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Bad assets

October 19, 2009

Analysts at US investment bank Merrill Lynch say their German competitors haven't done enough to clear toxic assets from their balance sheets, and will soon be forced to make a second wave of write-offs.

WestLB headquarters
Merrill Lynch says WestLB is still sitting on about 96 percent of its toxic assetsImage: AP

Analysts from US financial services giant Merrill Lynch have warned the German government that the nation's biggest banks are still harboring billions of euros of bad assets in their books, according to a report published Monday by Der Spiegel magazine.

The Merrill Lynch study said its German competitors are currently holding 650 billion euros ($970 billion) of "problematic" assets - equal to one quarter of the nation's gross domestic product (GDP). It said there was an acute need for 60 billion euros of write-downs.

"German banks appear to have a considerable backlog of non-performing loans," Der Spiegel quoted the study, adding that the nation's lenders were making little progress compared with international efforts to overcome the financial crisis.

Little progress

The logo and headquarters of Commerzbank in Frankfurt
Commerzbank's balance sheet clean-up could prove costlyImage: AP

The study said Germany's regional state lenders appeared to be the most reluctant to correct the values of their toxic assets.

Duesseldorf-based WestLB, for example, has only made write-downs on four percent of its 30-billion-euro junk bond portfolio, while its Stuttgart-based counterpart LBBW has downgraded just 11 percent of bad assets worth an estimated 22.5 billion euros.

Meanwhile, Germany's second largest bank, Commerzbank, is yet to tackle three quarters of its structured debt despite receiving some 18 billion euros of state aid.

Merrill Lynch analysts said balance sheet corrections and other risks stemming from its eastern Europe operations could wipe out 13.6 percent of Commerzbank's total value.

Accurate figures?

Der Spiegel reported that the financial institutions named in the study criticized the document for being too general and even misleading in its analysis of their portfolios.

But the magazine also said Merrill Lynch analysts had succeeded in capturing the attention of high-ranking government officials at both the finance ministry and the chancellery.

"They haven't dramatized the situation," an unnamed civil servant was quoted as saying. "Instead, it seems they wanted impress us with a very realistic assessment."

Editor: Kate Bowen