“The (German) state banks, collectively known as landesbanks, have benefited from low-cost government-guaranteed funding that some critics have said encouraged them to overreach in the past. One of them, Düsseldorf-based WestLB, lost billions of euros during the housing crisis;…

…it is now being dissolved by German banking authorities…. Munich-based BayernLB needed a €10 billion ($10.98 billion) lifeline from Bavaria in 2008 after ill-timed bets on the U.S. subprime-mortgage market and hefty losses on its Austrian unit left it at the brink of insolvency. As a condition of the bailout, European Union officials ordered the bank to shed half its roughly €400 billion in assets, repay the government and halt business unrelated to Germany…. LBBW in 2009 received roughly €5 billion from its regional government in Baden-Wurtemburg, plus €12.7 billion in guarantees for toxic assets because of big losses on its exposure to U.S. subprime mortgages and to Iceland, whose biggest banks defaulted in the financial crisis.”, Eyk Henning, “Regional German Lenders Expand”, The Wall Street Journal, November 2, 2015

Markets

Regional German Lenders Expand

By Eyk Henning

LONDON—Germany’s regional banks have regularly appeared on the wrong side of big bets in recent decades. Now, after several years of retrenchment, they are venturing back into riskier markets as they seek to expand.

Banks controlled by three of Germany’s richest states are diving deeper into property markets and planting flags from Rio de Janeiro to Tashkent, Uzbekistan, aiming to help homegrown clients push overseas and foreign investors find opportunities in Germany.

The state banks, collectively known as landesbanks, have benefited from low-cost government-guaranteed funding that some critics have said encouraged them to overreach in the past. One of them, Düsseldorf-based WestLB, lost billions of euros during the housing crisis; it is now being dissolved by German banking authorities.

Still, landesbank officials said they are ready to venture forth. One of the biggest, Bavaria’s BayernLB, recently celebrated the end of a seven-year diet enforced by regulators in Oktoberfest style at a century-old London hall. The bank welcomed guests with traditional wheat beer, smoked ham and lederhosen-clad men playing alphorns.

“We are 98% done with our restructuring and now want to expand again,” Chief Executive Officer Johannes-Jörg Riegler said. “Moving into our new London offices is the starting signal.”

Munich-based BayernLB needed a €10 billion ($10.98 billion) lifeline from Bavaria in 2008 after ill-timed bets on the U.S. subprime-mortgage market and hefty losses on its Austrian unit left it at the brink of insolvency. As a condition of the bailout, European Union officials ordered the bank to shed half its roughly €400 billion in assets, repay the government and halt business unrelated to Germany.

Mr. Riegler said he hopes the EU removes the last restriction so the bank can more flexibly boost revenue, especially from its London operation, which has roughly €4 billion in assets. BayernLB also hopes eventually to rebuild its once-profitable U.S. commercial real-estate operations, which it was forced to exit, and resume work for non-German corporations. The bank is one of Germany’s largest real-estate lenders, with €44 billion in loans.

BayernLB’s planned expansion comes as top German financial regulators worry the European Central Bank’s policy of holding interest rates near zero could spur excessively risky lending and create an asset bubble.

Analysts say going abroad is a must for banks to keep Germany’s army of small and midsize export champions, known as Mittelstand, as clients. ”There is a fierce fight between banks over serving Germany’s Mittelstand,” consultants from Bain & Co. said in a recent note, adding those clients expect banks to have offices in emerging markets and know-how of local trade-financing rules.

Rivals including Landesbank Baden-Württemberg, or LBBW, and Helaba from the state of Hesse, which includes Germany’s financial capital, Frankfurt, are tiptoeing back abroad as well.

The planned expansions are tentative partly because landesbanks have such a checkered past. In 1998, a year into the Asian financial crisis, landesbanks had cut their credit exposure to the region by only 10%, compared with a 33% reduction by listed and privately held German rivals, according to a 2004 report by Germany’s central bank. BayernLB lost more than $750 million in the crisis.

During the 1998 financial crisis in Russia, landesbanks increased their exposure to the country while listed German banks retreated. The regional banks were battered again a decade later in the U.S. housing crisis, when many plunged into an already inflated market. Hans Werner Sinn, president of German think tank the Ifo Institute, said during the crisis that government guarantees artificially inflated landesbanks’ appetite for risk.

LBBW in 2009 received roughly €5 billion from its regional government in Baden-Wurtemburg, plus €12.7 billion in guarantees for toxic assets because of big losses on its exposure to U.S. subprime mortgages and to Iceland, whose biggest banks defaulted in the financial crisis.

This year, LBBW said that it opened representative offices in Istanbul and Tashkent to “accompany clients into emerging markets.”

Helaba, a rare landesbank to have survived the financial crisis relatively unscathed, this month said that it would open offices in Istanbul, São Paulo and Stockholm this year to strengthen export-financing activities for Germany’s midsize firms.

—Madeleine Nissen contributed to this article.

Posted on November 2, 2015, in Postings. Bookmark the permalink. Leave a comment.

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