Olaf Scholz: Germany has much to be thankful for in the coronavirus crisis. But its banking sector still isn’t shining
Compared with the rest of Europe, Germans have had a lot more reason to thank their government since the start of the coronavirus crisis. As a proportion of GDP, Berlin’s immediate fiscal stimulus and its programme of state-guaranteed loans are more than twice the size of schemes other big European economies have announced, according to Brussels think-tank Bruegel. Germany’s health crisis has been less extreme than elsewhere on the continent and its economic hit is also expected to be less severe, particularly compared with southern Europe.
Judging by the stock market, however, investors don’t seem to think that’s going to put German banks in any better position than their European counterparts. Shares in the two biggest banks, Commerzbank and Deutsche Bank, fell by about 50% between mid February and April, in line with the sector across the region. Even before the coronavirus crisis, German banks were already struggling with profitability more than peers elsewhere in Europe.
Over the last decade German banks’ asset quality has generally been better than southern European banks – with the important exception of shipping and now, perhaps, aviation. As Berlin deploys its hefty financial muscle to backstop businesses, German banks are again hoping that they can again enjoy lower credit costs than banks further south.
Especially in comparison with Italy, sector insiders say just the signal of strong sovereign support has been vital to German businesses. Berlin announced a much clearer equity backstop than other European states, earmarking €100 billion for capital injections in March, and not just for the biggest corporations. Bankers say this could become vital if lockdowns persist, leading to unsustainable levels of leverage, and especially if equity capital markets remain closed.
The banks themselves have a crucial role to play in the biggest part of what federal finance minister Olaf Scholz called his ‘fiscal bazooka’ on March 13 – a massively enlarged and loosened version of a decades-old programme of bank-channelled business lending from state development bank KfW. Scholz has removed the previous €357 billion cap on the programme, which unlike other guarantee schemes in Europe also provides banks with liquidity up to the amount of the indemnity.
German bankers are enthusiastic. Chief executive of UniCredit-owned HVB, Michael Diederich, says “the decisiveness and speed of the government’s reaction were impressive.” Roland Boekhout, Commerzbank’s head of corporate clients, gives the KfW programme “two thumbs up”.
Michael Diederich, HVB
KfW is relying much more heavily than before on the banks’ assessment of firms’ creditworthiness, even though it is taking much more of the risk – 90% or 80% for the biggest chunk of the programme and 100% for smaller loans, compared with 50% before the Covid-19 crisis. Now it is only doing its own checks on loans above €3 million and on a fast-tracked basis for loans below €10 million.
The big German private-sector banks don’t see this as an opportunity to win market share but rather as proof of the value of their client relationships.
“We like to grant these loans as we like to stand by these customers. Our advantage is dealing with clients we know. If we’re their main bank, we prioritize them. It’s not a moment to acquire new clients but for standing by existing customers. This allows us to do a quick assessment, which is also useful for KfW,” saysBoekhout.
Christian Ossig, chief executive of the local association of private banks, the Bankenverband, adds it remains “an enormous challenge and responsibility” to plug firms’ liquidity shortages. He says credit provisions will be lower if banks act in concert, while healthier companies will also maintain more demand for things like transaction banking and foreign exchange, so it’s in the banks’ interest to deploy the loans as quickly as possible.
By early April the new KfW-guaranteed loans were already beginning to land in businesses’ bank accounts; a week earlier than originally planned and less than a month since the programme was first announced (some banks are also pre-funding the KfW loans). Meanwhile, Italy was only just issuing the guidelines to banks for a similar scheme through its equivalent to KfW, CDP.
|Stefan Bender, Deutsche|
However, the figures available from KfW by mid-April suggest Germany is not processing applications more quickly than France, where a scheme has been active for a similar amount of time. KfW counted about 10,000 applications, compared with around 150,000 at France’s BPI. French banks also say the volume of applications they have received is twice as large, at about €40 billion.
The German scheme targets a narrower range of borrowers, so lower numbers and perhaps volumes are to be expected. Germany has grants for sole traders, while KfW caps its guaranteed loans at €1 billion and has a separate scheme to guarantee participation in loan syndications for bigger firms.
Yet bankers in Germany certainly seem no less busy than the French. They say they are doing all they can to deal with a deluge of applications.
“Just put yourself in our shoes,” says Stefan Bender, head of Deutsche’s German corporate bank. “Before the coronavirus, this was a niche product for very specific requirements and with very specific processes. All of a sudden, on March 13, that changed and it was a product that was desperately needed.”
It seems the government is listening. Earlier than other countries, Germany tweaked the scheme in early April to offer a 100% guarantee for loans up to €800,000 for up to 10 years. Crucially, although bankers say the higher interest rate of 3% could dampen demand, firms are able to self-certify their eligibility for the scheme, which is dubbed Schnellkredit (quick loan) and is open to any previously profitable firm with more than 10 employees.
Even with self-certification, Bender says there’s still an obligation on the bank to question and possibly refuse the application if the relationship manager believes details may be incorrect or fraudulent. And for the bigger loans, which carry a rate of 1% or 2% and a six-year repayment period, banks still need to do a proper risk assessment. “This is not a free for all; there’s still a credit check, so we need to be able to explain the rules,” says Boekhout.
This is not a free for all; there’s still a credit check, so we need to be able to explain the rules- Roland Boekhout, Commerzbank
To deal with the workload, German banks have educated front-office staff on the practicalities and longer-term implications of extending the loans, transferred staff to the divisions handling credit decisions and generally streamlined their online credit processes.
Deutsche Bank has set up a ‘Corona Helpdesk’ staffed with 20 specialists in the technicalities of the KfW programme. Commerzbank has boosted its team dedicated to managing KfW loans from 12 to 100, mostly by transferring in structured finance bankers. “It’s all hands on deck to master the situation in front of us,” says Boekhout.
Roland Boekhout, Commerzbank
The KfW scheme has, temporarily at least, brought a very different series of priorities to German banks from a few weeks earlier, when the main job was to cut costs and staff as quickly as the stringent labour laws would allow. “You need to put out the fire that’s burning today before you deal with tomorrow,” says Boekhout, adding that the longer-term strategy to cut costs and boost profits is not under discussion or on hold.
Nevertheless, the longer-term future of the companies that are core clients of the German banks is now even more in question. Even before the coronavirus crisis, Germany’s determination to cling onto its manufacturing and export-focused economic model was beginning to crack under competition for higher-end products from China, American protectionism and the shift to electric vehicles.
In effect, KfW has excluded many car part manufacturers by only opening the scheme to companies that were not in financial difficulties in 2019. Bankers are hoping that this snub to the auto industry was just a sleight of hand in the government’s rush to get the programme out. But companies in other sectors, such as tourism, that were in less trouble before the crisis, also face a more uncertain long-term future now.
“You have to distinguish between short-term liquidity issues and long-term profitability,” says HVB’s Diederich, discussing the bank’s analysis of the risks of extending the larger KfW loans.
The problem is that the environment is so uncertain that banks are struggling to make a judgement on what could be a client’s long-term viability, while reacting as quickly as these clients require.
Factoring in how the government’s equity interventions might change things, through a federal bailout fund that is still under design, only adds to that challenge.