Just two weeks before the figures were published, acting Chief Executive Johannes Ringel told shareholders he expected the Dusseldorf-based bank to break even in the first half. But that was before a report by BaFin, Germany's chief financial-sector regulator, which called on WestLB to make an additional $248.6 million in provisions for its exposure to BoxClever, a troubled British TV-rental business.
The bank, which owns more than $500 million of BoxClever bonds, had already set aside $485.9 million for potential losses in its 2002 accounts. "We have now put everything we see in risk on the table," says Ringel, whose predecessor Jürgen Sengera, resigned in June. "The result was that we made a loss."
WORRIED POLS. Ringel claims that WestLB, which is 43.2% owned by the state of North Rhine-Westphalia, has now put the worst of its problems behind it. "We have taken a very, very conservative assessment of our risk," he says. Although he admits that WestLB, which has $331.1 billion in assets, is unlikely to make a profit for 2003 as a whole, he says he's satisfied with its revenue performance: "The main target for us is to keep our revenue stream alive, and the last six months have shown that we have been very successful in doing that." He adds: "I hope we will achieve this in the coming months as well."
The CEO has a point. WestLB posted an operating profit of $542.9 million in the first half and plunged into the red only at the net level after making provisions of $695.2 million. But that hasn't soothed North Rhine-Westphalian politicians, who fear that they may be asked to inject fresh capital into the bank. They're worried that revenues will tumble in the second half, and they fear that the bank is losing customers as a result of the bad press surrounding its dismal performance.
Business volumes slumped in June, when WestLB's posted a measly $4.5 million operating profit. Skeptics also note that the bank, which is a major player in the fixed-income markets, could be hurt by the bond market downturn.
OVER THEIR HEADS? Ringel insists that the sickly state of the German economy goes a long way to explaining WestLB's poor performance. "We're facing a crisis, like most German banks faced in 2002," he says. Germany has been through two recessions since 2000, and a record number of companies went bankrupt last year. The result: Most of the country's banks were swamped by bad debts.
WestLB has been hit harder than most, however. Critics blame ambitious managers who expanded too quickly into businesses they didn't fully understand. Like Germany's other Landesbanken, WestLB is the central institution for the savings banks in its local area. It's main function is to handle money-market, investment banking, and other complex operations on behalf of the savings banks, which are mostly small institutions with just a handful of branches. It also acts as the banker to the state of North Rhine-Westphalia.
Over the past decade WestLB has transformed itself into a global investment bank with offices in London, New York, and other international financial centers. It has also built up a major international bond business, moved into equity underwriting and even ventured into the Scandinavian mortgage market.
UNFAIR ADVANTAGE. WestLB was able to take business from private-sector banks around the world by exploiting its favorable credit rating. Because it's largely owned by the North Rhine-Westphalian government, it benefits from state guarantees, which means credit-rating agencies give it a much better ranking than it would otherwise deserve. WestLB can therefore borrow money more cheaply than many private-sector banks and, as a result, undercut them. And because it's under less pressure from shareholders to make profits, it can charge lower fees for investment-banking operations than private-sector banks can.
The trouble is that WestLB's practies came to the attention of the European Commission in Brussels, which ruled last year that the guarantees must be phased out by 2005 because they give WestLB and other Landesbanken an unfair advantage. As a result, WestLB is having to pay more for its funds, which removes one of its most important competitive edges.
That's not its only problem, however. WestLB had lent heavily to companies that couldn't repay. On May 16, it set aside $2.2 billion against nonperforming loans on its 2002 balance sheet. That's twice as much as it had forecast in February. It also looks likely that WestLB will have to make more provisions later this year.
"DRASTIC MEASURES." At the same time, trouble erupted at the London branch where Robin Saunders, the head of principal finance -- the banking equivalent of private equity -- had masterminded 35 transactions worth almost $25 billion since joining the bank in 1998. Saunders, a North Carolina native who studied dance at Florida State University before turning to finance, was considered one of the most dynamic dealmakers in London. She was so successful that as late as last October, former WestLB CEO Sengera talked about giving her a $3.5 billion war chest to fund deals.
But things unraveled this spring when it became clear that BoxClever, in which Saunders had invested more than $500 million, would probably not be able to pay its $190 million in annual interest payments. Some other Saunders deals also look like they could go sour. As a result, WestLB had to make huge provisions, the regulators swooped, and Sengera was forced to resign because he had signed off on the transactions.
WestLB is now seeking buyers for Saunders' unit. It's also exiting unprofitable businesses and initiating a far-reaching cost-cutting program. Ringel has put a new risk-management system in place that should prevent the bank from getting involved in bad deals. "We have set drastic measures to reduce risk," he says. "We have added a lot of new regulations so that staff have a clear guideline as to how they operate and will be, as far as possible, risk-averse."
That's all to the good. But given the scale of its problems, most analysts think WestLB probably won't start making a profit again until 2004 at the earliest. By David Fairlamb in Frankfurt