Is German banking a zero-sum game?


Dominic O’Neill
Published on:

Clients have had a much easier time than their banks in Germany, but fintech innovation is creating ways for the likes of Commerzbank and Deutsche Bank to thrive, even in the country’s SME heartlands.


As negative rates go deeper and last longer, the impact of the poor domestic positions of Commerzbank and Deutsche Bank is coming to a head.

More than any other big European banks, Germany’s biggest private lenders now stand almost no chance of earning their cost of equity. Efficiency measures alone won’t mend this, even if their workers brook deeper cuts.

Was this always the trade-off: between a strong German economy and sovereign, and the underperformance of the international banking champions?

Big banks work when they have large market shares at home. In Germany, even Deutsche and Commerz cannot compete against the local power of hundreds of cooperative and publicly owned savings banks, which have a far higher combined domestic market share.

The German cooperative and savings banks have been better at lending to the smaller SMEs that matter – largely because they are decentralized.

In any country, the corporate and mass market will be best served, because banks can more easily achieve economies of scale there without endangering their loan books. However, this is not where banks are most useful as creators of jobs and exporters.


German banks, especially private banks, are on average less efficient than their European peers. Yet if there were a simple zero-sum game between banks and their clients, the banks for which profit is a secondary concern should surely be less profitable than the ones whose ultimate goal is profit.

In fact, the opposite is the case, as the cooperative and savings banks – but importantly, not the publicly owned Landesbanken – have recently proven more sustainable than private banks.

The savings and cooperative banks made more than 70% of the sector’s profits in 2018, according to Fitch Ratings. At about €8 billion each, their pre-tax profits were more than four times what Commerz and Deutsche made apiece.

The cooperative and savings groups’ returns on average assets (0.6%) are about three times higher or more than the ROAA of the big private banks, according to Fitch.

What accounts for this?

Some in Germany defend their banks by arguing there is more foreign competition than in other markets. Germany is a battleground in Europe, it’s true – though not for the bulk of SMEs, rather than corporates and mid-caps. As such, it’s a battleground for business that Commerz and Deutsche traditionally lead.

It’s an issue of how near you are to the customer. Small and medium-sized businesses need small and medium-sized banks 
 - Helmut Schleweis, DSGV

That’s also why the Landesbanken have recently proven just as bad at making money as private banks.

The difficulties of the Landesbanken doesn’t mean there are too many savings banks or that savings banks’ businesses are bad. Their problem has been the refusal of regional politicians, and associated savings banks, to countenance mergers of the kind the cooperative group has done under DZ Bank, even in businesses such as asset management.

The private banks have lost relevance as their profit-motivated shareholders have not been better tutors for the long-term interests of the bank and its clients. Listed banks have suffered more international hubris and strategic caprice than the savings banks and cooperatives, if not more than the Landesbanken.

According to Andreas Martin, board member of cooperative banks’ association BVR, a strong and growing position in SME credit is not only good for the country, it’s also a lynchpin for a profitable customer franchise in Germany, given the structure of the economy.

“It’s much more interesting to have a business with SMEs than with private-customer deposits,” he adds.

Martin has seen no market impact since Commerz cottoned onto this three years ago, at a time when the co-ops have grown lending especially rapidly. As such, cooperative and savings banks still dominate German banking.

Moreover, this has been achieved through a fundamentally different model to the private banks: decentralization, according to the savings banks and cooperatives, remains vital to the rare, risky and valuable bits of SME lending.

Helmut Schleweis, president of DSGV, sits beside German chancellor Angela Merkel at a banking event in May

“It’s an issue of how near you are to the customer,” argues Helmut Schleweis, president of Germany’s politically powerful savings-banks association DSGV. “Small and medium-sized businesses need small and medium-sized banks.”

This strategy, in other words, doesn’t need M&A rainmakers and structured-finance wizards. It needs need good local managers that build trust and knowledge over many years.

And it’s naturally easier for smaller banks to get this right, as an individual client with €20 million in turnover, say, will be proportionally more important to the people running the bank; they’re less likely to ignore you.

Schleweis’s argument has some merit, but can the model survive negative rates and technological disruption, even in politically decentralized Germany?

In the digital era, if private banks play to their advantages and live up to their promise of being more innovative and agile, they might stand a chance of achieving dominance and profitability. After all, some of the world’s most exciting fintech companies are German.

Perhaps digital SME and mortgage credit in Germany will eventually prove just as safe for the bank and as popular with the client: and cheaper to run. Cooperatives and public-sector banks, on the other hand, have centralized tech initiatives of their own.

Meanwhile, if the savings and cooperatives banks suffer a similar demise to the Landesbanken, the beneficiaries may not be Commerz and Deutsche, rather the legacy-free foreign players, such as ING.