Key trends that are influencing the German banking landscape include regulatory changes, negative interest rates and digitisation. Asena Değirmenci speaks to both Julius Baer and Berenberg on the country’s private banking market.
The financial crisis has led to a peak in concern over German private banking, and has put banks at the forefront of public attention.
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Banks are now seen as a high priority, as the need for regulation becomes increasingly vital for managing the German economy.
Private commercial banks are a key pillar of the German economy. According to the European Banking Federation (EBF), private commercial banks account for 40% of total assets in the banking system – one of the largest segments by assets.
These banks also play a role in the German export economy, making up 88% of German exports and nearly three-quarters of the industry’s foreign networks. Another significant element that separates German private banks from public-sector and cooperative banks is that they compete with themselves, and not only with banks from other sectors.
In the past several years following the financial crisis, the industry has greater levels of expertise due to increased regulation. One of the main objectives is a more pronounced need for regulation, and to ensure that nobody repeats the mistakes that resulted in the financial crisis.
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By GlobalDataChallenges
A country with a large export-based economy needs strong banks, and with the industry now in the public spotlight and facing a need for increased regulation, private banks are presented with both challenge and opportunity. The challenge is that with increased public interest, private banks need to establish more regulation. The opportunity is that private banks now have a chance to prevent a replication of the past, and to create a wider public understanding of the industry and what it can do.
Patrick Prinz, sub-region head for Germany and Austria at Swiss private bank Julius Baer, says: “German private banks are currently facing challenges on both the cost and the profitability side of the business.
“Costs are being driven by the high density of regulations, the very rigid labour market, and the growing need for investments in IT and digitisation. At the same time, the relatively passive investment behaviour of German clients, as well as negative interest rates, are affecting revenues – and as a result profitability. All these factors are resulting in growing margin pressure, and thus in ongoing industry consolidation.”
Klaus Naeve, head of wealth management at Hamburg-based investment bank Berenberg, believes the current challenge for the German private banking market comes from a constant need for regulatory change.
Speaking to PBI, Naeve says: “Banks continue to operate in a difficult environment. Not only do they cope with constantly changing regulatory requirements and historically low or even negative interest rates, but they also have to overcome the challenges of digital transformation.
“Berenberg will continue to make every effort to master the challenges in a timely and proactive manner. As a medium-sized bank, we are very well equipped in this respect. We are of sufficient size while maintaining the flexibility to react quickly and in a targeted way.”
Naeve continues: “In recent years, we have repeatedly adjusted our business model to meet the respective requirements and to expand Berenberg into an advisory firm with international operations. Beyond Hamburg, we have become established at the major financial hubs of Frankfurt, London and New York.
“Thanks to our advisory services aligned to client requirements, we have been able to acquire numerous new clients in recent years. We are, therefore, optimistic about the future, and plan to further expand our business and continue to grow in our core markets of Germany, the UK, continental Europe and the US.”
Marketing Strategies
German banks bear a great responsibility, and are a key element of sustaining the country’s market economy. Banks here are a leading trade association, and for that reason they work toward shaping economic policy decisions to make Germany an ideal business location.
Explaining what Julius Baer is doing to build profits in the industry, and how this compares to its previous marketing strategies, Prinz says: “After having built up a profitable market share in the German private banking market over the last 10 years, Julius Baer will now focus going forward on further enhancing client focus, enabling fast decision-making, and thus substantially increasing the bottom line potential of our franchise.
“As one of the very few pure wealth managers for private clients and family offices, we are well placed to explore the substantial untapped potential that exists to deliver value to our targeted client segments.”
He continues: “As the architects of our clients’ wealth, we tailor highly individual, personalised solutions in a client-centric, integral way – yet powered by the best that technology has to offer to increase process efficiency.”
According to Prinz, the main drivers for Julius Baer to further build profits in the German private banking market are its focus on clients, its independence as a pure wealth manager free of any conflicts of interest, and its experienced relationship managers and the client proximity and service they offer through a network of locations across the country.
Interest in the German private banking market is increasingly significant, leading many banks to make preparations for development and improvement.
