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OO RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
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O 271004Z FEB 08
FM AMCONSUL FRANKFURT
TO RUEHC/SECSTATE WASHDC IMMEDIATE 4831
INFO RUEATRS/DEPT OF TREASURY WASHDC IMMEDIATE
RUCNMEM/EU MEMBER STATES IMMEDIATE
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UNCLAS SECTION 01 OF 02 FRANKFURT 000568
SIPDIS
DEPARTMENT FOR EUR/AGS
TREASURY FOR LUKAS KOHLER/OFFICE FOR EUROPE AND EURASIA
SIPDIS
E.O. 12958: N/A
TAGS: EFIN ECON GM
SUBJECT: German Private Bank Successes Highlight State Bank
Failures: The Outlook from Frankfurt
ENTIRE TEXT IS SENSITIVE BUT UNCLASSIFIED. NOT FOR INTERNET
DISTRIBUTION
REF: 08 Leipzig 0002
1. Summary. With 2007 annual reports coming in from the German
banking sector, Germany's two largest private banks registered
record earnings despite losses in the second half of the year from
subprime-related investments. The success of the large private
banks stands in contrast to several smaller state-owned banks that
have experienced significant losses and, in some cases, been forced
to rely on government intervention. While the recent shake-ups have
altered the German banking landscape, Frankfurt-based executives and
officials foresee no drastic changes in Germany's three-pillar
banking system and little cause for panic within the sector. End
Summary.
Private Bank Reports in, Results Good despite Turbulence
--------------------------------------------- -----
2. In early February, both Deutsche Bank and Commerzbank, Germany's
two largest private banks, reported record earnings for 2007 despite
write-offs in the second half of the year due to subprime-related
investments. Deutsche Bank reported 6.5 billion euros ($9.55
billion) in profits and 2.3 billion euros ($3.38 billion) in
write-offs, while Commerzbank announced a net profit of 1.92 billion
euros ($2.82 billion) and 248 million euros ($367 million) in
write-offs. On a less rosy note, Germany's third largest private
bank, the Allianz subsidiary Dresdner Bank, posted a meager profit
of only 450 million euros ($661.5 million), mainly due to subprime
losses, and announced that its K2 special investment vehicle would
require a rescue facility.
3. In a conversation with Pol Off, a senior Frankfurt-based
Commerzbank executive said the performance of Germany's private
banks was strong in this turbulent period because they were solely
responsible for the risks they accrued. He pointed out that
troubled state banks (Landesbanken) such as WestLB and SachsenLB and
the small private bank IKB had pursued "reckless" investment
strategies that led to ruin because these banks always had the
assurance of state intervention in case of serious trouble.
4. A Deutsche Bank executive noted that Germany's private banks had
to report on a quarterly basis, as opposed to annually in the case
of the state banks, and therefore had done better at disclosing
exposure in a timely fashion. According to the executive, Deutsche
Bank was, overall, not strongly affected by the turmoil because of
its diversified investment portfolio, including strong returns in
emerging markets. The Commerzbank executive highlighted his bank's
strong returns on investments in Eastern Europe and in Germany's
small and medium-sized businesses, which more than offset losses
from subprime vehicles.
5. Several sources confirmed rumors that Deutsche Bank and
Commerzbank would be interested in buying the government-owned
Postbank. Postbank has around 14.5 million private account holders,
a business sector attractive to the private banks, while Postbank
needs the access to other markets that the private banks provide.
Such an acquisition would shake up the banking sector in Germany by
creating what would be Germany's preeminent bank.
State Bank System Battered but Holds Up
---------------------------------------
6. Losses by smaller banks have fueled speculation that the
financial turmoil will shake up the three pillar German banking
system which separates private banks, savings and state banks
(Sparkassen and Landesbanken), and cooperative banks. Experts in
Frankfurt, however, saw little prospect for such a serious challenge
to the state bank system, where WestLB is in trouble, SachsenLB has
become insolvent and other banks have suffered heavy losses. An
official at the Bundesbank told Pol Spec that the three pillar
system could only be broken up by political forces, not economic
ones. The state banks enjoyed official government backing until
2005 and since that time still maintain close relations with the
state governments which often see the banks as a vital economic and
political asset. Landesbank Baden-Wuerttemberg's pending takeover
of SachsenLB (which is accompanied by a guarantee from the state of
Saxony) and the state bailout of WestLB again seemed to show that
consolidation was likely to occur only within, not between, each of
the three banking pillars and private banks would not have the
opportunity to acquire these entities.
7. A senior executive at Helaba, the state bank of Hesse and
Thuringia, pointed out that the financial turmoil had only affected
four of the six state banks and that his bank and NordLB remained
unaffected because they pursued a more conservative, but ultimately
FRANKFURT 00000568 002 OF 002
more successful business model. He dismissed rumors of more mergers
among the state banks or a possible pooling of losing assets, saying
that the healthy state banks would not have much interest in
partnering with the troubled ones. His outlook was confirmed on
February 21, when Hesse Economics Minister Alois Rheil said the
board of Helaba had cooled to the idea of taking over WestLB,
presumably in light of new evidence of the latter bank's poor
financial position.
8. The Commerzbank executive called troubled WestLB "the biggest
casino in Germany in the last fifteen years," and highlighted the
fact that Finance Minister Peer Steinbrueck was once Minister
President of North-Rhine Westphalia and therefore must have known
about the bank's risky investment strategy. The executive
questioned Steinbrueck's credibility in his recent calls for more
transparency in the banking sector in light of his former role. The
recent bailout of WestLB and the state-guarantee in the acquisition
of SachsenLB show that state governments still play an active role
in managing the state banks. The executive criticized the
relationships between the banks and the public officials, who often
sit on their boards, commenting that board memberships were treated
as perks and the members provided little real oversight of the
banks' activities. He predicted that the number of state banks
would decline, but that there would be no real changes to this
uniquely German system.
8. Comment: From the viewpoint of the Frankfurt business community,
the recent spate of annual reports points to basic stability in the
private banking sector and provides grounds for optimism that the
worst of the subprime turmoil is already behind us. At the same
time, the success of the private banks in a sink-or-swim environment
only highlights the lack of accountability among some state banks.
While outsiders have criticized the state banking system for
enabling banks to pursue risky strategies, it will most likely
endure unless there is a political change of heart. End Comment.
9. This cable has been coordinated with Embassy Berlin, which will
be providing a broader analysis of the current state of banking in
Germany in line with its ongoing reporting on the impact of the
subprime financial crisis, and also with Consulate General
Duesseldorf and Consulate General Leipzig.
POWELL