Another year means another chance for Germany to slough off its recent dismal record and make a positive impression in the capital markets. That’s the theory, and bankers have certainly started 2005 in a more upbeat mood. Then again, that was the story last year, so is there any more reason for optimism now?
Economically, the country has been afflicted by a combination of contracting growth, sluggish domestic consumption and rising unemployment. Add in high oil prices and a strong euro, and the alarm bells begin to ring. Some recent consumer surveys have been more upbeat and reforms are underway, but it is difficult to see the economy strengthening in the second half of the year. This is not the best backdrop for capital markets activity.
The country’s economic woes have been accompanied by problems in its investment banking industry. Ever-increasing competition has led to falling earnings and even losses at some houses, and certain banks have scaled down their activities. The answer must be for banks to play to their strengths. For example, as foreign competitors fail to target mid-cap companies and lack retail penetration, unique opportunities still remain for the domestic houses.
But in the loan market, German lenders are certainly under siege. Despite rapid growth in syndicated loans as borrowers move away from bilaterals, banks are facing highly aggressive competition and the problems linked to the lack of consolidation in their home market. Add the rapidly approaching Basle II deadline and the loss of the State guarantee mechanism, and the pressure for change in German loans cannot be ignored.
The Landesbank sector is also going through a challenging period. As the deadline approaches for the loss of the their State guarantee, restructuring challenges linger and nagging doubts remain as to whether Landesbanks will retain a place in the German banking system. In this report, we look at how they will fare.
Restructuring – of institutions and balance sheets – is a recurrent theme in this report, and the need for German banks to sell non-performing loans has sparked a flurry of interest from buyers of distressed debt. But with a slower than expected NPL disposal programme in 2004 and some expensive sales, will the same funds remain interested?
As well as restructuring old businesses, there are new opportunities to be seized. The arrival in Germany of foreign capital looking for value in the debris of the domestic banking system has created potential for a large secured bond market. Meanwhile, the new pfandbrief law means that borrowers must lift the lid on their once opaque cover pools.
The outlook for high-yield is also good. Financing middle-market Germany has provided European high-yield with a steady stream of business, and the same if not better flows are expected in 2005. As corporates turn away from the loan market, high-yield investors are welcoming the supply with open arms.
In the derivatives market, second-guessing likely German federal government swap use has become a near obsession for dealers, partly because the local debt management agency shrouds its intentions in secrecy. Increasingly sophisticated asset and liability management by insurance