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Going local: Thomas Fischer

It's back to basics at WestLB as CEO Thomas Fischer reins in the bank's international operations and looks for growth, and profits, in Germany.

As a teenager growing up in cold war Berlin in the 1960s, Thomas Fischer was a keen amateur boxer, better known for his grit and determination than for the punch he packed. That tenacity carried over to his banking career, helping him get back up after he was knocked to the floor.

The first knockdown occurred in 1998 at Landesgirokasse Stuttgart: After Fischer led a three-way merger to create Landesbank Baden-Württemburg, local politicians kept him from getting the top job immediately, prompting him to leave. He bounced back and landed at Deutsche Bank. There he rose to become chief operating officer, only to be decked by CEO Josef Ackermann in a struggle over strategy and control of the group executive board.

Today Fischer, a muscular man who still pounds the heavy bag to keep in shape, is chief executive of WestLB, one of Germany's biggest and most problem-plagued public sector Landesbanks. His aim is to transform the bank from a bloated institution that racked up billions in losses on an ill-advised international expansion into a lean, commercially minded lender focused on Germany and Europe. And he is trying to do so at a time when WestLB faces nothing short of an existential crisis: This year, like all Landesbanks, it will lose its state guarantee, an advantage that has propped the bank up for decades. Turning it around promises to be the fight of his life.

When the 57-year-old Fischer arrived at WestLB's Düsseldorf headquarters a year ago, the bank was reeling from years of reckless growth made possible by its double-A, state-sponsored rating, which allowed it to raise cheap funding and buy market share in wholesale lending and other markets. When such companies as Enron Corp. and WorldCom went bust, WestLB was among the banks that took hits.

Nothing illustrated WestLB's fateful hubris like its principal finance business, run by glamorous young American financier Robin Saunders. Operating with carte blanche to build up the London-based business, Saunders pulled off a stunning series of deals in the late 1990s, from a $1 billion-plus bond issue for racing tycoon Bernie Ecclestone's Formula One Holdings to the acquisition of British water utilities to the financing of a new Wembley Stadium rising over North London. She succeeded, however, by placing much of the risk on WestLB's books.

The bill for this unrestrained growth hit home with a vengeance in February 2004, just as Fischer arrived at the bank, when WestLB set aside a whopping E2.2 billion ($2.7 billion) provision for loan losses and write-downs of its equity investments, in addition to an already daunting E1.9 billion set aside a year earlier. Those provisions forced the bank to post a massive E1.9 billion loss for 2003, on top of a E1.7 billion loss the previous year.

Fischer had to move quickly to stanch the red ink and rebuild the bank's wafer-thin capital base, and he wasted little time answering the bell. Since taking over as chief executive, Fischer has overhauled the bank's management and supervisory boards, sold a raft of noncore industrial holdings, tightened risk controls and scaled back the U.S. and Asian lending operations. He strengthened WestLB by arranging a E1.5 billion capital increase from the savings banks of the state of North Rhine­Westphalia, which control WestLB and give it access to small and medium-size corporate clients. His efforts helped put the bank in the black for the first time in three years, with a pretax profit of E247 million for the first three quarters of 2004.

Now Fischer is looking to generate revenue growth while continuing to cut away at the bank's high cost base. He wants to build on WestLB's existing strength in syndicated lending and municipal bond underwriting and expand in such higher-margin businesses as structured finance and derivatives.

"We're going to be a very, very efficient bank," he tells Institutional Investor in an interview at the bank's Frankfurt office. "We're going to be a focused universal bank, a center of excellence in terms of products and world-class risk management, and we'll be making money."

That sounds dandy, but Fischer has a long way to go to prove he has a winning strategy to succeed in Germany's highly fragmented banking industry. The country's top five banks hold just 20 percent of total assets in the banking system, compared with a concentration of more than 50 percent in France, Spain and the U.K. The lack of scale, competition from state-owned and nonprofit cooperative banks and the negative impact of Germany's sluggish economy have hit profits hard. Returns on equity at German commercial banks averaged 11.8 percent in 2003, far behind the 24.6 percent average for Spanish banks and Austrian banks' 33.9 percent.

All German banks are struggling to cut costs, writing off nonperforming loans and considering mergers to survive in a politically charged environment. Deutsche Bank, which saw the German government rebuff a takeover overture from Citigroup a year ago, recently embarked on a plan to lay off as many as 6,000 employees, or nearly 10 percent of its workforce. Commerzbank and HVB Group remain the focus of merger speculation. WestLB, once Germany's biggest bank, now ranks a modest No. 6 domestically, with assets of E270 billion.

