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14 September 2015

Financial Times: Banking on German growth

Germany is expected to grow by close to 2 per cent this year. Banks keen to fund that growth are coming from elsewhere in Europe. BNP Paribas, Société Générale, Santander and HSBC have all set their sights on expansion in Germany.

Aside from the decent growth outlook, foreign banks are circling because they have spotted a chance to profit from the difficulties that homegrown rivals find themselves in.
That applies particularly to Deutsche Bank, whose co-chief executives recently announced their resignation, following a string of scandals and controversy over the bank’s capital strength. Germany’s biggest lender is now in a period of stasis, as new boss John Cryan wrestles with the old strategic plan. Caught between the chance to remain Europe’s biggest investment bank or retreat to Germany, some kind of compromise seems inevitable.
Even German business looks tougher than it should be. In its most recent quarterly filing, Deutsche reported that domestic corporate lending had weakened.
Commerzbank, the market number two, was more explicit, saying that companies’ “increased use of internal and alternative external funding sources” had “impeded” efforts to boost lending. German banks, in other words, were finding it tough to compete.
Part of that competition is, of course, coming from the French, Spanish and British banks that are upping the ante. But can they really succeed where the locals have long struggled?
The timing is not helpful. Perennially low interest rates are keeping profit margins tighter than usual — and however likely an early rate rise is in the US, the European Central Bank won’t be in a position to follow suit for years.
A more stubborn problem stems from the structure of the market, where lenders not focused primarily on profit, such as state-backed Landesbanks, savings banks and mutuals control more than half the market. These “pillars” were part of Germany’s post-second world war financial architecture, designed to allow its industrial heartland to flourish again. A structurally low-profit banking system was the price Germany decided to pay for its industrial revival.
Those who are optimistic about the current outlook for the German banks would say the efficacy of that experiment is fading. Landesbanks are in chaos after overextending themselves before the financial crisis. And savings banks are under pressure to raise prices in order to generate profits for their cash-strapped regional owners.
Full article on Financial Times (subscription required)

© Financial Times

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