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Western EuropeJuly 31 2007

Hannes Rehm, management board chairman of Nord/LB

In the debate on whether German Landesbanken should consolidate further, Hannes Rehm is Siegfried Jaschinski’s ideological opponent. While he does not rule out further consolidation in the sector, Mr Rehm, who has a PhD in economics, sees no pressing need for it, arguing that the three-pillar system has adequately financed corporate Germany.
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“Our German banking system has worked extremely well. There has never been a crisis and I’ve never heard of a case in which a German firm couldn’t get the capital it needed,” Mr Rehm tells The Banker at Nord/LB’s headquarters in Hanover. “What’s wrong with German firms turning to foreign banks for capital, especially when they do business in those banks’ countries? I thought this was what globalisation was all about.”

That Mr Rehm is, apart from his personal conviction, not amenable to change is easy to understand considering the good shape that Nord/LB is in. To prepare for the tougher competitive environment that followed the loss of its state guarantee, Mr Rehm and his board had the bank recapitalised to the tune of about €4.2bn, more than half of which came from its government and Sparkassen shareholders.

Other clever moves by Mr Rehm and the board included divesting non-core businesses like real estate holdings (now owned by US private equity firm Fortress), cutting 1000 jobs, strengthening corporate governance and finding a partner for further expansion in northern and eastern Europe.

That partner turned out to be quite a find: DnB Nor, the Norwegian banking giant that, like Nord/LB, is state-owned. In 2005, the two banks set up a retail venture for Scandinavia, Poland and the Baltic States. Based on the success of the venture, the partners have begun discussing what else they can do in banking. To further cement the relationship, Nord/LB is considering taking a 25% stake in DnB Nor.

“Nord/LB has been in the Scandinavian market for decades and has an excellent reputation there. When the region was hit by an economic crisis in the early 1990s, we were one of the few banks that kept its credit lines open. We have always been remembered for such loyalty,” says Mr Rehm.

There is much logic to Nord/LB merging with DnB Nor. There is a common culture, they are two of the world’s largest shipping banks and have a sizeable retail presence in their home markets (Nord/LB has 1.2 million clients and DnB Nor 2.1 million). The banks also complement each other in that DnB Nor would gain a major player in aviation finance, while Nord/LB would gain a major player in asset management. DnB Nor runs €200bn for retail and institutional clients.

Mr Rehm declines to comment on the prospects for a merger, but one bank expert in Munich is sceptical: “It’s hard to imagine that the government of Lower Saxony would want the Norwegian government controlling Nord/LB and vice versa.”

In any event, Mr Rehm’s restructuring efforts have produced a bank with a strong balance sheet and decent profitability, so it is no wonder that Mr Jaschinski recently knocked on its door. With a RoE of almost 14%, Nord/LB is one of the more profitable Landesbanken and, with a risk quotient of just five basis points (bp), is almost free of risk. Fitch assigned it a long-term debt rating of triple-A.

Mr Rehm says that in the interest of greater returns, the risk quotient might rise to 40bp in the mid-term. Other plans for the near future include expanding its private banking operations – it already has offices in Luxembourg and Switzerland.

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