"The drama for WestLB for the next three, four or five years will be, What are they? What do they want to be, and is there any room for such a bank?" says Michael Dawson-Kropf, vice president of Moody's Deutschland.

The challenge is particularly urgent for Fischer. Like the other ten public sector Landesbanks in the country, WestLB will lose its state guarantee in July following a decision by the European Commission, which ruled that the guarantees were an illegal subsidy (see box). The removal of the support is designed to force the Landesbanks to compete on equal terms with commercial rivals and, ultimately, to open up one of the most protected banking markets in the European Union.

The change will cause WestLB's credit rating to drop overnight from today's AA by Standard & Poor's and Aa2 by Moody's Investors Service to A­ and A3, and narrow the bank's margins by forcing it to pay more for its funding.

Fischer is making a virtue out of this necessity. He notes that WestLB ran into problems because it used its funding advantage to expand aggressively into international wholesale lending and principal finance, only to take big hits. "There was too much of this proprietary kind of banking vis-à-vis a staggering lack of client business," he explains. "That, in my view, was the disease. How are we going to cure the disease? By adding more client business in combination and cooperation with the savings banks."

The 114 savings banks, or Sparkassen, that jointly own WestLB are scattered across North Rhine­Westphalia, the industrial heartland of northwest Germany, and they are eager to make the alliance work. Owned by the municipalities they serve, these savings banks injected E1.5 billion in capital into WestLB in October and set aside a E1 billion reserve fund. The operation boosted WestLB's tier-1 capital ratio from 6.2 percent to 7.5 percent and increased the Sparkassen's stake in WestLB to 61.25 percent from 33.9 percent (North Rhine­Westphalia owns the remainder). The savings banks see their own fates as intimately tied to that of WestLB.

"If we want to remain independent, then Sparkassen have to have a window to the world," says Rolf Gerlach, president of the Westfälisch-Lippischer Sparkassen- und Giroverband, one of North Rhine­Westphalia's two savings bank associations, and chairman of WestLB's supervisory board. "Customers in even the smallest of towns operate internationally. For that we need partners. We want to work together with WestLB long term through equity participation. Taking a participation is better than having a simple working relationship."

Fischer's aim is to build WestLB into an institution that can compete head-on with major European commercial banks and play a leading role in consolidation in Germany. "We want to be as good as or better than Commerz and HVB, which is not completely the case as we speak," he says. "I would accept any comparison with superregionals in continental Europe." He names, as examples, ABN Amro and BNP Paribas.

Pulling off the transformation won't be easy, though, bankers say. "WestLB did a pretty good job of building up their international network and their international reputation," says Lutz Raettig, chairman of Morgan Stanley Deutschland, who started his career at WestLB in 1970. "To turn this group of people mentally around to become the preferred product provider for the savings banks of North Rhine­Westphalia -- that's a big job, a totally different corporate mind-set. I doubt you need a couple of hundred people in New York or London or Tokyo for that. You may need different people."

WestLB's modern business dates from 1969, when Rheinische Girozentrale und Provinzialbank and Landesbank für Westfalen Girozentrale merged to form Westdeutsche Landesbank Girozentrale. Employing 5,108 people, it instantly became the country's biggest bank.

Friedel Neuber, a former Social Democratic politician who headed the Rheinischer Sparkassen- und Giroverband, took over the reins in 1981 and ran the bank as if it were an arm of the state government. The socialist chief executive spent his career arranging the financing for public works and the pet industrial projects of the state of North Rhine­Westphalia, which then owned 43.2 percent of the bank.

"The bank had a state employee mentality," says one former executive. "WestLB saw itself as an employer for the state. People who worked there had their jobs for life."

Neuber also expanded aggressively by hiring Jürgen Sengera, then head of corporate relationships at rival Nord/LB, to spearhead a move into international wholesale lending and investment banking. Sengera made the bank a power in project finance and aircraft leasing as well as lending to industries like energy and telecommunications. He also expanded the bank's existing Eurobond underwriting franchise and pushed into equities by buying second-tier London brokerage Panmure Gordon for £30 million ($47 million) in 1996. By 2001 the bank was operating in 35 countries and employed nearly 11,000 people. Sengera succeeded the retiring Neuber as CEO that year.

Sengera's most fateful move was to lure a team of principal financiers led by Robin Saunders, a Florida-born financial whiz, from Deutsche Bank in July 1998. The two had met while working together on a project when Saunders was at the London branch of Chemical Bank, now J.P. Morgan Chase & Co.

