COMMISSION DECISION
of 29 September 2010
on State aid C 32/09 (ex NN 50/09) implemented by Germany for the restructuring of Sparkasse KölnBonn
(notified under document C(2010) 6470)
(Only the German text is authentic)
(Text with EEA relevance)
(2011/526/EU)
THE EUROPEAN COMMISSION,
Having regard to the Treaty on the Functioning of the European Union, and in particular the first subparagraph of Article 108(2) thereof,
Having regard to the Agreement on the European Economic Area, and in particular Article 62(1)(a) thereof,
Having called on Member States and other interested parties to submit their comments pursuant to those provisions (1),
Whereas:
1. PROCEDURE
(1)
Germany notified the measures on 21 October 2009.
(2)
By Decision of 4 November 2009 (2) (‘the opening Decision’), the Commission reached the preliminary conclusion that the recapitalisation measures of Sparkasse KölnBonn (‘the Bank’) constituted State aid and raised doubts as to whether the measures provided to Sparkasse KölnBonn could be found compatible with the internal market pursuant to Article 107(3) TFEU. Further, the Commission required the submission of a restructuring plan by the German authorities.
(3)
On 6 January 2010 the opening Decision was published in the Official Journal of the European Union and interested parties were requested to submit their comments.
(4)
On 11 February 2010 Germany submitted a restructuring plan which was discussed in a series of meetings and teleconferences during the period from December 2009 to September 2010.
(5)
Germany submitted further information and updates to the restructuring plan on 15 January, 10, 12 and 24 February, 10 and 26 March, 21 and 28 May, 8 and 11 June, 23 July, and 10 and 23 August 2010. The final version of the restructuring plan was submitted on 1 September 2010.
2. DESCRIPTION OF THE BENEFICIARY
(6)
Sparkasse KölnBonn is a German savings bank. It was created in its current form in 2005 as a result of the merger of Stadtsparkasse Köln and Sparkasse Bonn, whose owners (‘Träger’, responsible public institutions, hereinafter ‘owner’) were, respectively, the cities of Cologne and Bonn. The city of Cologne indirectly holds a 70 % stake in the new bank, the city of Bonn 30 %. Subsequent to this merger the role of owner of Sparkasse KölnBonn is performed by the association Zweckverband Sparkasse KölnBonn (‘Zweckverband’). The Zweckverband, which is incorporated under public law, is a special purpose association. The sole participants in the Zweckverband are the city of Cologne (70 %) and the city of Bonn (30 %).
(7)
At the end of 2008 Sparkasse KölnBonn was the second largest savings bank in Germany with a balance sheet of EUR 31 billion. At this point, Sparkasse KölnBonn had an Aa2 rating from Moody’s. This was changed to A1 on 15 March 2010.
(8)
Sparkasse KölnBonn provides banking services for retail clients (Privatkundengeschäft) and corporate clients (Firmenkundengeschäft). The Bank is, with a regional focus, active in project finance and capital markets (Kapitalmarktgeschäft), as well as in other financial activities such as asset management.
(9)
The Bank is active only in the Cologne-Bonn region, where it held a market share of approximately [30-35] (3) % in private customer deposits, around [20-25] % in loans to private customers and [15-20] % in credits to corporate clients in 2008 (4).
3. THE AID MEASURES
(10)
The capital of Sparkasse KölnBonn was strengthened by a total of EUR 650 million
(i)
by the issuance of certificates of participation (Genussrechte) at the end of 2008; and
(ii)
by a silent participation (Stille Einlage) at the beginning of 2009.
3.1. Certificates of participation (Genussrechte)
(11)
In December 2008 Rheinische Sparkassen-Förderungsgesellschaft (‘Förderungsgesellschaft’) subscribed nominal participation certificates in Sparkasse KölnBonn amounting to EUR 300 million in two tranches of EUR 150 million.
(12)
Förderungsgesellschaft is a wholly-owed subsidiary of Rheinischer Sparkassen- und Giroverband (Rhine saving banks association - ‘RSGV’). RSGV is the public-law association (‘Körperschaft des öffentlichen Rechts’) of all savings banks and their public owners located in the Rhineland and represents the Sparkassen and their (public) owners. According to its statute the objective of Förderungsgesellschaft is the promotion of savings banks belonging to RSGV. Förderungsgesellschaft can contribute to the capital of saving banks for the sole purpose of developing further credit-granting activities and can be granted loans.
(13)
The coupon of the certificates is 8 %. The lifetime of the certificates is until 31 December 2013. From a regulatory point of view the certificates of participation are Tier-2 capital.
(14)
The certificates of participation participate in yearly losses proportionately to the total of loss-absorbing equity. A […] carry forward of the payments on the participation certificates is attached to them, i.e. foregone payments on the participation certificates must be paid up to [2-6] years after they were due. The same applies to payments to top up the nominal value of the participation certificates if it is depleted due to absorption of losses.
(15)
In order to finance the certificates, Förderungsgesellschaft subscribed two loans with […]. These loans bear a fixed interest of [4-5] % over the lifetime of the certificates of participation. The loan is guaranteed to […] by RSGV, which will receive from Förderungsgesellschaft a guarantee remuneration of [1,8-2,5] %.
3.2. Silent participation
(16)
The silent participation contracts were concluded on 2 January 2009 and on 27 February 2009 between Sparkasse KölnBonn and the Zweckverband setting up a ‘Stille Gesellschaft’ for a total of EUR 350 million, paid out in two tranches, EUR 300 million on 2 January and EUR 50 million on 1 April 2009. The silent participation is a device by which the investor does not obtain any voting rights but receives a remuneration. The instrument is perpetual and acknowledged as Tier-1 core capital. The silent participation is held by the Zweckverband.
(17)
To finance the silent participation, the Zweckverband has contracted a loan of EUR 300 million for the first tranche. 50 % of the loan is provided by […] and the remaining 50 % by […]. The remuneration of the loan payable by the Zweckverband amounts to 12-month EURIBOR plus [0,7-1,1] %. The second tranche of EUR 50 million was refinanced using a loan from […], remunerated at EURIBOR plus [0,7-1,1] %. Whilst there is no specific guarantee by either Cologne or Bonn, there exists an unlimited statutory liability of both cities for all liabilities of the Zweckverband pursuant to the statute of incorporation of the Zweckverband.
