German banks disclose merger talks

Two more German banks on Monday disclosed they were in exploratory merger talks in a move that could quicken the pace of consolidation in the state-controlled financial sector. Landesbank Baden Württemberg said it was in talks with smaller rival Landesbank Rheinland-Pfalz about a takeover to create an institution that would overtake Bayerische Landesbank as the country´s largest state-owned bank by assets.

'We are in early, exploratory talks. A merger is always a possible scenario,' said Heinrich Haasis, supervisory board chairman at LBBW, which operates in the south-west of the country.

A deal would cut to 10 the number of landesbanken that combine the roles of development banks, central banks for their respective regions and clearing houses for local savings banks. The sector is in a state of flux as it prepares for the phased loss of state guarantees from July 2005.

However, observers warned that talks could well founder over conflicting interests.

The biggest obstacle could be WestLB, which is trying to sell its 37.5 per cent stake in Landesbank Rheinland-Pfalz in a bid to ease its own capital stresses.

WestLB is understood to be seeking a cash payment for the stake.

But aides to LBBW´s management described that aim on Monday as unrealistic.

An unpublished analysis of landesbanken by Standard & Poor´s last month showed that, without state guarantees, all but three of the banks would fall into BBB credit-rating territory, rendering unworkable their current business models based on borrowing cheaply in international markets.

S&P has said that merging with other institutions was one of the main ways that landesbanken should be able to improve their ratings.

The only significant merger to date has been the combination of landesbanken in Kiel and Hamburg to create HSH Nordbank, the fourth-biggest state-owned bank by assets.

LBBW is the highest placed in S&P´s ratings, at A+.

Landesbank Rheinland-Pfalz, which is rated BBB, has been seeking a partner for some time. Talks to merge with Deka, the public-sector asset management specialist, broke down in the summer after a possible deal was blocked by other Landesbanken that part-own Deka.

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