* Reluctant buyers, political resistance seen impediments
* WestLB sales process to be launched in September
* EU to shortly demand sale of HSH and BayernLB by 2014/15
By Arno Schuetze
FRANKFURT, Sep 6 (Reuters) - Germany's struggling landesbanks, soon to be spurred into consolidation by European regulators, will find the process slow going and impeded by reluctant buyers and politicians clinging to their influence.
Regulatory pressure could set in motion the long-overdue landesbanks consolidation later this month, when WestLB -- one of the highest-profile victims of the financial crisis in Europe's biggest economy -- starts the EU-enforced process of selling itself, with a deadline for completion next year.
The European Union is also likely to demand in coming weeks a sale of state-controlled HSH Nordbank and BayernLB within about four to five years as a condition for approval of state bailouts.
"These are steps in the right direction, but it could prove a hard task to find a buyer for landesbank assets," said Hans-Peter Burghof, banking expert at University of Hohenheim, adding some of the wholesale lenders still lacked a viable business model.
While many federal politicians have called for a merger of the currently eight landesbanks -- some of which rank among Germany's biggest lenders -- into one or two institutes, industry analysts say that more gradual change may be the best option.
"In my view, a large-scale M&A transaction is not a viable option for the landesbanks in the short run," says Moody's analyst Katharina Barten.
"A super-landesbank resulting from a merger may face serious funding risks as counterparties in the interbank market will likely reduce their combined exposures. This is a critical consideration given that markets currently remain very fragile," she adds.
Regional policymakers who fear losing their influence on regional economic development also are likely to to impede fast and thorough changes at landesbanks, which are traditionally co-owned by Germany's regional states and the savings banks, experts say.
The federal government has realized that its ability to influence reluctant German states and politicians to pursue landesbank mergers is small.
Opposition leaders have asked Chancellor Angela Merkel's cabinet to push more strongly for change, but ministry officials argue they have limited sway over the landesbanks.
"We are in the realm of encouraging, not pushing," one official said.
WestLB remains the only landesbank that has tapped the national bailout-fund SoFFin, and is thus the only wholesale lender where the federal government has a -- limited -- direct influence.
Past consolidation has seen SachsenLB being sold to rival LBBW in 2007, and small SaarLB was divested by BayernLB earlier this year.
THE CASE FOR CONSOLIDATION
Germany's landesbanks account 18 percent of total market share or for one in four loans granted to German companies.
Critics say they are too small to compete with international players on capital markets and too big to act just as suppliers of corporate loans to mid-size companies, which could be handled by municipally owned savings banks instead.
"Landesbanks need to cut the ties to the past and transform into modern lenders," an investment banker said.
Historically, landesbanks provided wholesale services for for savings banks, but they also used their access to cheap government money to expand into investment banking in competition with players like Deutsche Bank.
The banning of state guarantees by the European Commission in 2005 then took away a valuable safety net for landesbanks that were moving into higher margin and riskier lines of business.
When the bets on international markets turned sour, the owners of banks like WestLB, HSH, BayernLB and LBBW helped out with equity and guarantees worth more than 100 billion euros altogether -- which also helped them keep capital reserves in line with requirements and those of peers.
Bailed-out HSH for example passed the European stress test with the same tier 1 ratio as Deutsche Bank.
Despite loud calls for consolidation of the sector during the fire-fighting, little has happened since, and officials have seemed preoccupied with other, presumably more urgent matters.
"Finance Minister Wolfgang Schaueble has been less active in the consolidation issue than his predecessor as his attention is focused on the challenges of the euro zone and the austerity measures for Germany's federal budget", said Fitch analyst Michael Dawson-Kropf.
GRADUAL CHANGE
Meanwhile, small but important changes like the sale of non-core capital market and international activities are on the way that might help prepare the sector for bigger steps.
WestLB and HSH plan to shrink their balance sheet by half in coming years and all other landesbanks are also downsizing, shaking off risky assets and concentrating on core businesses such as lending to mid-sized companies in Germany.
Cutting down risk will get another push once a set of new banking rules dubbed Basel III is decided upon by the end of this year.
"Requirements for higher capital and matching maturities may not only improve banks' risk profiles but also result in lower leverage of the system and a reduction of the overcapacities," analyst Barten says.
Altogether, Basel III will intensify the clean-up of balance sheets and keep the landesbanks from venturing into risky businesses; although it may take some years for all homework to be done, experts say.
"In a couple of years, landesbanks might be attractive assets for other banks or even private equity investors," an investment banker said.
"At present, buyers for any landesbank assets remain out of sight", he said, adding the EU is likely to allow additional time in case deadlines -- like WestLB's to find a new owner by the end of 2011 -- cannot be met.
(Reporting by Arno Schuetze; additional reporting by Noah Barkin in Berlin; Editing by Hans Peters)