(18)
The remuneration paid by Sparkasse Köln Bonn for the silent participation is 12-month EURIBOR plus 7,25 %. That remuneration was set in line with a Fairness Opinion from Deutsche Bank. The payment of remuneration is subject to a balance sheet profit, and is foregone if Sparkasse KölnBonn reports no profit for the year. A payment is excluded if, at the time it is due, the capital ratio is below 9 % and in so far as the payment would lead to or increase a loss for the relevant accounting year. In case of deferral of the payment there is no carry-forward obligation to pay the foregone amount at a later point in time. Furthermore, the silent participation absorbs balance sheet losses in proportion to the total loss-absorbing capital.
4. THE RESTRUCTURING PLAN
(19)
According to the restructuring plan, Sparkasse KölnBonn will focus on its statutory business model of a regional savings bank. The Bank will concentrate on providing typical retail banking services to its traditional customer segments, being private customers and SMEs, and withdraw from other activities such as proprietary trading or investments in structured products and divest non-core subsidiaries. Further, the Bank will significantly reduce its administrative expenses.
4.1. Description of the restructuring plan
(20)
Sparkasse KölnBonn will focus on the services to customers located in the Cologne-Bonn region in the segments for private customers, private banking, SMEs, and corporate and institutional clients. The Bank will focus on corporate clients with a yearly turnover below EUR 250 million.
(21)
Sparkasse KölnBonn will reduce its largest credit exposures by limiting the credit lines, requesting additional collateral or transferring risks to other credit institutions. In the corporate clients segment, Sparkasse KölnBonn has already achieved a EUR 551,5 million reduction and will further decrease the exposure by EUR [900-1 100] million by the end of 2013 from the original level of EUR 2,8 billion in 2008. In addition credit exposure in the amount of EUR [800-900] million granted to institutions not connected with the Cologne-Bonn region will be reduced by the end of 2013 using the same instruments (see Annex I, point 4).
(22)
Sparkasse KölnBonn has already decreased its proprietary trading portfolio from originally EUR 550 million to currently EUR [20-23] million, which will be further reduced to 0. The Bank will cease all proprietary trading activities in the future and considers giving up its status as trading book institute, thus accounting all remaining limited trading activities in the banking book. They will be qualitatively limited to certain products and have to respect a quantitative daily exposure limit (market risk EUR [3-5] million, see Annex I, point 2).
(23)
One of the main sources of Sparkasse KölnBonn’s losses in 2008 was its investments in so-called ABS and Strategic Assets Allocation (‘SAA’) portfolios. At the time of investment in ABS portfolio, Sparkasse KölnBonn acquired geographically diversified (5) and predominantly AAA-rated assets, including RMBSs (6), CDO (7) s, CMBSs (8), ABSs (9) and CLOs (10). As per the end of 2007 the ABS portfolio amounted to EUR 1,05 billion in Sparkasse KölnBonn’s accounts. SAA is an investment in special funds, through which Sparkasse KölnBonn held a diversified portfolio consisting among others of international equity shares, REIT (11) and bonds including High Yield and Emerging Markets. As per the end of 2007 this portfolio was accounted for at EUR 2,2 billion in Sparkasse KölnBonn’s books. Although Sparkasse KölnBonn aimed at widespread diversification of its ABS and SAA portfolios, they were significantly affected by the financial crisis. Both portfolios mainly contributed to the write-downs of EUR 249 million (12) that Sparkasse KölnBonn had to recognise on its investment portfolio in 2008, in addition to EUR 108 million already recorded in 2007.
(24)
In its restructuring plan Sparkasse KölnBonn classified the ABS and SAA investments as not in line with the risk profile and its strategic reorientation towards a traditional savings bank. As a result, the Bank decided to completely sell off or run down those commitments by 2014. Sparkasse KölnBonn reduced its SAA investment by half in March 2008 in order to limit its exposure to equities. Further divestments took place in 2009, resulting in the reduction of the SAA portfolio to EUR 468 million as per 30 September 2009. The impact of the remaining ABS exposure (nominally EUR 970 million as per 30 September 2009) on the Sparkasse KölnBonn’s accounts will be absorbed by provisioning and hedging in 2010. Finally in [2012-2014] the whole remaining portfolio is to be sold.
(25)
Sparkasse KölnBonn has started implementing a comprehensive cost-cutting programme, including staff reduction, internal processes optimisation and closure of 22 out of 131 existing branches by mid-2011. As a result, its administrative expenses will be gradually reduced by [5-8] % by 2014 (13).
(26)
Germany commits that the Bank will respect restrictions on coupon payments (Annex I, point 7), advertisement (Annex I, point 9) and acquisition bans (Annex I, point 8) and a price leadership ban which stipulates that until the end of 2014 Sparkasse KölnBonn will not offer better rates for deposits and mortgages than the best out of its 10 largest competitors (for deposits in terms of market shares of competitors active in the relevant market in the Cologne-Bonn region and for mortgages in terms of market share in new production in Germany, see Annex I, point 5).
4.2. Restructuring of subsidiaries
(27)
Sparkasse KölnBonn plans to reduce its holding of subsidiaries by one third. From the portfolio of subsidiaries, held at EUR 635 million in the Bank’s accounts as per 31 December 2008, EUR [20-40] million were sold or liquidated by the end of 2009 and a further EUR [180-250] million are to be divested. By implementing this measure, Sparkasse KölnBonn follows two aims depending on the type of the subsidiary. First, the divestments of non-core subsidiaries (14), which are active in regional development projects or communal and social housing, aim at reducing Sparkasse KölnBonn’s risk exposure and vulnerability. Second, the sale of stakes in entities which are only indirectly related to Sparkasse KölnBonn’s activities, aims at generating profits to finance the restructuring of Sparkasse KölnBonn (see Annex I, point 10). A complete list of subsidiaries to be divested is given in Annex I, points 10 and 13.
(28)
Examples of divestments in the second group are stakes in companies such as RW Holding AG, S ProFinanz Versicherungsmakler GmbH, Schufa Holding AG and neue leben Pensionsverwaltung AG. Those sales have already been completed and have resulted in proceeds totalling approximately EUR [25-35] million.
