GERMANY’S ECONOMY may be slowing, but its financial capital is booming. New towers are rising to join those of Commerzbank, Deutsche Bank, DZ Bank, Helaba and others on Frankfurt’s jagged skyline. More are on the drawing board. Had you read no financial news for the past decade, you might presume that Germany’s banks were thriving too.
How wrong you would be. Bankers grumble about subterranean official interest rates—they must pay the European Central Bank 0.4% a year to deposit cash—that show no sign of rising. Those compound an old problem: Germany’s extraordinarily crowded banking market. The country has 1,580 banks, grouped in three “pillars”: private, public and co-operative. Although the grand total is shrinking by 40-60 a year, the public pillar still contains 385 Sparkassen—savings banks, mainly municipally owned—and half a dozen Landesbanken—regional lenders, such as Helaba, that also act as clearers for Sparkassen. There are 875 local co-ops. Their clearer and corporate lender, DZ Bank, is Germany’s second-biggest bank by assets.
Some, to be sure, have found ways of making money. Unencumbered by the cost of running branches, DiBa, an online bank owned by ING, a Dutch lender, has clocked up double-digit returns on equity (ROE). But according to Oliver Wyman, a consulting firm, German banks’ average ROE dwindled from a thin 4% in 2010 to a dreadful 1% in 2016. Big private-sector banks are the most discomfited by the lack of elbow room. They have to compete with public and co-op sector banks that have goals beside profits. The private banks’ shareholders regard 10% as a decent ROE. Few big European banks hit that mark; Germany’s are far from it (see chart).
Deutsche Bank, the country’s biggest bank, left it ludicrously late to adapt to the financial crisis of 2007-08. Since 2015 it has been undergoing a painful restructuring, including cuts in global investment banking, where before the crisis it went toe-to-toe with Wall Street’s mightiest. In 2018 it made its first annual profit in four years—just. Its ROE was 0.4%. Commerzbank, the third-biggest, made a mere 3%. On the stockmarket Deutsche is worth less than a quarter of the book value of its equity; Commerzbank, a little more.
Reportedly, Germany’s government would like to see Commerzbank and Deutsche Bank merge. Politics aside, the state has a limited direct say. It owns 15% of Commerzbank, the legacy of a bail-out and a merger with the stricken Dresdner Bank in 2008-09. It has no stake in Deutsche. Rumour has also linked Commerzbank with French and Italian suitors, and suggested that Deutsche’s bosses would prefer a deal with Switzerland’s UBS, but ministers may be loth to see another big bank in foreign hands (HVB, based in Munich, is owned by Italy’s UniCredit). In a speech on industrial strategy last month Peter Altmaier, the economy minister, included Deutsche in a list of “national champions”—although national albatross is more accurate.
It is possible to build a business case for a deal. The main gains would come from cutting costs and greater scale in retail banking. Deutsche has around 1,500 branches (including those of Postbank, which it bought in 2008-10) and Commerzbank 1,000. Combined, the two would have nearly 20% of total deposits, according to Autonomous Research, easily the biggest share. There is some overlap in business customers, but Commerzbank focuses on the Mittelstand, Germany’s army of mainly private, export-oriented firms and Deutsche more on bigger companies. Commerzbank has quit investment banking; Deutsche, though weakened, has clung on.
The timing, though, would be terrible. Deutsche, having decided to sell Postbank in 2015 and to keep it two years later, is still tying two systems together. A merger would mean combining Commerzbank too. Both banks are already slashing costs and shedding staff; a union would add another round.
And the deal would do little to ease the banks’ biggest headache: the structure of Germany’s banking market. Though they consist largely of minnows, the public and co-operative sectors are serious rivals, accounting for most deposits, mortgages and lending to companies. Without faster consolidation in those pillars—or inter-pillar deals— marriage will not bring Commerzbank and Deutsche bliss.
Granted, the past decade has seen action, besides the steady stream of unions among neighbouring savings banks and co-ops. The merger of DZ Bank and WGZ Bank, a similar but smaller outfit, in 2016 united the top of the co-operative pillar. In the public sector, the financial crisis forced the eventual dismembering of WestLB, much of which was absorbed by Helaba, in 2012. HSH Nordbank, another Landesbank, was bought by private investors last year, having been sunk by bad shipping loans and recapitalised with state help, and renamed Hamburg Commercial Bank.
Helmut Schleweis, the head of the German Savings Banks Association (DSGV), which represents the public-sector banks, has called for the creation of a “super Landesbank”. According to Handelsblatt, a financial newspaper, he wanted to start with the merger of Helaba and NORD/LB, another Landesbank holed by bad shipping debts, and eventually to bring in LBBW, from the south-west, Deka Bank, an asset manager, and Berlin Hyp, a mortgage lender.
Late last year Helaba had a close look at NORD/LB—its domain would have stretched from the river Main to the Baltic—but could not agree on terms. The DSGV and Lower Saxony’s state government have since hatched a plan to recapitalise NORD/LB. Cerberus, an American private-equity firm, is said to be a likely buyer. (A rare optimist about German banking, Cerberus has stakes in both Commerzbank and Deutsche Bank and part-owns Hamburg Commercial Bank.)
Without that first stage, the super-Landesbank looks improbable. Even with it, persuading public-sector owners, with their own political agendas, to give up a large stake in their local bank for a smaller slice of a national one would be a tall order. A regional savings banks’ association owns nearly 70% of Helaba, for instance; the state of Baden-Württemburg owns 41%, and the city of Stuttgart 19%, of LBBW.
Mergers between pillars remain all but unthinkable for now. Klaus-Peter Müller, a former boss of Commerzbank, once declared that he admired the Sparkassen so much he would like to buy one, if only he could. With that path to consolidation closed, his successors may wonder how they will ever make much money from the domestic market. But others might look at Germany’s economic record over the decades and conclude that the three-pillar system has served the country pretty well—even if it frustrates some of the occupants of Frankfurt’s towers.