By Sean Walters
GERMAN INSURANCE GIANT ALLIANZ'S HOPES OF GETTING a good price for its Dresdner banking unit are in tatters after the ailing bank's dismal second-quarter performance.
Dresdner had a 700 million euro ($1.07 billion) trading loss, even though Allianz, in its first-quarter report, had indicated that the German bank's likely worst-case quarterly loss would be around €500 million.
And there's more to come. Dresdner's balance sheet has residual exposure to asset-backed securities and monoline insurers worth €5 billion. They were the two main sources of write-downs in the second quarter.
The problem for Allianz (ticker: ALV.Germany), Europe's largest insurer when measured by premium volume, is that the longer it waits, the more unattractive Dresdner may become. China Development Bank's interest evaporated some months ago. Other potential acquirers like Spain's Santander (SAN.Spain), France's BNP Paribas (BNP.France) and the Netherlands' ING /zigman2/quotes/203566071/composite ING -2.63% (ING.Netherlands) have been slow to come forward, if they will be coming forward at all.
Other than a sale, there are few alternative solutions. Raising equity to bolster Dresdner might prove costly and difficult for Allianz, considering that European banks already have tapped markets for around €70 billion of capital in recent months. Investor appetite for more financial-sector stock could prove limited, especially because many will argue that recapitalizing Dresdner is throwing good money after bad.
A theoretical alternative, but one that's unlikely to be implemented, is to close down Dresdner Kleinwort, the investment bank which is the source of Dresdner's losses. The trouble is the costly damage to Allianz's reputation from what would be heavy job losses, mostly in Germany.
So Allianz might have little choice but to give Dresdner Kleinwort away at a bargain-basement price. Germany's Commerzbank (CBK.Germany) is a likely buyer; in fact, it's the only candidate currently in talks with Allianz. But there are doubts that Commerzbank could raise the sort of money that's been talked of -- around €9.6 billion, based on a sale price of 80% of Dresdner's book value -- given the economic climate and the continued uncertainty over the value of the assets on Dresdner's balance sheet.
The upside for Allianz would be that with the investment bank sold, it would have an easier task of selling Dresdner's healthier retail and commercial-banking operations, for which there should be interest. Crédit Mutuel last month paid €4.9 billion for Citigroup's German retail banking business.
Allianz must act fast. The German insurer certainly doesn't need any distractions from its core insurance operations. Allianz's premium growth is under pressure. The value of its new life-insurance-business growth slowed in western Europe, and fell in the U.S. and Asia in the second quarter.
EUROPEAN STOCKS ENDED STRONGLY FRIDAY , buoyed by lower oil prices, which would help airlines, and a weaker euro, which raised prospects for exporters, such as auto makers. The Dow Jones Stoxx 50 ended at 2928.31, up 2.7% from the previous Friday's close.
SEAN WALTERS, who is based in London, is a contributor to The Skeptic, a Dow Jones Newswires column on which this European Trader is based.