Working from London, Saunders and her team masterminded more than 35 transactions for WestLB worth nearly $25 billion, including most famously a $1.4 billion asset-backed bond issue for Formula One Holding. Morgan Stanley had struggled to find buyers for the issue because of a European Union competition inquiry into Formula One. Saunders came to the rescue, effectively using WestLB's cheap funding to buy as much as half of the issue, according to reports at the time. (Saunders declined to comment for this article, and WestLB doesn't disclose the details of its principal financing business.)

Saunders would repeat the tactic many times over the next few years. She underwrote a E420 million financing for the building of a new Wembley Stadium in London, took stakes in British water utilities, pub chains and distilleries and invested an estimated E1.3 billion in a junk bond issue for Boxclever, a British television rental company. The deals, most of which involved issuing debt backed by future revenue streams, exposed the bank to big risks but did not set off warning bells at WestLB's Düsseldorf headquarters. "They loved the money Saunders brought in," one former executive at the bank says of management.

The London financier's winning streak came to an abrupt end in 2002 when several deals, most notably Boxclever, went sour as the businesses failed to generate the expected level of revenues. The TV rental company was placed in court-administered receivership the following year. In May 2003, WestLB announced that it was setting aside E2 billion in provisions for credit losses in 2002, including some E400 million for its exposure to Boxclever. Those provisions pushed the bank deep into the red for the year.

BaFin, the German financial industry regulator, immediately ordered an investigation of the bank's lending practices and risk controls. The inquiry led to a recommendation that the bank increase loan-loss provisions, tighten risk controls and replace top management. BaFin also asked the Düsseldorf prosecutor's office to investigate a criminal breach of trust, and to investigate whether Sengera and Andreas Silbert, who was in charge of corporate finance at the time, could be held responsible for the losses. Bernhard Englisch, the state's prosecutor, declined to comment on the investigation, which is continuing.

Under pressure from the regulators, Sengera and Silbert resigned. Johannes Ringel, who headed the bank's Asian business and had been a member of the management board since 1987, took over as interim CEO. Saunders was forced out in December 2003. Ringel shut down the principal finance unit and began selling off the bank's equity positions. WestLB wrote off most of the rest of its Boxclever exposure and took a E416 million hit on aircraft leasing in setting aside E1.2 billion for credit losses in 2003. It also wrote down its equity investments by a hefty E1 billion that year.

At the same time that Saunders' unit was taking its big positions, WestLB was expanding aggressively in the wholesale lending market, taking advantage of its cheap funding to gain market share by discounting.

"The Landesbanks unfortunately did use the arbitrage with their higher ratings to get a lot of money and funnel it through to buy market share -- that was their mistake," Fischer says bluntly.

BORN AND RAISED IN BERLIN, THOMAS FISCHER has long had driving ambition. He left school at 16 to work in his family's chemicals business when his father became ill. During his national service in the German army in the mid-1960s, he started a short-lived but successful business selling German recruits' used cars to American and British soldiers stationed in Berlin. After leaving the army he took night courses to get his high school diploma. In the early 1970s he reunited with his family in British Columbia, where they had emigrated.

The family eventually sold the chemicals business, making Fischer a millionaire. Ever ambitious, he returned to Germany in 1976, married and enrolled at the University of Freiburg, where he got an undergraduate degree in 1978 and a Ph.D. three years later, both in economics.

After a brief stint at battery manufacturer Varta, Fischer joined Deutsche Bank in 1984 as a protégé of then­chief executive Alfred Herrhausen. He rose quickly through a number of posts, including global head of derivatives, before ultimately chairing the bank's risk management committee.

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In 1989, Deutsche bought London investment bank Morgan Grenfell to strengthen its position in the rapidly expanding capital markets. Fischer had opposed the move, arguing that Deutsche should expand organically. He also disliked what he regarded as the lavish lifestyles of Morgan Grenfell's London investment bankers, which were far in excess of those their Frankfurt counterparts enjoyed. When Deutsche doubled its bet on investment banking in 1995 by hiring a group of bankers from Merrill Lynch & Co. led by Edson Mitchell, Fischer resigned and moved to Landesgirokasse Stuttgart, the largest savings bank in southern Germany, as vice chairman of the management board, effectively deputy CEO.

