Financial Crisis Legacy

Struggling Regional Banks Rid Themselves of Bad Assets

Bavaria's finance minister Markus Söder. Bavaria is the main shareholder of Bayern LB. Source: DAPD.
Bavaria's finance minister Markus Söder. Bavaria is the main shareholder of Bayern LB.
  • Why it matters

    Why it matters

    Germany’s Landesbanken have cost federal and state governments billions of euros in bailouts since the financial crisis. The latest asset sales bring these banks closer to closing a dark chapter.

  • Facts

    Facts

    • BayernLB’s primary owner is the state of Bavaria. It still owes the German government €4 billion that has to be paid back by 2019.
    • LBBW is part-owned by the city of Stuttgart, the state of Baden-Württemberg and the state’s savings and loan banks. It took a bailout of €5 billion after the financial crisis.
    • Germany’s Landesbanken are among 127 European financial institutions being subjected to a comprehensive review of their balance sheets by the European Central Bank.
  • Audio

    Audio

  • Pdf

It hasn’t been easy for Germany’s Landesbanken over the last six years. Many of these banks, which are part-owned and guaranteed by the states, made bad loans and acquisitions ahead of the 2008 financial crisis and had to be bailed out to the tune of billions of euros by the German government.

For these banks, the legacy of the financial crisis remains a daily worry. Now, two of these state-owned banks, Bavaria’s Bayern LB and the Stuttgart-based LBBW, may have succeeded in shedding a major remaining portion of the bad loans on their books.

The asset sales could hardly have come at a better time. Germany’s Landesbanken are among the 127 European financial institutions currently being subjected to a comprehensive review of their balance sheets by the European Central Bank, the results of which will be released in October.

“We’re happy it’s over,” BayernLB chief executive Jörg Riegler said Thursday as he announced the sale of its Hungarian subsidiary, Magyar Külkereskedelmi Bank, or MKB, to the Hungarian government.

The Hungarian subsidiary was sold off for €55 million, slightly above its current market value, according to Bavaria’s finance minister, Markus Söder, who also attended the announcement.

The Bavarian state is the primary owner of BayernLB, which still owes the German government €4 billion from a bailout it made at the height of the 2008-2009 financial crisis. The bailout must be paid back by 2019. Mr. Riegler said the loan repayment remains on schedule.

After 20 years of losses, Bayern LB gets rid of its subsidiary MKB Bank. Source: DPA.
After 20 years of losses, Bayern LB gets rid of its subsidiary MKB Bank. Source: DPA.
After 20 years of losses of almost €2 bn, Bayern LB sells its subsidiary MKB Bank. Source: DPA.

 

 

With the latest deal, BayernLB can finally draw a line under a long and painful saga that has cost it some €2 billion since purchasing Magyar Külkereskedelmi Bank in 1994. Even the final agreement was painful – BayernLB agreed to relinquish claims of €270 million from the Hungarian bank.

“We’re escaping with a black eye,” Mr. Söder said.

Analysts viewed the sale positively. “The MKB has cost time and effort for management, which can now turn its attention to the core business,” said Michael Dawson-Kropf, who heads German banking analysis at the rating agency Fitch.

The clean break with MKB is also a far better result for BayernLB than the ongoing troubles it faces with its former Austrian subsidiary, Hypo Alpe Aldria, a bank it took over in 2007 for €1.7 billion. When the bank faced collapse after the financial crisis, it was handed over to the Austrian government in 2009 for a total of one euro.

Five years later, Hypo Alpe Aldria “still remains the biggest challenge” for Bayern LB, according to Mr. Söder. The two banks are still in court fighting each other for billions of euros in damages. The Austrian government is also involved – the parliament is moving on a law that would reclaim the costs of its own bailout from Hypo Alpe Aldria’s creditors. BayernLB could be required to pay €800 million.

The Stuttgart-based Landesbank Baden Württemberg, or LBBW, has meanwhile found a buyer for a securities portfolio amounting to €4.7 billion, according to financial sources.

LBBW has already shrunk its portfolio of risky assets held over from the financial crisis down from €95 billion to €9 billion. While it will likely make a small loss on the latest sale, according to the local newspaper Stuttgarter Zeitung, analysts said this is a good time to shed risky loans. Many hedge funds and investors around the world are taking on more risk to earn money in the current climate of low interest rates.

“I think it makes sense for banks to be selling their loan portfolios at the moment,” said Martin Faust, a banking professor at the Frankfurt School of Finance and Management. “There seems to be an opportunity that banks should be making use of.”

 

MKB bank in Budapest. Source: Soós Lajos
MKB bank in Budapest. Source: MTP.

 

The sale still has to be approved by LBBW’s owners, which include the city of Stuttgart, the state of Baden-Württemberg and the state’s Sparkassen, a network of savings and loan banks. The three groups have a voice after rescuing LBBW from collapse in the financial crisis, raising €5 billion in capital and offering nearly €13 billion in guarantees for its loan portfolio. LBBW is paying its three creditors fees of about €300 million per year for those guarantees, an amount that would go down if the latest asset sale is approved.

Stuttgart’s city council has already backed the deal, while the local Sparkassen association is expected to approve the sale on Monday, according to financial sources. A spokesperson for Baden-Württemberg’s finance ministry said the state is still reviewing the deal. LBBW wouldn’t comment on the asset sale.

Christopher Cermak contributed to the story and rendered it into English.

We hope you enjoyed this article

Make sure to sign up for our free newsletters too!