Private Wealth Every Bank for Itself

Germany’s private banks, once the sole beneficiaries of wealthy clients, are struggling in a more competitive and low-interest rate environment. They need to work better together.
Empty vaults. Private banks are finding it harder to attract wealthy customers.

Thick carpets, priceless artwork and glass cases with displays about the history of trading adorn the entrance to the Frankfurt headquarters of Bankhaus Metzler, a 340-year old privately-held bank that manages the assets of some of Germany’s wealthiest families. These are customers that like to be treated well.

And yet when Emmerich Müller, the bank’s head, lobbies for new customers these days, he finds the talk is much less about the finer things in life than it is about the hard numbers. Where a wealthy client used to choose from three banks where to place the family fortune, these days the competition is fierce.

“These things are much more organized these days. We’re increasingly parading ourselves before clients like in a beauty contest,” Mr. Müller said.

Wealthy families with money to be managed are getting choosier. Transparency has replaced the private chats that used to be enough for private bankers to seal the deal. Families will now typically ask their suitors to fill out a detailed questionnaire, said Mr. Müller. Only if they pass this stage will they be invited for a personal meeting with the family patriarch or matriarch.

“We are finding that customers are much more scrupulous in their choices than in the past,” said Stephan Rupprecht, a partner of Hauck & Aufhäuser, another German private bank founded in 1796.

The small banks only have a chance today if they take control of a niche market and continue to develop further in that space. Mario Caroli, Ellwanger & Geiger

These families also have more to choose from. Larger investment banks like Deutsche Bank and Commerzbank are increasingly engaged in cross-selling. Asset managers, smaller savings and loan banks and foreign firms, led by French asset manager Carmignac and Oddo, are also vying for the business of managing Germany’s wealthiest.

It is proving a tough transition for Germany’s storied private banks, many of which have been in business for more than 300 years. They are not the only ones struggling: Much of Germany’s banking industry is in tumult, ranging from smaller savings and loans that are facing pressure to cut costs by closing local branches, to state-backed regional lenders that still have bad loans on their books, a legacy of the financial crisis.

All of these banks are increasingly looking to diversify their business models. This is also leading to a competition on price as banks squeeze their charges to attract business, said Marc Jochims of the strategy consultant Kampmann, Berg & Partner. Meanwhile costs are increasing, both for complying with financial regulations and for adopting the latest technologies, which bankers say their clients are increasingly demanding.

“You try to pass costs on to the customer as much as possible. But the margins are simply not as good as they used to be,” said Mario Caroli, head of Ellwanger & Geiger.

Historically-low interest rates are another key challenge. Yields for safe investments in particular have fallen dramatically. In real terms and after costs, the yield can increasingly often turn negative.

These things are much more organized these days. We’re increasingly parading ourselves before clients like in a beauty contest. Emmerich Müller, Bankhaus Metzler

All of this means that profit margins for these private banks are falling, down from 0.62 percent on managed assets in 2009 to 0.45 percent in 2014, according to Eurogroup Consulting.

There would be ways to improve these margins, in particular if private banks would join forces on certain back office tasks like meeting regulations or combining IT departments. But for an industry that has long lived from discretion and takes pride in its independence, this has not been much of an option to date.

“Everyone is fighting alone,” said Christian Leurs of Eurogroup Consulting.

The falling margins are also leading many of these banks to tinker with their business models, but in different ways.

Some banks are looking to specialize: Haus & Rupprecht recently shuttered its mergers and acquisitions business. Bethmann took over the private banking arm of Credit Suisse and is betting on bulk in the sector. Ellwanger & Geiger is honing in on the property market.

“The small banks only have a chance today if they take control of a niche market and continue to develop further in that space,” said Ellwanger & Geiger’s Mr. Caroli.

Others are headed in the opposite direction. Bankhaus Lampe is looking to expand into capital markets, taking its cue from Berenberg, which has made a name for itself in guiding companies through stock market listings. On the private banking side, Berenberg came under fire recently for saying it will focus only on clients with assets of more than €1 million.

“The services we offer are very complex and not without costs. The customer has to be willing to pay for these, and this typically only begins to make sense starting at €1 million,” said Peter Raskin, Berenberg’s head of private banking. Customers with smaller assets are not excluded, he noted, they just have to pay a higher premium for the bank’s services.


Laura de la Motte is a banking correspondent for Handelsblatt based in Frankfurt, Germany’s financial capital. Christopher Cermak also contributed to this story. To contact the author: [email protected]