(29)
For some subsidiaries, which account for approximately EUR [70-100] million, Sparkasse KölnBonn expects little interest from private third-party purchasers. That low interest is mainly due to the character of those entities, as they are small, involved in social housing and regional development in cooperation with the City of Cologne, or their ownership structure, which is already dominated by the City of Cologne. Therefore, the Bank is considering selling those activities to [the City of Cologne or a company associated with the City of Cologne]. The transfer would take place at market value, assessed by an independent expert. The assets held by the subsidiaries to be sold to the City of Cologne are mainly related to real estate activities.
(30)
In consequence of the implementation of the restructuring measures, the Bank will reduce its risk-weighted assets (RWA) by EUR [2-5] billion to EUR [15-20] billion (i.e. by [15-20] %) (without taking into account future growth in the core business over the restructuring period). If growth in the core business is taken into account, the reduction of RWA will amount to [10-15] % by 2014. Sparkasse KölnBonn’s […] will be reduced by EUR [4-6] billion to [20-30] billion (i.e. by [15-20] %) (without taking into account future growth in the core business over the restructuring period). When growth in the core business is accounted for, the restructuring measures will result in a total assets reduction of 5 %.
4.3. Ability to return to viability in base and stress case
(31)
Germany has submitted a base and a stress scenario with the aim of demonstrating Sparkasse KölnBonn’s ability to restore its long-term viability.
(32)
In the base case the submitted financial projections are based on assumptions which are in line with projections for Germany published by acknowledged economic institutes. It is assumed that GDP growth will remain at the same moderate level for the whole restructuring period. The unemployment rate is expected to continue rising until 2011 and fall slowly thereafter. Finally, it is expected that the currently unfavourable, low-interest rates environment will improve in 2010 and then remain unchanged for the rest of the restructuring period.
(33)
As illustrated in Table 1 below, in the base case Sparkasse KölnBonn is expected to return to profitability in 2010 and continuously improve its results until 2014. In 2014 the Bank will achieve a return on equity (ROE) of [9-10] %. Chart 1 below illustrates the main financial performance indicators of Sparkasse KölnBonn for the years 2008-2014.
Table 1
Sparkasse KölnBonn’s pre-tax profit 2010-2014 in base case
Scenario
2009
2010
2011
2012
2013
2014
Base case
-98,8
[5-10]
[80-100]
[125-150]
[150-175]
[20-225]
Chart 1
Sparkasse KölnBonn’s main financial performance indicators for 2008-2014 - base case
Indicators
2008
2009
2010
2011
2012
2013
2014
RWA (15) (EUR bn)
20,2
19,1
[17,5-20]
[…]
[…]
[…]
[15-20]
Tier-1 ratio (16)
6,4 %
(5,5 %)
6,9 %
(6,1 %)
[7-8] %
([6-7] %)
[8-9] %
([7-8] %)
[8-9] %
([7-8] %)
[8-9] %
([7-8] %)
[8-10] %
([8-9] %)
ROE
-13,5 %
-6,5 %
[0-3] %
[4-6] %
[7-9] %
[7-9] %
[9-10] %
CIR
73,0 %
70,0 %
[65-75] %
[60-70] %
[55-65] %
[50-60] %
[50-60] %
FTE
3 824
3 672
[3 500-3 750]
[3 250-3 500]
[3 000-3 250]
[3 000-3 250]
[2 750-3 000]
(34)
In the stress case the macroeconomic assumptions are those of a continuation of the crisis until 2011 and slow recovery in 2012. The stress case assumes two additional years of unfavourable low interest rates compared with the base case.
(35)
In the stress case Sparkasse KölnBonn is expected to return to profitability in 2012 and continuously improve its results until 2014. In 2014 the Bank will achieve an ROE of [10-12,5] %. According to the stress case scenario, the capital ratios for Sparkasse KölnBonn and for the whole consolidated group will remain well above the minimum regulatory requirements throughout the restructuring period. Table 2 and Chart 2 below illustrate the main financial performance indicators of Sparkasse KölnBonn for the years 2008-2014 in the stress case.
Table 2
Sparkasse KölnBonn’s pre-tax profit 2010-2014 in stress case
Scenario
2009
2010
2011
2012
2013
2014
Stress case
-98,8
-[125-150]
-[25-50]
[50-75]
[125-150]
[175-200]
Chart 2
Sparkasse KölnBonn’s main financial performance indicators for 2008-2014 - stress case
Indicators
2008
2009
2010
2011
2012
2013
2014
RWA (17) (EUR bn)
20,2
19,1
[17-20]
[17-19]
[17-19]
[17-19]
[16-18]
Tier-1 ratio (18)
6,4 %
(5,5 %)
6,9 %
(6,1 %)
[6-7] %
([5-6])
[6-7] %
([6-7])
[6-7] %
([6-7])
[6-7] %
([6-7])
[7-8] %
([6-7])
ROE
-13,5 %
-6,5 %
-[8-9] %
-[1-3] %
[3-5] %
[8-10] %
[10-12] %
CIR
73,0 %
70,0 %
[70-75] %
[65-70] %
[60-65] %
[55-60] %
[50-55] %
FTE
3 824
3 672
[3 500-3 750]
[3 250-3 500]
[3 000-3 250]
[3 000-3 250]
[2 750-3 000]
(36)
Because the current low level of short-term interest rates constitutes the main constraint on the Bank’s earnings, an additional sensitivity analysis of the interest rates has been conducted (scenario 1: upward shift of the interest curve by 100 bps, scenario 2: its downward shift by 50 bps). The analysis confirmed that further increasing interest rates would improve Sparkasse KölnBonn’s profitability, whereas decreasing interest rates would reduce its profitability, i.e. a linear decrease of 50 bps of the short-term interest rates would lead to a reduction of EUR [20-25] million of profits per year. Overall the sensitivity analysis provided by Germany demonstrates that Sparkasse KölnBonn’s vulnerability to major interest rate shocks is limited.
4.4. Corporate governance
(37)
Germany submitted information showing that the politically driven investments which contributed to Sparkasse KölnBonn’s difficulties were decided in the period 1997-2004, prior to the merger of Stadtsparkasse Köln with Sparkasse Bonn in 2005 which created Sparkasse KölnBonn in its current form. Those investments were also decided under a different legal framework, defined mainly by the Savings Banks Act of North Rhine-Westphalia (19). Since then, improvements to the corporate governance of Sparkasse KölnBonn have been implemented.
