The last 15 years have provided
a new lease of life for Germany’s Berenberg, the country’s oldest
bank, driven by an increasingly professional and sophisticated
approach to client service. The bank is now looking to expand in
London, where it has targeted £500m in AuM by 2013. Maryrose Fison
reports.
Go deeper with GlobalData
Not many banks can claim the title of being a nation’s
oldest bank, but Berenberg enjoys the dual accolade of being
Germany’s oldest bank while also having one of the most up-to-date
asset allocation tools on the market.
With its origins tracing back to 1590, the
Hamburg-based bank traditionally operated as a cloth trader before
becoming a trading house for luxury goods such as indigo and spices
and latterly a fully-fledged bank.
More than four centuries on and it has
developed into a global bank with four divisions covering private,
investment and commercial banking and institutional asset
management. Collectively the four divisions have accumulated
€21.9bn ($30.2bn) in assets under management, around 9,000 clients
and 894 staff.
Much of this development has occurred over the
past few decades, according to Andreas Brodtmann, one of three
managing partners at the bank.
How well do you really know your competitors?
Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.
Thank you!
Your download email will arrive shortly
Not ready to buy yet? Download a free sample
We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below form
By GlobalData“The last 15 years have really given us a boom
on the private banking side,” Brodtmann explains.
“Berenberg always came from the smaller end of
the net worth individual. For example, 10 years ago we had accounts
of €1m, €2m, €500,000 in size. But over the course of the past
decade, we have developed from the lower end of the private banking
market to the very high net worth individuals.”
The average size of a portfolio has risen
almost three-fold, from €1m to €2m then to €5m now, and Brodtmann
says the number of larger mandates, ranging typically from €10m to
€30m, €50m to €100m, and €100m to €200m has shot up
substantially.
‘Ten years ago we weren’t as sophisticated and
as professional as we are today,” Brodtmann says.
“This is related to the fact that we have far
more specialists in the specific divisions from research to
macro-economic side; specialists in optimising portfolios,
specialists who are able to optimise portfolios on a tax basis and
things like that.
“Today, in our private banking division we have
close to 200 specialists, compared to 50 a decade ago.”
Expansion in London
Now, with a thriving private banking
business in Germany and international private banking operations in
Switzerland and Austria the bank has its sights set on the UK.
Berenberg already has a base in the heart of
London’s financial district on Thread-needle Street, where about 60
staff conduct the investment management business. Brodtmann, who
pioneered the bank’s first international private banking branch in
Switzerland seven years ago, now plans to recruit ten highly
accomplished bankers to begin offering services to UK-based clients
by the end of the year.
The team will work from the Threadneedle
office, but on a separate floor to the investment banking division.
Brodtmann says this is so as to preserve the bank’s “Chinese
walls”.
“We clearly separate the trading activity on
our investment banking from our private client banking,” he adds.
“We even do not give the research of our investment banking to our
private banking clients and this is so as to not mix interest of
clients. We never want to be accused from private banking clients
that we were selling stock when we were in an investment banking
transaction.’
Recruitment, hiring and putting in place the IT
processes to run the systems is expected to cost in the region of
£2m ($3m), Brodtmann estimates and within three years the London
division will be expected to have accumulated at least £500m in
assets under management, at a rate of £200m per year.
Brodtmann believes the bank’s conservative
capital ratio and use of cross-border EU regulations will make the
bank’s services attractive to UK investors.
In anticipation of a widespread increase in
capital liquidity ratios, it has opted for a core capital ratio of
13.1%, well above Germany’s current 8% requirement and the UK
domestic banking average of 6% for core, tier one capital.
Future private clients, both individual and
institutional, will also be covered for up to EUR50m under
Germany’s deposit protection fund – the German equivalent of the
UK’s financial services compensation scheme.
Asset allocation
The bank has also committed resources
to enhancing its existing asset allocation tool – the Sigma
Analysis – a sophisticated quantitative tool established in-house
in 2003 and founded on the modern portfolio principles and capital
asset pricing model developed by Nobel prize-winning economists
Harry Markowitz, William Sharpe and Merton Miller in the 1960s.
A team of 12 from Berenberg’s subsidiary
Berenberg Private Capital is working on the upgrade, which is
expected to be completed within six months and improve the accuracy
of individual investment predictions.
“What you take into consideration is really
what behavioural finance says,” Brodtmann adds. “You try to
identify who is holding equities and whether these equities are in
stable hands or instable hands and what the psychology of the
market currently is. You take all these kinds of emotional factors
into consideration and put it into a model.”
Brodtmann expects that the basic underlying
theory will remain in place, but the asset prediction will be
enhanced.
“Correlations between asset classes in crashes
and panic situations are substantially higher than under normal
circumstances and [the upgraded model will] try to better predict
this,” he says.
Performance
If past results are anything to go by,
then the bank’s steady attitude towards growth is on the right
course. Last year, it opened two more branches in Salzburg and
Braunschweig, bringing Berenberg’s branch total to ten.
Net profit rose by 38% to €65.1m, 1000 new
clients used the bank’s services and assets under management rose
by €1.6bn.
But in spite of the overall growth, Berenberg
hasn’t been immune to the fallout from the credit crunch. Within
the private banking division, net profit remained flat last year.
