2008 the bank forced out chief executive Werner Schmidt, who had championed the deal, and in December 2009, BayernLB paid the Austrian government 3.5 billion to take Alpe-Adria off its hands. The bank also took hits on real estate investments in Iceland. The tab? The state of Bavaria injected 10 billion in fresh capital and provided an additional 19.7 billion in liquidity and asset guarantees to keep the bank afloat. The aid lifted the states ownership of the bank to 94 percent from 50 percent, and raised doubts about the banks long-term future. They still have to clear a lot of nonperforming assets from their balance sheet, says Helaba CEO Brenner.
BRENNER SPENT MOST OF HIS career as an accountant, which turned out to be good training. Other landesbanks got into trouble because their chief executives wanted to be big investment bankers, says banking professor Burghof. Helabas strength is recognizing its limitations, so an accountant like Brenner is a good person to have at the top. The CEOs peers have a similarly positive opinion about him. He isnt an innovator with revolutionary ideas that shake people up, says NordLBs Dunkel. Rather, he reacts well to a situation. Hes a man of few words, yet very influential. Dunkel, for one, has bought into Brenners vision of landesbank consolidation in the coming years. Not many disagree with that vision, he says. Brenner came to banking late in his professional life. After receiving his degree in business administration from Saarland University, he joined accounting firm Peat, Marwick, Mitchell & Co., which turned into KPMG in 1979. He remained with the firm for 22 years, the last ten as partner and head of its Frankfurt branch, KPMG Deutsche Treuhandgesellschaft, where he mainly handled banking clients. In 2001 he had just finished an exhausting due diligence process at Dresdner Bank, which was being acquired by giant insurer Allianz, when Helaba chief executive Günther Merl offered him the job of chief financial officer. I thought maybe this was an opportunity to work less and have a more balanced life, deadpans Brenner, a 59-year-old of medium height and build with a penchant for electric-white shirts, bright ties and dark suits. The career change proved anything but relaxing. The year he joined Helaba was the year that Germany agreed to phase out state guarantees for the landesbanks. Brenner responded by helping to devise a risk restructuring of Helaba that would maintain a high credit rating for the bank. Helaba is jointly owned by its regional savings banks association (with an 85 percent stake) and the states of Hesse (10 percent) and Thuringia (5 percent). In 2004 the owners created a group structure under which Helaba and the savings banks function as a single economic entity with an integrated risk management system. The revamp helped Helaba win a credit rating of A from Standard & Poors the highest of any landesbank. This was meant to compensate for the loss of state guarantees, says Brenner. And it worked. Helabas funding costs are lower than for most other landesbanks, says Christian van Beek, a Frankfurt-based analyst for Fitch Ratings, which gives Helaba an A+ credit rating. Funding costs dropped even lower after Helaba acquired Germanys sixth-largest savings bank, Frankfurter Sparkasse, in 2005. A landesbank taking over a sparkasse is a sensitive issue. Savings banks see a natural territorial divide between their retail and small-business lending and the wholesale banking of the landesbanks. But Frankfurter Sparkasse was a troubled savings bank that had suffered steep losses between 2000 and 2005 because of bad bets in the capital markets, including the purchase of bonds from Parmalat, the Italian dairy company that collapsed in 2003 under 14 billion in debt. With the bank at risk of going under, Helaba stepped forward as a white knight, helping the Association of Savings and Giro Banks of Hesse-Thuringia avoid an expensive rescue. For 725 million in cash, Helaba purchased a savings bank with 13.8 billion in assets and 70 branches. Frankfurter Sparkasse is the market leader in retail and mittelstand banking in Frankfurt, Germanys richest major city, with per capita income of 76,700. We were still watched closely by the savings banks association they were worried we might expand beyond the Frankfurt region, says Herbert Hans Grüntker, a longtime Helaba executive who now serves as Frankfurter Sparkasses CEO. But we turned the bank around so that the association would not have to help out financially. And they are even happier now because we are paying dividends. Frankfurter Sparkasse largely withdrew from the capital markets and refocused on the Frankfurt retail and SME markets. By retaining profits, it has steadily raised its core tier-1 capital from 7 percent at the time of Helabas acquisition six years ago to 15 percent today. And it has kept its return on equity above 10 percent. Over the past five years, Frankfurter Sparkasses fastest-growing segment has been its Internet banking subsidiary, 1822direkt, named after the year the savings bank was founded. The unit has more than doubled its client base, to some 400,000, and now accounts for 5 billion of the savings banks 14 billion in deposits. The Internet subsidiary has helped the savings bank maintain a 35 percent share of retail banking in Frankfurt, which is arguably the most competitive region in Germany, with five banks claiming market shares above 10 percent. The savings bank acquisition has delivered the synergies that Helaba hoped to achieve. In addition to retail and SME customers, Frankfurter Sparkasse has been able to attract business clients with annual sales of as much as 500 million unusually high for a savings bank by offering them Helaba products and services. If a company is growing fast and needs even more credit facilities, we turn them over to Helaba, says Grüntker. In the first nine months of 2011, Frankfurter Sparkasse contributed 105 million to Helabas 278 million in net income. By providing some of their deposits to Helaba, the savings bank accounted for close to 5 billion of the landesbanks total 14 billion in funding for the first three quarters of 2011. And both Helaba and Frankfurter Sparkasse have cut down costs by combining back-office activities. Brenner