(38)
Due to the change in the structure of the Bank’s responsible public institution (Träger) after the merger of 2005, important decisions in the Zweckverband are taken by qualified majority of shareholder’s votes, which is set at 85 % at least, a level exceeding the participation held by any single city.
(39)
The number and size of the institute’s bodies have been reduced, including major reductions in the size of the Supervisory and Management Boards (20). The Participation Committee consisting of three members of the Management Board, which in the former Stadtsparkasse Köln was entitled to pre-decide on investment in subsidiaries, was dissolved. The Management Board took over responsibility for investment policy in respect of equity engagements, which are to be assessed according to economic criteria. Additionally, any new investment entered into by Sparkasse KölnBonn requires the approval of the Supervisory Board.
(40)
The changes in the Savings Banks Act obliged the Bank to establish risk and accounting committees and provide them with far-reaching control powers. The law also requires members of the Supervisory Board to possess qualifications necessary to assess and control operations of a savings bank. The Management Board bears sole and comprehensive responsibility for management of the Bank and is not bound by any instructions of the Supervisory Board or the shareholders.
(41)
In addition to the already implemented improvements to the corporate governance structure, Sparkasse KölnBonn will further strengthen its governance by increasing the number of independent (21) members of the Supervisory Board from two (at present) to four out of 18. The members of the Accounting Committee will be reduced from nine to seven and of the Risk Committee from nine to six respectively starting from 1 January 2011. The Participation and the Strategy Committees will be dissolved by the end of 2011 and the end of 2010 respectively. The former will naturally lose its importance once Sparkasse KölnBonn has divested the major part of its subsidiaries. The duties of the latter will be performed by the Management Board. Finally, the decision-making processes regarding acquisitions of companies will be amended and will involve unanimous decision-making in the Management Board and require investments that exceed EUR [2-5] million to have already been positively assessed by an independent expert, in the course of a due diligence or business valuation.
4.5. Hybrids
(42)
Sparkasse KölnBonn holds hybrid capital placed with third-party investors (private certificates of participation) in the amount of EUR 224 million. According to the information provided by Germany, the Genussrechte and the private certificates of participation rank pari passu. The silent participation is junior to both certificates. As shown in Table 3 below, since 2008 no coupon payments on hybrids have been made. In 2008 and 2009 the Genussrechte participated in the losses in the amount of EUR 57,4 million. The silent participation and the private certificates participated in the losses in 2009. Starting from 2010 the hybrid instruments will be topped up and from 2011 cancelled cumulative coupon payments will be caught up with by 2012. In 2013 all hybrids will be topped up, all cancelled coupon payments will be caught up with and a full coupon will be paid on each instrument. Given that the coupon payments are triggered either by a positive P&L or balance sheet result, Sparkasse KölnBonn does not have any discretion to suspend coupon payments if it operates profitably and any capital depletion has been replenished.
Table 3
Sparkasse KölnBonn’s profit distribution in 2009-2014 (base case)
2008
2009
2010
2011
2012
2013
2014
Profit before tax
-98,8
[5-10]
[80-100]
[125-150]
[150-175]
[200-225]
Profit distribution according to capital instruments
State's certificates of
Loss absorption
40,6
16,8
0
0
0
0
0
Principal replenishment
0
0
[…]
[…]
[…]
[…]
[…]
Coupon
0
0
[…]
[…]
[…]
[…]
[…]
Private certificates of
Loss absorption
0
12,5
0
0
0
0
0
Principal replenishment
0
0
[…]
[…]
[…]
[…]
[…]
Coupon
0
0
[…]
[…]
[…]
[…]
[…]
Silent participation
Loss absorption
0
19,5
0
0
0
0
0
Principal replenishment
0
0
[…]
[…]
[…]
[…]
[…]
Coupon
0
0
[…]
[…]
[…]
[…]
[…]
(43)
Germany has provided the commitment that the Bank will not proceed with any coupon payments on the hybrid capital held by private investors, except for what it is contractually obliged to pay (see Annex I, point 7).
4.6. WestLB
(44)
Another source of Sparkasse KölnBonn’s difficulties was its participation in WestLB. In the past Sparkasse KölnBonn incurred losses amounting to EUR […] million, because as a member of the regional savings banks association it contributed to the reserve fund established by the savings bank association as a safety net for its members and the Landesbanks. In the context of the WestLB rescue in 2008 the fund had to intervene. The remaining risk exposure is linked to Sparkasse KölnBonn’s indirect holding in WestLB and remaining indirect liability for WestLB’s bad bank via RSGV.
(45)
Although Sparkasse KölnBonn has not invested directly in WestLB, it is exposed to the stake in it held by RSGV, in which Sparkasse KölnBonn holds a direct stake of about 19 %. According to information provided by Germany, the risk that any impairment of RSGV’s book value for WestLB will have an impact on Sparkasse KölnBonn is very limited. First, WestLB has been valued by an independent party recently and its book value in RSGV accounts was reduced accordingly as per 31 December 2009 from the historic cost of EUR […] billion to EUR […] million as per 31 December 2009. Therefore the indirect stake of Sparkasse KölnBonn in WestLB amounts currently to approximately EUR […] million. Further, as Sparkasse KölnBonn is exposed to WestLB only by its stake in RSGV, only the intrinsic value of the latter is relevant for Sparkasse KölnBonn. This is influenced not only by the value of WestLB, but also other subsidiaries and investments held by RSGV. Valuation of other RSGV subsidiaries conducted at the end of 2009 disclosed significant latent reserves, which would suffice to cover even the potential worst case scenario write-down of WestLB to 0.
(46)
Sparkasse KölnBonn’s obligation to contribute [to the …] created to cover potential losses of the recently created WestLB bad bank amounts to EUR […] million over 25 years. However, this commitment will not impact the capacity of the Bank to meet its regulatory requirements in the future because the contributions [to the …] are to be made only out of future profits.
4.7. Partial early exit
(47)
Germany has provided a commitment that Sparkasse KölnBonn will repay part of the received capital earlier than provided for in the terms of the instruments (see Annex I, point 27). The repayment will take place starting in 2011 and involve two steps.
