Foreign banks are muscling their way into Germany, attacking a market segment that had long been firmly in the grip of domestic players — the so-called Mittelstand of small and medium businesses, a key part of Europe’s largest economy.
London-based HSBC, Dutch bank ING-Diba and BNP Paribas of France are profiting from the weakness of top domestic players Deutsche Bank and Commerzbank, both in the throes of restructuring programs that are binding management resources and capital. In contrast, many of Germany's foreign competitors have been quicker to put the financial crisis behind them.
“We’re steadily gaining new clients,” said Carola Gräfin von Schmettow, the chief executive of HSBC’s German operations.
Backed by well-capitalized parents with strong international networks, foreign banks increased their share of total lending in Germany to 10.8 percent by November 2016. This is up from 9.6 percentage in 2013. The most recent figure also doesn’t include many subsidiaries of foreign banks. Munich-based Hypo-Vereinsbank, for example, is categorized as a domestic bank by the German central Bundesbank, even though it belongs to Italy’s Unicredit.
“Many international banks have discovered the classic Mittelstand because it offers double-digit returns,” said Walter Sinn, Managing Director of consultancy Bain in Germany. He adds that these banks are even starting to show interest in relatively small companies with annual sales of €50 to €100 million.
Meanwhile German banks are busy groaning about mounting regulatory constraints, rock-bottom interest rates and digitization.
To be sure, some of the foreign competitors have to regain the trust they lost among German clients after abruptly pulling out of Germany in the wake of the 2008 financial crisis. Some corporate finance chiefs still remember how foreign banks abandoned them and radically scaled back their lending.
Foreign banks in Germany are successful in areas where they can build on their strengths in their home market. Holger Sachse, Partner at Boston Consulting Group
“International banks that want to grow in Europe can’t avoid the German market,” said Mr. Sinn. But he added that the market was also difficult and crowded, with an average return on equity of just 2 percent after tax and 1,700 banks jostling for business.
Foreign banks are also benefiting from their strength in investment banking. Last year, Bank of America Merrill Lynch became the first U.S. bank to lead the mergers and acquisition advisory market in Germany, ousting Deutsche Bank from the top spot. That, however, was due to the mega-acquisition of U.S. seeds giant Monsanto by German drugs group Bayer. Deutsche Bank wasn’t involved in that deal because it was advising a Bayer competitor.
German companies, and especially Mittelstand firms with their solid finances and well-grounded business models, are attractive clients. Most domestic banks, be they private, state-backed or cooperative, are fighting for a piece of the action.
“I don’t know a single bank that doesn’t want to grow in the corporate clients business,” said Oliver Dany, senior partner of consultancy BCG. According to a BCG survey, earnings in the German corporate clients business are expected to deliver next to no growth in coming years, and more than half the banks in the market aren’t even recouping their capital costs.
But foreign banks are trying to corner the market by offering attractive terms and boasting strong parent companies.
“Foreign banks in Germany are successful in areas where they can build on their strengths in their home market,” said Holger Sachse, a partner at BCG. Some foreign banks can offer a broad international payment network or have strong knowhow in certain forms of finance or certain industries. “Those who push hard to promote such unique selling points can win market share from German banks,” he said.
Many international banks have discovered the classic Mittelstand because it offers double-digit returns. Walter Sinn, Managing Director of Bain consultancy in Germany
HSBC, for example, is wooing clients with its 4,400 branches in 91 countries. “We can provide global services for Mittelstand firms that want to grow abroad,” said Ms. von Schmettow of HSBC.
BNP has strongly expanded its German business. In 2013, it only had 250 corporate clients in Germany. Last year the number was more than 450, with current plans to increase up to 600. To help drive its business, BNP hired Lutz Diederichs, the former head of corporate banking at Hypo-Vereinsbank, as its Germany chief.
For many foreign banks, lending is just a way to get their foot in the door to offer clients more lucrative services, including currency management, trade finance or capital market services.
“Credit is the foundation of our relationship with corporate customers – it’s our entrance ticket so to speak,” said Ms. Schmettow. “But we earn the money with commission for other products with which we support clients in Germany and abroad.”
Most companies do the bulk of their banking with a handful of core banks, and foreign competitors are now trying to get into that inner circle. It’s a threat to homegrown banks, of course, which is why the core group is ready to put up a fight.
Commerzbank wants to attract some 10,000 new corporate clients and is focusing on small and medium-sized companies. That's good news for firms that can pick and choose their creditors.
For the banks, the battle for customers is risky – and not just because they have to offer more attractive terms.
“Of course there’s a danger that banks might take bad risks onto their books,” warned Mr. Sinn of Bain. “But that only shows up three to five years later.”
As Ms. von Schmettown points out, HSBC has recruited some 350 new staff since 2013, which has helped increase the revenue from corporate banking by 12 percent per year.
“Many banks are preoccupied with themselves and have to redefine their strategies and business models. That is pulling their focus away from clients and unsettling employees. In contrast, the fact that we can grow in peace is a big advantage not just for our customers – we are also receiving many job applications.”
Michael Brächer has been a financial editor in the investment team in Frankfurt since January 2013. To contact the author: [email protected]