Shake-out starts in Germany as Bavarian banks merge

Two Bavarian banks announced plans to merge yesterday, creating Germany's second biggest bank and Europe's largest mortgage provider. The fusion of Vereinsbank and Hypo-bank heralds the beginning of the long-awaited shake-out in the German banking sector, regarded by analysts as one of the most inefficient in Europe.

The merger, expected to be approved by Germany's cartel office, will create an institution with combined assets of DM742bn (pounds 246bn), which is DM140bn behind the market leader, Deutsche Bank. The integration of the two banks will take nearly a year to complete.

In the first step, Vereinsbank will swap shares it holds in the Allianz, the insurance giant which is a shareholder in both banks, in return for shares in Hypo. This will give Vereinsbank a stake of up to 45 per cent in Hypo-Bank.

In the second stage, the full merger of the two banks will be prepared from October, with plans presented to shareholders for approval by spring 1998 at the latest. Allianz will hold 15 per cent of the new merged bank.

"The way they've done it is exceptionally clever," said a source close to JP Morgan, who brokered the deal. "The merger is strongly earnings- enhancing."

Analysts estimate savings of DM1bn a year as a direct result of the fusion. The new entity, to be called Bayerische Hypo-und Vereinsbank, is expected to shed between 5,000 and 7,000 staff of the current total of 40,000. It will outrank the current number two bank, Dresdner, which employs 46,000 people and has DM561bn worth of assets. Officials declined to predict yesterday how many of the two banks' 1,259 branches, mostly in Bavaria, would be kept.

The merger will help to boost the international presence and visibility of the banks. Vereinsbank has been in the United States for decades, with offices in New York, Chicago, Los Angeles and Miami. Hypobank also has an office in New York.

The German banking market has long been ripe for a big merger, with the "Bavarian solution" presented in yesterday's announcement seen as one of the most likely scenarios for much-needed consolidation in the sector.

Germany is regarded as heavily overbanked, with more than 3,600 commercial, public and co-operative banks battling for market share, and a rate of one branch per 1,100 inhabitants. The top five banks have a joint market share of just 14 per cent and are struggling to make their costly retail branch networks more efficient.

The two banks now coming together have recently been the subject of takeover rumours. Deutsche bought a 5 per cent stake in Vereinsbank a year ago in preparation, it was believed, for a full-scale bid. Deutsche is now expected to intensify its search for suitable takeovers.

Bank shares in general surged on the Frankfurt bourse when trading opened yesterday. Vereinsbank shares jumped 12.2 per cent to DM92 while Hypo- Bank stock jumped 25 per cent to trade just under the DM75 offer price at DM73.

But analysts' initial reactions were mixed. Commerzbank immediately raised its recommendation on the top five listed German banking stocks to a "buy", while Salomon reduced its recommendation on Vereinsbank to "hold" from "buy".

Vereinsbank, partly owned by the Bavarian state, has been one of the star performers of the sector, turning in double-digit growth for several years. In 1996 it recorded a profit of DM1.64bn, and was expected to repeat the feat this year.

Edmund Stoiber, the Prime Minister of Bavaria, welcomed the merger plans, saying they would strengthen the competitiveness of the two banks.