(48)
The first step consists of the sale of a EUR 150 million tranche […] to the Zweckverband. The transaction, and in particular the level of the purchase price, will leave Förderungsgesellschaft no better off than if it kept the instrument (22). The Zweckverband will then convert the Genussrechte, which are currently acknowledged as Tier-2 capital, into Tier-1 capital instruments. In particular, the new instrument would be subordinated, not be redeemed for at least 30 years and have non-cumulative coupon payments. That step will result in the improvement of Sparkasse KölnBonn’s Tier-1 capital ratio by [0,8-1,0] %.
(49)
The increase in the Tier-1 capital ratio allows for the second step, which is the buy-back by Sparkasse KölnBonn of the remaining tranche of the Genussrechte held by Förderungsgesellschaft in 2011 worth nominally EUR 150 million. Overall both steps will result in a decrease in the Tier-2 capital ratio by [0,5-1,0] %. Additionally, RSGV or another member of the savings bank sector will buy at market price the stakes of Sparkasse KölnBonn in two savings-bank-related […] (23) and […]. The sale of the indirect stake in the two entities would result in a further [0,2-0,5] % decrease in the Bank’s total assets. The sale of the two entities is closely linked to the repayment of the second tranche of the Genussrechte as RSGV will buy the two entities with the proceeds from the sale of the Genussrechte.
5. GROUNDS FOR INITIATING THE PROCEDURE ON THE RECAPITALISATION MEASURE
(50)
The Commission recalls that in this case it opened the formal investigation procedure on the recapitalisation measure regarding its compatibility with the internal market pursuant to Article 107(3) TFEU (24) as restructuring aid on 4 November 2009.
(51)
Further, the Commission expressed doubts as to whether adequate burden-sharing was ensured in any way and whether the distortion of competition was limited, as required by the State aid rules (paragraph 50 of the opening Decision).
(52)
Finally, given the uncertainty as to whether the difficulties of Sparkasse KölnBonn were due to investment decisions taken well before the crisis or rather to the crisis itself, the Commission did not conclude whether the recapitalisation measures would fall under Article 107(3)(b) TFEU or under Article 107(3)(c) TFEU. The Commission decided to proceed with an investigation of the facts in order to identify the proper legal basis to be applied and to take a position later in the process.
6. COMMENTS FROM INTERESTED PARTIES
(53)
The Commission notes that no comments from interested third parties have been received with regard to the opening Decision on the recapitalisation measure.
7. COMMENTS FROM GERMANY
(54)
Germany indicated that it had reviewed the Commission’s Decision of 4 November 2009, in which the Commission decided to initiate the procedure laid down in Article 108(2) TFEU. It informed the Commission that it upheld its opinion that the recapitalisation measures received by Sparkasse KölnBonn in the form of a silent participation and certificates of participation at the end of 2008 and the beginning of 2009 did not constitute State aid within the meaning of Article 107(1) TFEU. Germany considered the measures to be in conformity with the market economy investor principle in accordance with the reasoning provided prior to the opening Decision (see paragraphs 24-28 of the opening Decision).
(55)
Germany disagreed with the Commission’s assessment that at the time the recapitalisation measures were executed, i.e. end 2008/beginning 2009, the market for hybrid instruments had completely dried up (25). More specifically, it disagreed with the Commission’s conclusion that no market economy investor or owner would have engaged in such an investment at the time, even at a higher price (see paragraph 38 of the opening Decision). It argued that market developments did not affect Sparkasse KölnBonn, which was able to issue junior debt both in the last 4 months of 2008 (totalling EUR [10-15] million) and in the first quarter of 2009 (totalling EUR [35-40] million) in tranches of up to several hundred thousand euro.
(56)
Finally, Germany contested whether the recapitalisation of Sparkasse KölnBonn by Förderungsgesellschaft involved any state resources.
(57)
Germany expressed, however, its confidence, that were the Commission to confirm its preliminary assessment regarding the State aid character of Sparkasse KölnBonn’s recapitalisation, the measures would be compatible with the internal market under Article 107(3)(b) TFEU.
(58)
Germany argued that the restructuring plan complied with all the conditions set forth in the Commission’s Communication of 23 July 2009 on the return to viability and the assessment of restructuring measures in the financial sector in the current crisis under the State aid rules (26) (‘Restructuring Communication’).
(59)
In Germany’s opinion the restructuring plan ensures that Sparkasse KölnBonn’s long-term viability is restored, Sparkasse KölnBonn provides a sufficient own contribution to the restructuring costs and distortions of competition are limited by substantial structural and behavioural measures.
(60)
The commitments provided by Germany are set out in Annexes I to III and form an integral part of this Decision. In order to ensure that the commitments will be implemented, a monitoring trustee will be appointed. The appointment procedure and the responsibilities of the monitoring trustee are set out in Annex II. Further, Germany has committed itself to a timeline for divestments (see Annex I, points 10 and 13). Should the committed timeline for divestiture not be met, a divestiture trustee will be appointed and will perform his duties in accordance with the conditions stipulated in Annex III.
8. ASSESSMENT
8.1. Existence and amount of the aid
(61)
The Commission must assess whether the measures concerned constitute State aid. Article 107(1) TFEU provides that any aid granted by a Member State or through state resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings is, in so far as it affects trade between Member States, incompatible with the internal market.
(62)
In the opening Decision (section 5.1) the Commission reached the preliminary conclusion that the recapitalisation measures of Sparkasse KölnBonn constituted State aid. The Commission cannot agree with Germany’s reasoning according to which the measures did not constitute aid inasmuch as the conditions of both instruments were in line with what a market economy investor would have accepted. Even if the remuneration on both instruments was in line with the interest paid on comparable instruments until the beginning of 2008, it was too low in the case of Sparkasse KölnBonn given the high risk resulting from the lack of profitability of the Bank. At the time of the recapitalisation, the market for hybrid instruments had even completely dried up. Therefore, in the context of the case and in particular the situation of the market, the Commission could not accept the argument that a market economy investor would have made the investment at the time, not to mention investing on equivalent terms.
(63)
The investigation did not reveal any information which would have altered this assessment. Junior debt issuances by Sparkasse KölnBonn at the end of 2008 and in the first quarter of 2009 do not provide reliable evidence that the markets for hybrid instruments were active owing to the very limited amount of single tranches involved. Tranches of hybrid instruments worth several hundred thousand euro represent a considerably different level of risk from an instrument worth nominally EUR 150 million and are therefore much easier to absorb by the private markets. Therefore, the Commission upholds its view that no market economy investor would have acquired a hybrid instruments issue of comparable size and characteristics as Sparkasse KölnBonn’s recapitalisation measures at that time.