Within a year Fischer had assumed the CEO post and was steering the bank toward a 1998 merger with two other public sector institutions to form Landesbank Baden-Württemburg. But when state politicians voted to rotate the CEO post at LBBW, Fischer opted to depart because, as the youngest of the three CEOs, he wasn't scheduled to take over the top job until 2003.

Fischer returned to Deutsche in Frankfurt, where then-CEO Rolf Breuer in 1998 appointed him as the bank's chief risk officer with a seat on the managing board. He quickly came into conflict with Ackermann, who had left Credit Suisse in 1996 to head up Deutsche's investment banking business and edged out Fischer to become Breuer's heir-apparent. Shortly after becoming CEO in May 2002, Ackermann proposed a dramatic restructuring of top management with the creation of a group executive board, dominated by his allies from the bank's investment banking business in London and New York. Fischer fought the plan, arguing that it would reduce the existing management board to a mere rubber stamp for Ackermann's small group executive board. He lost out when Deutsche's supervisory board backed Ackermann.

"I did the only thing I could -- I left," he recalls stoically. "Joe would have done the same thing if he had lost. That's business."

Friends say Fischer's experience at the Stuttgart savings bank and at Deutsche ought to provide an ideal background for his task at WestLB, giving him an understanding of global capital markets as well as the machinery of German politics and the role of the country's savings banks. Unlike many bankers, who believe that the Landesbanks ultimately need to float themselves or merge with commercial banks to survive, Fischer is an unabashed defender of WestLB's public sector ownership.

"What people in the Anglo-Saxon world have to understand is that we are talking about a legal setup in the Federal Republic of Germany," Fisher tells II. "If people want to change the laws, they can. Up until now they don't want to change the laws. You know why? Because they like the system. People understand the difference between a bank that is there and helps them and a bank that is not there and does not help them. And the public banks have been there and have helped them."

This is a stump speech Fischer loves to give because, he says, he feels passionate about it. At a November press conference, he launched into a robust defense of WestLB's public ownership after one reporter asked whether there is a place in today's economy for a state-owned bank. A spokesman tried to cut Fischer off and call on another questioner, but the CEO would not be interrupted. "Just a minute," he joked, "I've got to massacre this guy."

Once at WestLB, Fischer immediately turned his attention to the savings banks, both to improve access to their small and medium-size corporate clients, the so-called Mittelstand, and to bolster capital. The attraction for him is easy to see. The Sparkassen in the states of North Rhine­Westphalia and Brandenburg, the eastern German state that WestLB also serves, have a total of 11.5 million customers and assets of E245 billion.

Fischer crisscrossed North Rhine­Westphalia last summer, painstakingly negotiating individual contracts between WestLB and each of the 114 savings banks. The agreements grant WestLB exclusivity in providing the Sparkassen with more than 50 products, including structured financing and principal financing, to help the region's Mittelstand move into foreign markets.

WestLB's strategy is to increase fee income from its capital markets products, such as the popular German equity-linked certificates, a type of warrant on stocks and stock indexes, while boosting its interest-bearing assets by scooping up a share of the loans made by the Sparkassen to their corporate customers.

WestLB has been doing this kind of business with bigger savings banks for years, but the new agreements promise to extend and deepen the cooperation, says Hans-Peter Krämer, CEO of Kreissparkasse Köln, which has 207 branches in the Cologne area and E21.8 billion in assets. "They are our quasiwholesaler," he says. "No savings bank is big enough to be able to offer each and every product. WestLB can help us widen the palette for our corporate customers."

Five years ago business with the savings banks "wasn't taken seriously within the bank. We were product-focused, not customer-focused," says Paul Middendorf, who is in charge of public sector customers at WestLB. "Dr. Fischer had to work hard to convince the savings banks that they weren't throwing good money after bad."

Fischer thinks that closer cooperation with the savings banks should generate 20 percent of WestLB's revenues eventually, up from negligible levels today. The customer potential is certainly there: North Rhine­Westphalia is home to 22 of Germany's 50 largest companies and boasts a gross domestic product of E467 billion, roughly 22 percent of Germany's economic output. WestLB has banking relationships with all 22 of those corporations, and Fischer is keen to strengthen them, but the key to his strategy is penetrating the small and medium-size corporate market.

Fischer has also moved to restore discipline to WestLB's lending. He established new group credit risk and asset-liability committees, reduced big exposures and moved to spread risk across more business sectors. WestLB has shifted some E400 million of nonperforming commercial real estate loans to a specially created joint venture bank with Hannover-based Nord/LB, which will securitize the loans, and is inviting other Landesbanks and Sparkassen to dump their nonperforming loans into the venture.