Brodtmann says the persistently low interest rates across the
eurozone – held by the European Central Bank at 1% for the past 10
months (at the time of going to press) – has contributed.
“When you are in the private banking business
you have clients who have a large part of their assets in cash
particularly in times when the markets do not look too good and you
cannot just earn an interest margin when the absolute level of
interest is 0.5%,” Brodtmann says. “In an interest environment of
4% or 5% it is absolutely fair to charge 0.25%. But when rates are
only 0.5% or 0.75% you cannot just take 0.25% as a margin. This is
quite a burden on every private bank.”
The bank also has a long-standing policy of
paying for expansion from its own balance sheets, with the costs of
setting up two new branches further limiting the division’s profit
margins. Brodtmann says this is a natural result of the bank’s
growth cycle.
“You always have phases as a private bank when
you invest substantially or when you feel that your business is so
well-set that you just grow and because of that will have higher
profits from an operation,” he says.
He estimates that the cost of setting up each
branch is on average between €1m and €2m, with around two thirds of
the cost arising from human resources, and the remainder spent on
IT systems and the legal costs of applying for an EU passport – the
essential licence needed to provide investment advice.
Private banking clients
The proliferation of branches is
indicative of the bank’s sustained client growth over the past
decade. Unlike in the UK, where most private wealth originates from
individuals with backgrounds in the financial services, Brodtmann
says Berenberg’s clients come from a rich tapestry of
professions.
“It is the typical Mittelstands
[medium-sized] companies from all the different kinds of sectors:
we have clients who have made their money from engineering, from
the car industry, the technology industry – it is an extremely
broad split across all major industries,” Brodtmann adds.
“You have retired people who have sold
companies, others who have been chief executive officers of German
DAX-listed companies, some who own companies and successful
lawyers, advisers, consultants.”
In fact the client base for private banking is
so broad that it has recently set up a dedicated team to deal with
the bank’s relatively new celebrity clients. The celebrity desk was
founded about two years ago, although Brodtmann says this is not a
major part of the business.
But the area that continues to see the most
growth, is the charity sector-foundations as they are technically
referred to in Germany- followed by family office business.
“This is a very rapidly growing client segment
for us,” he says. “If you subdivide to private banking, this is one
of the fastest growing groups in our case. The family office
business is also fast growing group.’
Once a client comes on board, they have a range
of private banking services to choose from, spanning discretionary
management, advisory services, mutual fund management and unit
trusts. On average, a client who uses the bank’s discretionary
services will wait between two and four weeks before a portfolio
mandate is drawn up and agreed, and pay a fee of 1% on assets under
management although this varies dependent on portfolio size.
The bank has also increased the number of
investment advisers it has in regional branches – a move it credits
with increasing overall group profitability last year- expanding on
its historic concentration of advisers in Hamburg.
Impact of regulation
As the rest of Europe fights to keep
its head above the parapet in the wake of widespread market
contractions, Germany too has not been untouched by the tightening
regulatory requirements imposed on financial institutions since the
onset of the economic crisis.
Since January, under new MiFID requirements,
all authorised investment advisers at German financial institutions
have been required to provide a “memorandum of advice” to clients,
allowing potentially for any transaction to be revoked within seven
days. Brodtmann says it is here that having the right IT systems in
place can really help.
“[Under the new MiFID rules] it means if a
client gives an order over the phone or the investment adviser has
given a recommendation – for example, ‘buy Siemens because of these
reasons’ – under specific preliminaries the client has a right to
say within seven days, ‘Actually I thought about it twice after the
market came down. I do not agree with you. Please cancel the
transaction’,” he explains.
“The trade is then only valid when the client
signs a memorandum. To cope with that you obviously have to be
extremely efficient in your IT and secondly you have to have
clients whom you trust.’
The concept of trust flows into the lifeblood
of the institution, and manifests itself most prominently in the
ownership structure. Brodtmann, like co-managing partners Dr
Hans-Walter Peters and Hendrik Riehmer are all personally liable
partners.
Under the personal liability partnership, not
only are the three partners responsible for the financial wellbeing
of the bank, but even if they leave to pursue other interests,
their liability runs on in the case of a delayed damage.
Brodtmann says having this vested interest in
the health of the bank is a good motivator for continuing along the
safe and consistent path of performance.
“As fully liable partners we do not have a
basic salary,” he says. “We only earn the first penny if the bank
is profitable. Full personal liability in Germany means that you
are liable with whatever you have on the private banking side. You
may profit over 10 years from strong bank results, but may loose it
all in the 11th. We are very much service focused and not margin
driven.
“Although you might not have a majority of a
stake in the bank, you are the active body. So, in that respect, it
makes a lot of sense that you are remunerated when you are
successful and you are not remunerated when you are not
successful.
“And it guards against leaving a mess behind.
You can’t say, ‘OK I have had 10 nice years here’ and leave and in
the 11th year we have a financial crisis. Your personal liability
does not end when you leave, it goes on for another five
years.”
While the regulatory landscape across Europe
may continue to look uncertain, Berenberg’s conservative, low-risk
approach which has safely steered it through four centuries of
social, political and economic change looks set to keep it in a
steady course going forwards.