(64)
As regards the nature of the resources used to recapitalise Sparkasse KölnBonn by Förderungsgesellschaft, the Commission recalls that it has already established in its case practice that means provided by RSGV are resources directly or indirectly controlled by public authorities (27). The Commission considers that this also applies to Förderungsgesellschaft, which is a wholly-owned subsidiary of RSGV. Therefore, these resources are state resources within the meaning of Article 107(1) TFEU.
(65)
In the light of the above, the Commission confirms the provisional conclusion reached in the opening Decision that the recapitalisation measures in favour of Sparkasse KölnBonn constitute State aid within the meaning of Article 107(1) TFEU.
(66)
The Commission furthermore notes that the rescue aid measures have been converted into restructuring aid which continues to constitute an advantage for the Bank. The measures allowed the Bank to obtain financing in a situation where it was unable to raise capital on the market, especially in the financial and economic crisis. This gives an economic advantage to the Bank and strengthens its position compared with that of its competitors in Germany and other Member States that are not benefiting from the same support. The measures must therefore be regarded as liable to distort competition and affect trade between Member States.
(67)
The aid element in the capital injections amounts to EUR 650 million and represents 3,3 % in relation to the Bank’s risk weighted assets (end of 2008).
8.2. Compatibility of the aid with the internal market
8.2.1. Legal basis for the compatibility assessment
(68)
In its opening Decision of 4 November 2009, the Commission did not conclude what would be the proper legal basis for the analysis of the recapitalisation measures. Based on the information available at that time, the decisions to invest in regional development projects taken in the period considerably before the financial crisis seemed to be the major source of Sparkasse KölnBonn’s difficulties. As the crisis appeared only to have exacerbated existing problems of the Bank, the application of Article 107(3)(c) TFEU was not excluded. On the other hand, the implementation date of the recapitalisation measures at the peak of the financial crisis and the Commission’s financial crisis banking case practice suggested the application of Article 107(3)(b) TFEU.
(69)
Further, even if previous decisions made reference to the Guidelines on State aid for rescuing and restructuring firms in difficulty (28) (‘Restructuring Guidelines’), the Commission has clarified in point 49 of the Restructuring Communication that all aid notified to the Commission before 31 December 2010 will be assessed as restructuring aid to banks pursuant to the Restructuring Communication instead of the Restructuring Guidelines.
(70)
Given the continuing sensitivity of the banking sector in Germany the Commission concludes that the potential dissolution of one of the biggest saving banks in Germany due to the […] would have had systemic implications and therefore threatened financial stability in Germany.
(71)
Therefore, Article 107(3)(b) TFEU is the appropriate legal basis for assessing whether the aid received by Sparkasse KölnBonn is compatible with the internal market as restructuring aid in order to preserve financial stability.
8.2.2. Compatibility of the restructuring aid with the internal market
(72)
According to the Restructuring Communication, first, the restructuring plan has to demonstrate that the restructuring process which a beneficiary of State aid is undergoing is suitable to restore its long-term viability. Second, the aid amount must be limited to the minimum necessary and both the beneficiary and its capital holders should contribute to the restructuring as much as possible with their own resources. Third, measures need to be in place to limit distortion of competition created by artificially supporting the market power of the beneficiary and to ensure a competitive banking sector. Finally, monitoring and procedural issues need to be addressed.
(i) Restoration of long-term viability
(73)
In line with points 9 to 11 of the Restructuring Communication, Germany submitted a comprehensive and detailed restructuring plan which provides complete information on the business model. The plan also identifies the causes of the difficulties faced by the Bank.
(74)
As regards its business model, Sparkasse KölnBonn intends to refocus on the traditional regional savings bank business activities. It will provide a full range of retail banking products to its core customer segments in the Cologne-Bonn region: retail, SMEs as well as smaller corporate customers and institutional clients located in the region. As a consequence, Sparkasse KölnBonn will concentrate on its statutory activities and capitalise on its core competence, while withdrawing from those areas which have been at the origin of its financial difficulties. In particular, Sparkasse KölnBonn ceases proprietary trading, all non-core subsidiaries and investments in SAA and ABS portfolios. The Commission considers that the new business model of the Bank is viable and sustainable in the long term.
(75)
Sparkasse KölnBonn’s difficulties were mainly attributable to three activities: (i) regional development projects, (ii) investments in ABS and SAA portfolios and (iii) the Bank’s investment in WestLB.
(76)
Already in 2008 Sparkasse KölnBonn initiated the sale or liquidation of non-core subsidiaries related to regional development. The full cessation of these activities constitutes a necessary and appropriate measure to remove the Commission’s concerns as the divestments set an ultimate limit to any future losses or risk exposure resulting from the subsidiaries. Additionally, the measure frees up capital as well as management capacities, which can be re-employed in the core business of the Bank. Furthermore the divestments will also reduce the Bank’s balance sheet by approximately EUR [180-230] million ([0-2] %) (29).
(77)
As the activities of the subsidiaries to be sold to the City of Cologne are mainly real estate development and real estate-related services, the Commission does not consider that the application of the Communication on the treatment of impaired assets in the Community banking sector (30) (‘Impaired Assets Communication’) is necessary or appropriate in this case. The book values of these subsidiaries have been significantly written down in the past years in order to bring them in line with their market values. Therefore significant further losses for the Bank due to the sale of the subsidiaries are not expected. Furthermore, the commitment of Germany that the Bank will sell at market value, which will be determined by an independent expert, ensures that no additional State aid is involved in the transactions.
(78)
Another source of the Bank’s problems was the ABS and SAA portfolios. Those investments have already been significantly reduced. Sparkasse KölnBonn will withdraw completely from those portfolios by the end of 2014. As those investments are outside the scope of the new business model of the Bank, the withdrawal from those portfolios is a necessary step in the implementation of Sparkasse KölnBonn’s strategy. The current book values of the remaining assets in the ABS and SAA portfolios are overall in line with their market value. Therefore the remaining risk exposure stemming from those portfolios is limited and does not affect the viability of the Bank.
