VZCZCXRO8284
OO RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHFT #0568/01 0581004
ZNR UUUUU ZZH
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