September 26, 2011 1:34 am

Finance industry: Demise of WestLB is a sign of changing times

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The decline of Düsseldorf as a financial centre has been a disappointing aspect of North Rhine-Westphalia’s economic performance over decades.

Now it is to lose its biggest bank, WestLB.

Publicly owned WestLB, which employs 2,900 people in Düsseldorf, is to be broken up, the price demanded by EU competition authorities after a series of mistakes and bail-outs.

Germany’s most populous state will be the first to lose its Landesbank in this way, reflecting the broader identity crisis for these institutions, many of which are struggling to find a viable business model.

If an agreed plan is stuck to, by June 30 next year the bank – owned by the state government and the savings banks of North Rhine-Westphalia – will be split up and most parts sold or earmarked for winding down.

A rump institution will continue but will not carry the WestLB name and may not preserve many jobs in a city that once rivalled Frankfurt as Germany’s financial capital.

Norbert Walter-Borjans, the state’s finance minister, says: “It has been clear for a long time that the [European] Commission would only accept a drastic reduction of the bank. Brussels wants WestLB to disappear: definitely the name, and definitely the banking business.

“I can understand some of Brussels’ frustration with WestLB over the years, but that is not a matter for revenge and it does not make the decision any easier to swallow.

“Any form of restructuring will cost jobs – we have to be clear. Of course that is not pleasant, but this was the only course available to WestLB.”

Hope for the future comes from another bank in the city, HSBC’s German subsidiary, HSBC Trinkaus, which has expressed interest in buying some parts of the WestLB business. Mr Walter-Borjans insists: “Banking is not going to disappear from the state be­cause one bank goes. This economic hot spot is not going to be a dying location for finance.”

The crises at WestLB, which was created in 1969, have not been a good advertisement for past regional governments, which, as dominant owners of the bank, had oversight of – or some might say, meddled in – its strategy: nor for the managers who failed to give it a sustainable business model.

The bank built up a sizeable international business and pushed into investment banking but repeatedly proved accident-prone.

Trading losses in 2007, and heavy losses on the types of securities at the heart of the financial crisis in 2008, were the beginning of the end for WestLB, whose owners missed chances to cut merger deals with other banks.

By next summer, WestLB will have been scaled back to something called a Verbundbank, capitalised by the savings banks and engaged in low-risk business.

The reformed entity is intended to have a balance sheet of only €40bn ($55bn) to €45bn, in comparison with the current figure of €160bn, and staff of only 400.

Talks have started on ways of incorporating it into Frankfurt-based Helaba, another Landesbank, which might mean a further migration of influence from Düsseldorf.

Parts of WestLB that cannot be sold by next June will have to be wound down via a “bad bank”.

This unit, called Erste Abwicklungsanstalt or EAA, was set up in December 2009 to start winding down some €77bn of toxic and unwanted assets that WestLB removed from its balance sheet as part of rescue efforts.

WestLB hopes to sell as many businesses as possible before June 2012, but the current nervousness in financial markets is bound to make the task more difficult.

HSBC is said to be interested in WestLB’s most profitable business line, corporate customers, while Apollo, a US financial investor, is in talks over the bank’s property finance unit.

“We are confident that, in spite of the difficult market environment, we have enough link-up options,” Dietrich Voigt­länder, WestLB chief executive, said last month.

Subject to talks with Brussels, the regional government also wants part of WestLB to continue as a locally-based “service and portfolio management” bank.

This would not be a lender, but would offer services under contract to the Verbundbank, EAA and third parties.

How many jobs this might preserve is unclear and it would also probably have to be privatised after a few years.

NRW Bank, the state’s development bank, was carved out of WestLB almost a decade ago and remains in state hands.

Mr Walter-Borjans acknowledges that times have changed in the Landesbank sector.

“A Landesbank that is primarily doing corporate banking business is not something that needs to be in public ownership.

“We have the development bank to be active in fields where it is required,” he says.

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