(79)
Finally, the Bank’s remaining exposure to WestLB, which in the past resulted in Sparkasse KölnBonn’s losses of EUR […] million, is limited in size and compensated by reserves in the investment portfolio of RSGV. Further, the contribution of the Bank [to the …] is to be made only out of future net profits. Therefore, the obligation of Sparkasse KölnBonn to contribute [to the …] will not endanger Sparkasse KölnBonn’s long-term viability. Additionally, the Commission views positively the fact that the Bank’s contributions can take place only once the State’s capital has been remunerated in line with the recapitalisation terms.
(80)
The Commission notes that the Bank has already addressed and will further address the weaknesses of its corporate governance. The change in the shareholders structure and the qualifying majority voting introduced in the light of the merger of Stadtsparkasse Köln with Sparkasse Bonn in 2005 ensures that the political interests of the owners do not overrule the economic interests of the Bank. Further, the changes in the structure and size of Sparkasse KölnBonn’s bodies as well as in the decision-making process lead to improved accountability of the top management. Fewer divided responsibilities, as well as a higher proportion of personnel who are not politically driven and who are [external …] experts in the Bank’s bodies, will increase the transparency and efficiency of the decision-making process. Together with the change in the shareholder structure, those measures address the sources of Sparkasse KölnBonn’s difficulties as they minimise the risk that Sparkasse KölnBonn will engage in politically-driven projects conflicting with the economic interests of the Bank. Further, the independence of the Bank’s management seems to be sufficiently anchored in the existing law. The fact that Sparkasse KölnBonn provided evidence that since 2004 the Bank has not engaged in new politically-driven projects shows that the implemented measures are effective. Overall, the new corporate governance code is in line with what was achieved in comparable cases (31). Therefore, the implemented and committed changes of the corporate governance of Sparkasse KölnBonn can be considered adequate and sufficient to contribute to the restoration of the Bank’s long-term viability.
(81)
The Commission considers that Sparkasse KölnBonn’s restructuring plan meets the requirements set out in points 9 and 12-15 of the Restructuring Communication, namely that the restructuring plan should also demonstrate how the Bank will restore its long-term viability without State aid as soon as possible. In particular, the Bank should be able to generate an appropriate return on equity, while covering all the costs of its normal operations and complying with the relevant regulatory requirements.
(82)
First, Sparkasse KölnBonn has provided financial projections for the period 2008-2014, giving information on the revenues, costs, impairments, profits and capital position of the Bank. The Commission finds that the base case projections provided are based on reasonable underlying macroeconomic assumptions. The Bank expects to generate profits again in 2010 and continuously improve its yearly results over the whole restructuring period. Further, in 2014 ROE will reach a level of [9-10] %, which appears to be an adequate level of remuneration for a retail bank in normal market conditions. Furthermore, starting from 2013 Sparkasse KölnBonn will fully remunerate the aid measures. The Bank’s capital ratios remain well above the minimum regulatory requirements with the Tier-1 ratio improving from 6,1 % in 2009 to [8-9] % in 2014.
(83)
Second, Sparkasse KölnBonn demonstrated that it is able to withstand a stress scenario. The assumptions of the stress scenario have been assessed as reasonable. As the stress scenario demonstrates that Sparkasse KölnBonn will exceed its regulatory capital requirements, the Bank can be regarded as meeting the requirements of paragraph 13 of the Restructuring Communication. Further, the sensitivity analysis shows that the Bank is capable of withstanding a significant change in interest rates in the future.
(84)
Finally, Sparkasse KölnBonn presented a partial early exit strategy. The partial repayment of the state capital should be possible without depleting the capital base of the institution, as Sparkasse KölnBonn’s Tier-1 capital ratio is projected to reach [6-7] % in 2010 and will exceed this level afterwards in the base case scenario and also remain well above the regulatory minimum in a stress case scenario in the restructuring plan. The partial early exit does not involve additional aid either to Sparkasse KölnBonn or to other entities which are part of the transaction. First, due to the design of the purchase price to be paid for the first EUR 150 million tranche of the Genussrechte, which closely simulates the cash flow Förderungsgesellschaft would receive had it kept the instrument, Förderungsgesellschaft would be left no better off. Second, the transaction takes place between two public entities. Further, as the instrument to be converted into Tier-1 capital already qualifies as aid and Sparkasse KölnBonn will pay the same remuneration to the Zweckverband after the conversion, the Commission does not see any additional aid involved in the conversion. Finally, the buy-back by Sparkasse KölnBonn of the second EUR 150 million tranche will also closely simulate the cash flow Förderungsgesellschaft would have received had it kept the instrument.
(85)
Consequently, the Commission considers that the restructuring plan submitted by Sparkasse KölnBonn fulfils the requirements of the Restructuring Communication with regard to the restoration of the long-term viability and thereby allays the doubts expressed in the opening Decision.
(ii) Own contribution/burden-sharing
(86)
As stated in the Restructuring Communication, banks and their stakeholders need to contribute to the restructuring as much as possible in order to ensure that aid is limited to the minimum necessary. This implies that banks use their own resources to finance the restructuring, for instance by selling assets, while the stakeholders should absorb the losses of the bank where possible. The measures committed to by Sparkasse KölnBonn ensure that own resources are used and that private investors holding hybrid capital of the Bank contribute to the restructuring.
(87)
The restructuring plan does not contain any elements that suggest that the aid exceeds the means required to cover those costs which are triggered by the restoration of viability. The aid received is required to ensure that Sparkasse KölnBonn will have reasonable capital buffers in the base case and will be able to comply with regulatory capital requirements in a stress scenario.
(88)
In respect of the contribution to restructuring costs through internal resources generated by Sparkasse KölnBonn, the Commission notes that the Bank is implementing cost-cutting measures. The cost-cutting measures will result in a reduction of annual costs by EUR [25-35] million by the end of the restructuring period, which represents about [5-8] % of the total costs in 2009.
(89)
Further, the divestments of profitable non-core subsidiaries will generate proceeds which can be used to finance the restructuring costs.
(90)
The Bank has no discretion to suspend or delay the payment of a coupon on the hybrid instruments if it generates a profit in a given year. However, the holders of hybrid instruments also bear to the extent possible the losses incurred by Sparkasse KölnBonn, as both coupon payment and principal of the hybrid capital were suspended or participated in the absorption of Sparkasse KölnBonn’s losses. Therefore, the Commission considers that the maximum possible burden-sharing from its private hybrid investors is ensured and therefore the requirements of the Restructuring Communication for the contribution to the restructuring costs by the private investors are met.