became Helabas chief executive on October 1, 2008, just as global markets were seizing up in the wake of the collapse of Lehman Brothers Holdings. After the past three years, his hair and mustache show more salt than pepper. Still, Helaba has had fewer worries than its peers. It ended 2008 with a modest loss of 44 million, the smallest of any landesbank, and bounced back to post net income of 323 million in 2009 and 298 million in 2010. Several larger landesbanks fared much worse. BayernLB racked up a combined 7.7 billion in losses in 2008 and 2009 before returning to the black with a 635 million profit in 2010, while LBBW lost a total of 3.3 billion in 2008 and 2009 before posting a profit of 317 million in 2010. Like Helaba, LBBW seeks a leadership role in landesbank consolidation. In 2008 the bank paid 328 million to acquire Landesbank Sachsen Girozentrale (SachsenLB), the troubled landesbank of the eastern German state of Saxony. As part of the deal, the Saxony government guaranteed to cover as much as 2.75 billion of SachsenLBs losses on its structured debt portfolios. Those guarantees were not nearly enough, however. The banks 11 billion investment portfolio was riddled with exposure to loss-making Irish real estate and U.S. securitizations, as well as large holdings of sovereign bonds from Greece and other peripheral euro zone countries. With losses mounting, LBBWs supervisory board forced CEO Siegfried Jaschinski to resign in 2009. In December 2009, with European Commission approval, LBBW was rescued with a 5 billion capital injection and 12.7 billion in guarantees from its owners, the Savings Bank Association of Baden-Württemberg (40.5 percent), the state of Baden-Württemberg (40.5 percent) and the city of Stuttgart (19 percent). As part of the deal, LBBW agreed to shrink its 2008 balance sheet of 448 billion by 40 percent and sharply reduce its international business. The bank is roughly halfway toward its goal, having pared its assets mainly through sales by some 20 percent, to 354.8 billion, by June 2011. They are refocusing on their region in terms of both business and retail clients, says Fitchs van Beek. Looking forward, there is no reason they should not be successful in the next couple of years. In fact, LBBW is the likely third member of the landesbank trio along with Helaba in central Germany and NordLB in the north that is expected to emerge from the sectors consolidation over the next five to seven years. LBBW has the same strategy in the south as ours in the north, says NordLBs Dunkel. NordLB raised its net income to 262 million in the first three quarters of 2011 from 79 million in the same period of 2010 thanks to an even more conservative business model than Helabas. Net interest income rose 7.4 percent in the first nine months of 2011, to 1.31 billion, and accounted for more than 90 percent of overall revenue. Notwithstanding its relative strength, Helaba faces challenges in fulfilling Brenners vision. Embarrassingly, the bank had to drop out of the European Banking Authoritys stress tests last July because of a last-minute dispute over its hybrid capital, which the EBA deemed insufficient to qualify as core tier-1 capital. As public sector entities owned by the states and savings banks associations, most landesbanks have no conventional equity capital. But those owners provide so-called silent participations under which they agree to inject more capital whenever the bank needs it and to forgo any increase in voting rights. Silent participation means you give your money and keep your mouth shut, explains Peter Lutz, head of banking regulatory issues at the Federal Financial Supervisory Authority, the German agency also known as BaFin. Helaba relies on the instrument more than other landesbanks. Silent participation, most of it provided by the state of Hesse, makes up 51.7 percent of Helabas core tier-1 capital of 5.75 billion. The proportion raised alarms at the EBA last summer. The agency had been widely criticized because an earlier round of stress tests, in July 2010, failed to detect problems in the Irish banking system, which imploded shortly afterward. For the July 2011 test, the EBA decided to apply stricter criteria, making few allowances for any hybrid capital at the 90 banks in 20 different countries. The move caught Helaba by surprise and led to an open shouting match between the EBA and BaFin chief Jochen Sanio, who blasted the European agencys decision as being without legal authority. Helaba and its owners appear to have resolved the issue. In November the state of Hesse agreed to convert its silent participation of 1.92 billion into a financial instrument that will count as common equity. We are of the opinion that their silent participation now complies with all requirements for core tier-1 capital, says BaFins Lutz. If accepted by the EBA, the instrument will lift the banks core tier-1 capital ratio to 10 percent, comfortably above the 9 percent required by the EBA and Basel III. Helaba, like other European banks, faces a rapidly deteriorating economic climate. The debt crisis and resulting austerity measures have pushed Greece and Portugal into recession and left Italy and Spain on the brink of it. Even Germany, Europes strongest economy, likely experienced a slight drop in output in the fourth quarter of 2011, the Federal Statistical Office announced last month. Yet Brenner is confident that Helaba can weather any downturn. We have strong midcap and large-cap corporate clients, so in case of a modest recession, I would not expect high loan-loss reserves, he says. And in case of a bigger recession, all our peers will be hurt a lot more than we will be. A downturn, moreover, would only increase pressure for a faster consolidation. Brenner predicts that in addition to WestLB, at least two other troubled banks could disappear in the next few years: Landesbank Saar, based in the Saarland, along Germanys border with France, and Hamburg-based HSH Nordbank. And in the case of BayernLB, you have to ask yourself where its liquidity will come from now that it isnt linked to the savings banks, says Brenner. This means that in all these states, the savings banks associations will have to make arrangements with other landesbanks.Like Helaba, for instance.