Forget Italy. Germany is still thebiggest banking problem in Europe; not just because the market itself is poor and destabilizing but also because it negates the possibility of a world-beating continental banking sector. Germany is Europe’s heart: geographically, economically and strategically.
There will be no convincing claim to continental dominance without big market shares in both Germany and France. This is why the French are on the offensive and why Germany remains the battlefield of European banking – even though it is barely worth fighting over.
It was arguably Jean Pierre Mustier’s biggest achievement that the French chief executive managed to bring UniCredit back from the brink last year with a €13 billion rights issue – without having to sell the Italian bank’s German arm, HVB.
All the big bank mergers under discussion today have Germany at their heart. A Deutsche Bank/Commerzbank merger would be a game changer, particularly if it gave way to a merger between Société Générale and UniCredit and later perhaps a deal involving any of those banks and BNP Paribas.
French banks lead way
After UniCredit, the French (alongside ING’s online retail-orientated business) are the biggest foreign banks in Germany. The extent of their ambition is evident in their search for clients lower down the corporate pyramid.
BNP Paribas is deepest in that descent, having gone as low as firms with turnovers between €250 million and €1 billion, partly through making better use of the regional German corporate network it inherited from Fortis.
“To be one of the strongest banks in Europe, we have to be strong in Germany,” country head Lutz Diederichs tells Euromoney. “We have to make Germany one of the home countries for BNP Paribas.”
For Société Générale, the acquisition, agreed early in July, of Commerzbank’s equity markets and commodities business is its biggest investment in Germany since its leasing acquisition from Deutsche in the early 2000s. It will turn Frankfurt into a hub for its markets business, with booking, trading and market making, says SocGen’s Germany head Guido Zoeller.
And yet Germany’s banking problems are not bringing better opportunities for international banks. This is partly because of market contagion to other European banks and partly because the German banks, recognizing their difficulties in competing internationally, are refocusing on their home market, making it even more competitive. This includes the Landesbanken and now Commerz and Deutsche.
At the same time, wholesale firms are seeking to undermine their new and old competitors’ claims to offer their German clients better international expertise. Mutual group DZ Bank, for example, has recently made agreements with China Development Bank and Indonesia’s Bank Central Asia to do just that.
It is all supposed to be worth it because even smaller mittelstand clients need international trade finance and hedging products, not just low-margin lending. However, the scope for that is now waning too, thanks to the impact of technology and populist nationalism on international trade.
There is a similar problem in investment banking. While other European banks are trying to gain market share, Deutsche’s German investment banking team is its largest ever. Moreover, despite cuts elsewhere, it is growing its Frankfurt staff base – and not just because of Brexit.
Under new chief executive Christian Sewing, Deutsche’s corporate and investment bank now reports financial results internally for four global regions rather than three, with the German-speaking countries split from the rest of EMEA. It is also beginning to target smaller corporate clients for investment banking products.
This is understandable. If there is one place where the European banks can beat the Americans it is in their home markets. The problem is that, unlike the US, these are not individually big enough to act as a base for globally competitive investment banks. The US investment banking fee pool is about 10 times bigger than the UK, according to Dealogic. It is almost 20 times bigger than Germany and France.
No wonder Berenberg is following Deutsche’s earlier example in focusing away from Germany as a means to grow. There are about 450 public stocks in Germany – compared with about 2,000 in the UK – many of them rarely traded. Germany is also a smaller M&A market because so many of the private equity firms covering the country are based in London.
The stock market is smaller in Germany partly because mittelstand companies are so cash-rich, but it is also an effect of Germany’s more public-dominated pension system. Unlike the UK, there are just a handful of large institutional investors in Germany (DWS, DekaBank, Union Investment and Allianz Global Investors).
What this all means is that Germany is a bad home for its banks to fall back on. There is a partial exception in Deutsche’s local private banking business, which dominates a relatively consolidated local market.
A much greater share in corporate and commercial banking would also make things much better for Commerzbank, but there are so many competitors today that even big mergers, whether French or otherwise, will do little to help.