(91)
Point 24 of the Restructuring Communication states that an adequate remuneration of the state capital is also a means of achieving burden-sharing. In this respect the Commission considers the level of remuneration set in the terms of recapitalisation measures is appropriate in association with the other burden-sharing measures described above. The projected profits will allow the Bank to remunerate the state capital and pay suspended coupons in line with the terms of the recapitalisation starting from 2011 for Genussrechte and from 2013 for silent participation, after the nominal capital of the instruments has been topped up. It should be noted that the interest on the Genussrechte held by the State is cumulative for [2-6] years and the capital depleted due to loss absorption is to be topped up in the case of both recapitalisation instruments. Therefore, according to the financial projections in the base case the unpaid interest on the Genussrechte and depleted principal of both instruments will subsequently be recovered by the State.
(92)
In the light of the above, the Commission considers that the restructuring plan submitted by Germany provides for a sufficient own contribution to the restructuring and therefore allays the doubts expressed in the opening Decision.
(iii) Measures limiting the distortion of competition
(93)
The Restructuring Communication requires that the restructuring plan proposes measures limiting distortions of competition and ensuring a competitive banking sector. Moreover, they should also address moral hazard issues and ensure that State aid is not used to fund anti-competitive behaviour.
(94)
The package of measures sufficiently addresses the issue of moral hazard. Sparkasse KölnBonn is committed to implementing a comprehensive sale of profitable non-core businesses. These include the stake in […], […], RW Holding AG, S ProFinanz Versicherungsmakler GmbH, Schufa Holding AG and Neue Leben Pensionsverwaltung AG, which are significant […] of Sparkasse KölnBonn.
(95)
The German authorities have provided a detailed timeline for planned divestments and committed to the appointment of a monitoring trustee in order to ensure that the commitments will be carried out in a timely manner. A divestiture trustee would be appointed for the divestments if the committed timeline is not met.
(96)
The restructuring of the Bank includes a reduction of Sparkasse KölnBonn’s presence in certain customer segments. Those measures will allow competitors to access parts of the Bank’s large corporate and institutional clients. Since it affects mainly large entities, which generally have access to the capital markets, the Commission considers the risk of negative impact on the real economy of this measure to be negligible.
(97)
Further, as a consequence of the implementation of the restructuring measures, Sparkasse KölnBonn will reduce its total assets by [15-20] % in terms of RWA ([15-20] % in terms of total assets) on a pro forma basis and by [10-15] % including future growth (5 % in terms of total assets). The reduction will be mainly driven by the withdrawal from the SAA and ABS investments, the cessation of proprietary trading ([6-8] % in RWA terms, [6-8] % in terms of total assets) and the reduction of large credit exposures and credit lines to institutional clients (RWA: [5-7] %, total assets: [5-7] %).
(98)
In view of the amount of aid in the present case (3,3 % of RWA), these measures can be considered to be sufficient and proportionate in terms of the reduction of the Bank’s size and scope of activities. Sparkasse KölnBonn is active only in the Cologne-Bonn region, where it has a significant ([18-23] % - [30-35] % depending on the product), but not dominant market position. Moreover, the Bank does not act as a price leader in its core business segments. For this reason, additional measures aiming at further reducing the Bank’s market share in its core retail market do not appear to be appropriate in the case of Sparkasse KölnBonn. First, the Commission notes that the core activity was not the source of the Bank’s difficulties. Further, Germany provided sufficient evidence showing that such measures would be difficult and disproportionately costly to implement, thereby negatively affecting the underlying earning ability of the Bank, and would constitute a threat to the long-term viability of Sparkasse KölnBonn. Furthermore such measures would adversely affect Sparkasse KölnBonn’s core business segments, SMEs and private customers, which, however, were not the source of the Bank’s difficulties. Finally, given the limited alternative sources of financing for those customer groups and Commission’s case practice, which is aimed at maintaining lending to the real economy, the Commission finds that further constraints to Sparkasse KölnBonn’s scope of activities would impact its core business and would therefore be harmful both to the Bank and to the markets it serves.
(99)
The Commission also notes the behavioural commitments provided by Sparkasse KölnBonn and Germany. Those commitments include a price leadership ban and an advertisement ban on the state support, thus preventing Sparkasse KölnBonn from using the aid to fund anti-competitive market conduct. In line with point 40 of the Restructuring Communication, the acquisition ban furthermore ensures that the State aid will not be used to take over competitors.
(100)
On the basis of the above, the Commission considers that the scale and nature of the measures proposed by Sparkasse KölnBonn are sufficient and adequate to address any distortions of competition. Therefore, the restructuring plan of Sparkasse KölnBonn fulfils the requirements of the Restructuring Communication in terms of viability, burden-sharing and measures to mitigate the distortion of competition and hence allays the doubts expressed in the opening Decision.
8.2.3. Monitoring
(101)
Pursuant to section 5 of the Restructuring Communication, regular reports are required to allow the Commission to verify that the restructuring plan is being implemented properly. Germany will appoint a monitoring trustee who will provide semi-annual monitoring reports. The first report is due in February 2011. The Commission, therefore, finds that proper monitoring of the implementation of the restructuring plan is ensured.
(102)
The Commission finds that the restructuring plan set out in chapter 4 of this Decision is compatible with Article 107(3)(b) TFEU.
9. CONCLUSION
(103)
The Commission concludes that the restructuring measures are apt to enable Sparkasse KölnBonn to restore its long-term viability, sufficient in respect to burden-sharing and appropriate and proportional to offset the market-distorting effects of the aid measures in question. It therefore considers that the submitted restructuring plan fulfils the criteria of the Restructuring Communication and the restructuring measures can therefore be considered compatible with the internal market pursuant to Article 107(3)(b) TFEU. The capital injection measures can therefore be approved in accordance with the restructuring plan,
HAS ADOPTED THIS DECISION:
Article 1
The restructuring aid provided to Sparkasse KölnBonn by its public shareholders constitutes State aid within the meaning of Article 107(1) of the Treaty on the Functioning of the European Union.
The aid is compatible with the internal market, subject to implementation of the restructuring plan and fulfilment of the commitments set out in Annexes I, II and III.
Article 2
This Decision is addressed to the Federal Republic of Germany.
Done at Brussels, 29 September 2010.