A splattering of public bank mergers
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A splattering of public bank mergers

By 2005 Germany's Landesbanken will lose their state support. Then, say the private commercial banks, the country's banking system will benefit from a level playing field. But none of the banks will be able to turn a profit if they don't make radical changes.

Germany's like a ketchup bottle

The German banking system is in trouble. Private commercial banks say their profitability and capital generation will improve after public-sector rivals lose state support in 2005, by EU order. That may be wishful thinking. Close analysis suggests that several of the banks supported by Germany's states, the Landesbanken, are far cleverer and more dangerous than private bankers often assume.

True, they need to cut costs and improve profitability to match the increase in their funding costs. Mergers are on the way.

Consolidation has to happen and among both Landesbanken and savings banks. Richard Zirps, director in Lehman Brothers' German debt capital markets group, says: "These issues are complicated and always take plenty of time, but they have to be resolved by 2005. Germany's like a ketchup bottle - you hit it for half an hour without result and then everything comes out at once."

After consolidation, the Landesbanken could emerge as even more potent competitors; the commercial banks' hard-fought effort to level the playing field could blow up in their faces.

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