Not so bleak

In last week's issue (“The flying forint”) we said that the Czech Republic's official short-term interest rate was 1.5%. The correct figure is 2.5%. Apologies.

Public-sector banks are preparing for a tougher future

"IT'S the best thing that ever happened to us,” says Gunther Merl, head of Landesbank Hessen-Thuringen (Helaba). He is referring to a case taken to the European Commission in 1994 by Germany's private-sector banks against their public-sector rivals, such as Helaba. “It rather backfired,” says Mr Merl.

That may sound odd, because the public banks lost. They will forfeit their state guarantees from next year, and last month were ordered to pay €4 billion ($4.8 billion) in back interest for assets funded at below market rates. But most of this money will return to them in the form of new capital from their owners, and the commission's ruling has sent a fresh breeze of competition through the state sector. While the private banks have been reducing their lending exposure, the public banks have been picking up business.

The public-sector banks - 11 regional wholesale Landesbanken, a few development banks and nearly 500 savings banks - account for 36% of German banking assets and more than half of savings deposits. For years they have been protected by laws and state guarantees from the full force of the market. Since 2001 they have known that their privileges, including cheap funding, would end. The Landesbanken are not yet making money - although they are doing better than big private banks. But the public banks are reshaping themselves as far as they can, short of privatisation.

This week, Fitch, a rating agency, gave its blessing to S-Verbund, an alignment of local savings banks with Helaba. The binding of business policy and risk management under an active supervisory committee, with a consolidated balance sheet, is so strong that Fitch sees S-Verbund as a “single economic group”. It bumped up its hypothetical unguaranteed rating for Helaba by one notch to A+, giving the flotilla of 51 savings banks the same rating.

Such links between savings banks and Landesbanken are likely to strengthen. Helaba is negotiating to buy Frankfurter Sparkasse, a so-called “free” savings bank (ie, which is not municipally owned). Savings banks in Bavaria, Baden-Wurttemberg and North Rhine-Westphalia, have also huddled around their local Landesbanken, but in a looser way. There has also been some consolidation between Landesbanken: recently one, Landesbank Rheinland-Pfalz, agreed to become a subsidiary of its neighbour, Landesbank Baden-Wurttemberg. All of this has persuaded rating agencies to give hypothetical ratings for next year of between A+ and A- to all the LANDESBANKEN but one, enough to allow them access to normal funding in the capital markets.

Still, the Landesbanken face big challenges. Their original function, as wholesale banks and lenders to local governments, has left most of them with no retail base. They have always had to be wary of competing directly with savings banks, their part-owners, and with the mutual-fund business of DekaBank, which they own jointly with the savings banks.

Supra-regional mergers between Landesbanken are unlikely, notwithstanding Bayerische Landesbank's ownership of tiny Landesbank Saar. As for privatisation, some public-sector pragmatists believe this will happen within ten years. In North Rhine-Westphalia, local politicians have proposed the sale of minority stakes in savings banks. A bid by the mayor of Stralsund, a small port in eastern Germany, to sell the local savings bank, was blocked by the state government early this year.

Some bankers, including Dietrich Hoppenstedt, head of the national savings banks association, see private ownership as the very devil. More than privatisation, others fear the pressure on short-term performance that comes from a stock-exchange listing. “Without being punished by quarterly reporting we can plan for the longer term,” says Helaba's Mr Merl.

In the next few years, however, structures such as those in Italy or Austria may emerge, in which savings banks are appended to listed holding companies. With capital expensive and local governments short of cash, the push towards shareholder value cannot be resisted forever.

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