WestLB has slashed its lending exposure in the U.S. in half, to E2.5 billion, because it was too risky, Fischer says. The bank has also shrunk its exposure in Asia and Australia and may very well exit the region altogether, one executive concedes privately. At the same time, WestLB is expanding its presence in Eastern Europe to serve the growing interests of midcap German companies in the region.

Fischer hopes to generate a further 20 percent of revenues by building on WestLB's existing capital markets and structured finance divisions, mainly in Germany and Europe. The bank ranked a modest 19th in European debt capital markets in 2004, acting as book runner on 107 deals worth E55.5 billion.

WestLB has scaled back its equities business to focus on large-cap European stocks and equity derivatives. The bank sold Panmure Gordon to Lazard & Co. for an estimated £10 million early last year, roughly £20 million less than it paid for the business eight years earlier.

Fischer is also continuing the cost-cutting and divestment program begun by Ringel. He aims to reduce head count to 6,200 by the end of this year, from 7,280 currently. He has begun outsourcing back-office and information technology operations. He hopes to cut costs by E500 million this year, on top of E540 million in savings over the past two years.

The pruning is certainly overdue. WestLB's cost-income ratio of nearly 78 is far above the European banking average of 59 and the U.K. average of 49. Moody's Dawson-Kropf says anything above 60 is grossly inefficient. "You would expect a central bank with no branches to have a better cost-income ratio than one with branches," he says.

Fischer has continued to unload the stakes built up by Saunders' principal finance business, raising an estimated E2.5 billion through disposals. He sold the U.K.'s Odeon cinema chain to London-based private equity group Terra Firma Capital Partners for a reported £400 million in September 2004, making a profit that bankers and analysts estimate at E25 million to E30 million. In December he sold WestLB's 31.3 percent stake in TUI Reisen, Europe's largest travel agency, to Deutsche Bank for an estimated E950 million and dealt the bank's 94.9 percent stake in German steel trading business Klöckner & Co., along with HSH Nordbank's 5.1 percent stake, to New York­based private equity firm Lindsay Goldberg & Bessemer for an estimated E320 million. Terms weren't disclosed, but WestLB said it would post a gain on the transaction in 2005.

In January the bank announced the sale of its stake in Boxclever to New York­based private equity groups Fortress Investment Group and Cerberus Capital Management for an estimated £200 million. Earlier this month, WestLB sold its 30 percent stake in whiskey maker Whyte and MacKay to management and British entrepreneur Robert Tchenguiz for an undisclosed amount, leaving just one Saunders legacy -- a stake in U.K. utility Mid Kent Water -- to be sold.

The restructuring efforts helped WestLB restore profits in the first half of last year. Fischer is aiming for pretax profits of E357 million for 2004 (results will be announced later this month), rising to E942 million in 2006. The bank's 13.8 percent return on equity in the third quarter exceeded the target of 8.2 percent that Fischer set for 2006.

Some analysts question whether the improvement is sustainable. "The difference between the bottom line in '03 and '04 is due to the swing in loan provisions and risk," says one London-based credit analyst. "Is this stable? No. They got lucky."

WestLB also has a long way to go to match its ostensible peers. BNP Paribas had a return on equity of 18.5, a cost-income ratio of 59.9 percent and gross operating income of E1.9 billion in the first half of 2004.

Most bankers believe Fischer will set his sights on a merger with other Landesbanks once WestLB's profit recovery is firmly entrenched. WestLB chairman Gerlach believes there will be only two Landesbanks left standing at the end of this decade: one in the south, presumably grouped around Landesbank Baden-Württemburg and Bavaria's BayernLB Holding; the other, in the north, would be based around a combination of WestLB with HSH Nordbank, Nord/LB and the Landesbanks of Bremen and Berlin. Under such a scenario the savings associations would own 50 percent plus one share, Gerlach says. The remainder would be floated on the German stock exchange.

So much for theory. In practice it remains to be seen whether mergers will produce more-profitable Landesbanks that can attract private investors. "You have to have a good business model," says Morgan Stanley's Raettig. "Does Fischer have a good model? We don't know yet. Show me that the model works."

Fischer wants to play a leading role in consolidation but knows he has to prove the skeptics wrong and deliver tangible results. "I don't rule out a merger, but it's not my intention at the moment," he says. "Before you run you have to walk. First we have to get WestLB growing and successful."

This fight is in the early rounds, and Fischer will have to do a lot of fancy footwork to come out on top.

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