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After more than €9bn ($12.6bn) of losses last year, these are the toughest of times for Germany’s Landesbank sector. Two of the seven institutions have this month unexpectedly parted company with their chief executives, and the talk in Germany is of government pressure to force consolidation on the regionally owned banks, which Berlin has never controlled.
Gunter Dunkel, chief executive of NordLB, is nevertheless upbeat about the future of his bank, which enjoys closer links to the more stable, retail-led savings bank sector than most peers.
“The mixture between entrepreneurial savings banks in a region, and a strong Landesbank focusing on client business, is a wonderful model for the next 150 years,” he says in an interview.
NordLB was a relative winner in the sector last year, albeit with pre-tax profits of only €22m ($31m). Mr Dunkel, who took over last year, sees no advantage in taking part in a forced consolidation of the sector.
But he admits that Landesbanken have to improve and believes their business models must have a strong regional component. “We will concentrate on pure client business and eliminate everything else . . . We want a simplified, regionally rooted bank, with 50 per cent in special finance,” he says of NordLB.
“Our special finance is client oriented and asset oriented. We never steered away from always taking the asset as security, as a matter of principle. We always want a mortgage or control of the asset.”
NordLB plays a prominent role in shipping and aircraft finance – sectors that many analysts believe will suffer big losses. Mr Dunkel is more relaxed than expected about this exposure, saying it is less of an immediate risk than property and corporate lending.
“Shipping will be more an issue for 2010 than 2009 . . . in aircraft we are one of the 10 biggest lenders in the world, with about €6bn, but we have a very young fleet, one of the youngest in the industry. That will protect us from significant losses,” he says. “We believe shipping and aircraft are being a little overestimated in terms of the risks borne by Landesbanken, while real estate and corporate risk is a little underestimated.
“In corporates we are well spread and have very few loans to large corporations. We believe the big hits will come from big corporates that cannot finance in the dried-up capital markets. We are not really exposed to large acquisition finance. But nevertheless this is unsecured business and so we have to account for increased risk in a downcycle.”
Problems persist at DnB Nord, the Denmark-based bank centred on the Baltic region, which is co-owned with DnB NOR of Norway. DnB Nord will make a loss this year, Mr Dunkel says.
“We agree with DnB NOR, our co-owner, that this is a cycle and not a structural bad market. We want to see the bank through this difficult period because we strongly believe that in three to five years’ time these will become very attractive banking markets again,” Mr Dunkel says.
“We are not overly exposed. We believe Latvia, economically, has already found the bottom and Lithuania most likely as well. Poland has not been hit so hard, so we have to see what the outcome is there.”
Mr Dunkel says Germany’s government is showing a “sense of urgency and concern about the banking sector as a whole”. But he harbours doubts about the effectiveness of the “bad bank” plans to be implemented by Berlin, which will allow banks to cut their short-term exposure to a collective €200bn of “toxic” assets by shunting them into a special purpose vehicle.
The scheme is “not an option” for NordLB, he says, although a wider scheme that could give banks relief from a broader range of illiquid assets could be more of interest.
“The advantage in doing so would not be loss-prevention but taking the volatility out of the balance sheet,” he says. “But I don’t think the government will turn to illiquid assets before the issue with toxic assets is resolved . . . It is a question of the size of the problem, and politicians are quite right in first trying to solve the problem of toxic assets.”