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German bank 'deal' nixed
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July 7, 1999: 8:05 a.m. ET
Owners deny moves to merge regional banks to form German powerhouse
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LONDON (CNNfn) - German banking and government officials Wednesday quashed speculation of a three-way banking deal that could have led to the creation of the country's second-largest financial house after Deutsche Bank.
The officials were reacting to a report in the German business daily Handelsblatt that the federal states of Baden-Wurtemberg Hesse, Hessen and Bavaria were looking to combine their savings banks, known as landesbanks, into a single entity with assets of almost 1 trillion marks ($523 billion).
The report said the regional governments were looking to combine three of the largest savings banks - Bayerische Landesbank, Frankfurt-based Helaba and Landesbank Baden-Wuerttemberg -- into a new regional powerhouse provisionally known as Suedbank.
However, officials at the finance ministries in Bavaria and Baden-Wurtemberg Hesse told Reuters that there were no merger talks and dismissed the reports as speculation.
Helaba, which is already looking to sell a 49 percent stake to a strategic partner, didn't rule out the possibility of a different deal with other banks.
Helaba has held talks on its own with four other landesbanks -- including Bayerische Landesbank and Landesbank Baden-Wuerttemberg -- about the 49 percent stake. "Maybe in the near future there may alternatives [to the sale] such as a single holding company," a Helaba official told CNNfn.com.
Despite the official denials, analysts praised the logic of a three-way tie as the landesbanks seek to trim their high cost base, reflecting the large branch networks they are obliged to maintain. "There is a strong argument for pooling resources," said Jurgen Haferkorn, at the Duff & Phelps credit rating agency in London.
Haferkorn said a number of other landesbanks, notably Westdeutsche Landesbank (WestLB), have engaged in more limited cross-shareholdings to reap economies of scale in some markets, but Bayerische Landesbank has been notable for its absence in such deals.
The landesbanks -- most of which enjoy top-tier credit ratings because of their state ownership -- have used their balance sheet strength to expand in the international loan markets. Bayerische and Helaba are active participants in the European loan market.
Haferkorn said the momentum for mergers could be increased by the European Commission's decision to crack down on the state guarantees given to WestLB and other landesbanks, which decreases their cost of capital.
The landesbanks have so far trailed behind the publicly owned universal banks in consolidating. NordLB last year broke off merger talks with Berlin-based BBG.
The German banking landscape has been transformed by the merger of Munich-based Bayerische Vereinsbank and Hypo Bank to form Hypovereinsbank, currently the second-largest institution ahead of Dresdner Bank (FDRB).
However, Haferkorn said it was difficult for landesbanks to combine with publicly-owned banks because their large unfunded pension liabilities makes valuation difficult. 
-- from staff and wire reports
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