Improved Outlook for Landesbanken as State Aid Review Concluded

The completion of the European Commission’s (EC) state aid investigations into Germany’s state-owned and regionally-organised Landesbanken is positive for the sector in that it reduces uncertainty and will help steer the banks back towards their lower-risk core business, according to Fitch Ratings.

The credit ratings agency (CRA) said it believes the EC has focused on the continued viability of the sector when setting restructuring conditions, and there is potential for viability ratings to rise if Landesbanken can demonstrate successful new business models over the next few years.

On 25 July the EC approved the restructuring plans of BayernLB and NORD/LB after they were recapitalised by their state owners. The pair were the last two Landesbanken to get restructuring approval. BayernLB faces tough requirements, including the repayment of €5bn (US$6.15bn) of aid by the end of 2019 and the reduction of its balance sheet by around 50% from its 2008 level.

Fitch says that while these targets should be achievable, they will be challenging. BayernLB has attractive assets that it can sell, including a portfolio of over 32,000 apartments in Bavaria, but it also needs to divest weaker assets, such as MKB Bank. The loss-making Hungarian unit is unlikely to return to profitability this year and there is little prospect of a sale in the foreseeable future.

If needed, BayernLB has further assets, including Deutsche Kreditbank, which could attract a lot of bid interest. However, these assets are considered part of its core business and the bank is therefore keen to avoid a sale if at all possible. The conversion of some silent participations (a form of hybrid capital) to equity will help with the repayment of capital. But repayment of the rest through retained earnings will remain a challenge because silent participations that have been written down due to losses at the bank that need to be made good, and interest charges for the last few years also need to be paid.

The required asset sales will take BayernLB back to a simpler, lower-risk business model that focuses on corporate customers in Bavaria and Germany. Other Landesbanken are restructuring along similar lines and Fitch believes that these models could eventually justify higher viability ratings for some Landesbanken, especially those which can maintain their strong links with the German savings banks. For BayernLB this would also require a reduction of the group’s structurally high cost base and a successful effort to raise margins to offset likely increased funding costs when guaranteed funding runs out, mostly in 2015.

Fitch adds that it is unclear what the consequences would be if BayernLB failed to repay €5bn by the 2019 deadline. However, if the failure were for reasons that were beyond the bank’s control, such as a further market downturn, the CRA would not expect the EC to impose the same harsh measures that have led to the breakup of WestLB.


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