Stress Tests

Four German Banks on the Brink

HSH Nordbank is coming under scrutiny for shipbuilding lending. Source: Bloomberg
HSH Nordbank is coming under scrutiny for shipbuilding lending.
  • Why it matters

    Why it matters

    The European Central Bank was tasked with checking the financial solidity of Europe’s banks following the wake of the global financial crisis.

  • Facts

    Facts

    • Four German banks are possibly on shaky ground with the ECB’s stress test, sources said.
    • HSH Nordbank is intense discussions with regulators over the risks from shipbuilding lending.
    • The ECB will announce results on October 26.
  • Audio

    Audio

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Time to sink or swim? In a week it will be the hour of truth for 128 banks across Europe, including 24 German institutions.

The European Central Bank will give the results of its so-called “stress tests” to the banks on October 24. Shortly thereafter, at a Sunday afternoon press conference in Frankfurt, it will inform the public about which of the banks passed the months-long checkup into the health of their balance sheets. The test is designed to give the ECB a clean slate when it takes over the role of supervising Europe’s largest banks on November 4.

While Germany’s largest banks, including Commerzbank, are expected to pass the test, there are still four smaller banks putting in extra hours in hopes of passing ECB muster, according to information received by Handelsblatt.

“In part, data and justifications need to be sent over, in order to convince the regulators,” said one insider, who declined to be named.

Sources in the financial industry have named the state-backed regional lender HSH Nordbank, as well as IKB, a Düsseldorf-based bank supporting small and mid-sized businesses. The southern regional bank MünchenerHyp is also on the edge. The fourth bank is still unknown. The sources say it is possible that, after the last consultations, only two are really at risk of failing the stress test.

Commerzbank, Germany’s second-largest bank that is still 17-percent owned by the German government, seems to have cleared the hurdles. Deutsche Bank is also not being treated as a problem bank. The largest German bank’s future legal costs are not being considered in the stress test and its capital increase last spring has a positive impact on the stress test rating.

Observers also give the all-clear to the publicly listed Aareal Bank and the cooperative financial institutions DZ Bank and WGZ Bank. Spokespeople for the banks would not comment before the results are released. When it comes to Germany’s state savings banks, BayernLB considers itself to be not at risk. CEO Johannes-Jörg Riegler said on Thursday: “You can assume that we are very, very solidly equipped and have considerable buffers to cushion some things. Do not worry.”

But the situation in the very north of the country is more dramatic, where HSH Nordbank is struggling to convince regulators.

Following an increased guarantee worth billions of euros on the part of the public owners Hamburg and Schleswig-Holstein, the state bank is so well financially padded that it could financially cope with the tougher guidelines from the ECB on the assessment of ship loans. According to the guidelines of the central bank, a lump reduction of 12 percent based on the calculated value of the ship will be levied, which naturally has an impact with ship lending volume of €20 billion.

At issue is the performance under the so-called adverse scenario, which simulates high macroeconomic burdens such as a recession, a lasting shipping crisis, interest rate shocks and pressure on real estate prices

“Even so, we would have a core capital ratio which would be considerably over the minimum requirement of 8 percent,” said Stefan Ermisch, chief financial officer of HSH Nordbank in August. In the first half of this year, the bank reported a core capital ratio of 12.8 percent. Nevertheless, it is still unclear if the HSH Nordbank has passed the stress test.

At issue is the performance under the so-called adverse scenario, which simulates high macroeconomic burdens such as a recession, a lasting shipping crisis, interest rate shocks and pressure on real estate prices. Under this scenario, the bank has to show that it will still have a core capital ratio of 5.5 percent.

“The bank, the German Financial Supervisory Authority and the ECB are still having intense discussions on this,” according to sources in supervisory circles.

The bank supporting small and mid-sized businesses, IBK, is one of the financial institutions still trembling with fear. The ECB stress test took the institution by surprise last year, because, with a balance sheet total of €25.8 billion at the time, the IKB was actually too small to fall under ECB supervision. In an unusual move for the bank, it publicly complained about the matter.

It was “unexpected for the IKB, and triggered complex management problems and considerable expenditures and costs,” the institution said in a statement last December. In addition, the bank said, the timeframes were “surprisingly harsh and shortened with less time for the institution to react.” In the meantime, the ECB took the IKB off the list of banks that it wants to directly oversee. But the bank still had to undergo the stress test and plug possible capital gaps that are detected.

By contrast, the situation with the MünchenerHyp bank is not particularly problematic. The cooperative mortgage lender revealed a capital hole on the date the ECB used as a reference point for its test – December 31, 2013. At that time, the bank’s core capital ratio was at 6.3 percent, considerably below the necessary 8 percent. But last summer the bank implemented an extensive increase in capital, which led to the core capital ratio rising to 11.1 percent by the end of June.

Münchenerhyp is also backed by a collective promise among Germany’s cooperatives to back each other up if needed. “When in doubt, the Volks and Raiffeisenbanken will assist their institutions with further capital measures if there are problems,” said a source in the financial industry.

In all, the stress test will bring relatively good results for German banks. Whether or not this will bring back trust in the industry will first be seen with the market reactions during the week after the stress test.

Jürgen Fitschen, co-chief executive of Deutsche Bank and president of the German Banking Association, recently warned that simply waving all of the banks through would be “fatal.” But neither should the negatives be exaggerated.

Peter Köhler, Yasmin Osman, Frank Drost, Robert Landraf and Kerstin Leitel contributed to this story. To contact the authors: koehler@handelsblatt.com; landgraf@handelsblatt.com

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