Outlining the steps that Berenberg is taking to increase profits, and comparing these to its previous methods, Naeve says: “We will retain our proven, diversified business model with the wealth and asset management, investment bank and corporate banking divisions.
“In wealth management, we will focus on providing services for sophisticated wealth structures. This division is closely integrated with asset management to provide our clients with an even broader and superior range of products. To this end, we also make use of the bank’s outstanding equity expertise, which will be a key driver of asset performance for the foreseeable future.
“We expect the forward-looking positioning of the division to generate above-average growth compared with the market. Further investments in personnel, technology and processes, as well as automation, will help us to convince even more customers of the advantages of professional asset management. At the same time, we will press ahead with the intermeshing with other business areas in order to make the Berenberg platform even more intensively available to our wealth management clients in the form of innovative product and advisory solutions.”
He continues: “Despite rapid growth during the last years, Berenberg is still small enough to implement very fast new solutions and – even more important – to deliver them by using different channels and departments throughout the bank. In wealth management, we named this approach WM Plus.
“Accountability is a guiding principle for us, as a dynamically growing house with 430 years of tradition. Therefore, in addition to our social commitment, the application of sustainability and governance criteria has a high priority in investment processes. This is valued by wealthy individuals and institutional investors.”
Digital Speed
Digitisation has become a key feature in the development of the German private banking market. Speed is also a fundamental factor in transforming the industry, due to increasing competition and change. New technological advances can help banks to improve productivity through the creation of new test products and faster solutions.
In recent years, digitisation has also become an important factor in optimising sales, and allowing banks to provide more innovative and interactive experiences for their customers. Numerous new digital players are piquing the interest of customers and their expectations, resulting in increased competition to serve a growing client base.
Negative interest rates, regulatory changes and a rise in digital platforms have put the German banking landscape in a leading position to reconsider new business models. Although many banks have already increased their digital presence with new self-service functionalities, there remains potential for the industry to further expand its online and mobile offerings.
Naeve says: “In the field of digitisation, we will continue to analyse very closely which innovations can generate added value for our clients, directly or indirectly, and which positioning or income sources can be integrated into our business model as a result.”
Economic Developments
As mentioned previously, German banks have played a pivotal role in shaping the economic marketplace. In the last few years, various economic developments have helped to shape and influence the German private banking market.
According to Prinz: “The German private banking market has grown faster than the European private banking market as a whole, thanks to Germany’s higher-than-average rates of economic growth. This economic development has further strengthened Germany’s position as the second-largest private banking market in Europe.
“Potentially, the German economy may slow down due to structural changes in some key industries – automotive, steel and energy, for example; however, with a constant growth rate in the UHNWI population, a strong SME sector – what we in Germany call the mittelstand – and more than 22,000 active foundations, the German private banking market will maintain its attractiveness.”
In contrast, Berenberg’s head of wealth management says the last few years have been testing for German banks, noting that there have been numerous calls to reform the German private banking sector due to increasing threats.
“The last few years have been challenging for German banks. At the same time as implementing extensive regulatory requirements and dealing with the consequences of the financial crisis, market conditions have fundamentally changed: by low interest rates and the challenge of digital transformation,” says Naeve.
German banking must make structural changes if it wants to secure a stable future and restore profitability. One of the first steps in paving the way for a strong economic future is expanding strategic measures. The main priority for wealth managers is to retain clients and bring in new ones. With regulatory updates, technological advances and new business models, the types of consumer and how they purchase products are changing. Managers increasingly need to focus on consumer needs and preferences – be that through a digital landscape or demand for more investment products and better-value providers.
Speaking about the wealth management industry, Prinz says: “The bank’s local and international investment expertise, combined with our proven performance track record, result in a high penetration of discretionary mandates in Germany. A very high percentage of our German clients also make use of our holistic services and solutions, where our wealth planning experts play a major role.
“A number of our wealth planners who focus on the German market assist our clients and our relationship managers in finding the most suitable solution for their personal wealth in terms of protection, growth and the transition to the next generation.”
Outlook
Although the road ahead is still unclear, it is undeniable that significant emerging trends are shaping the future of the banking industry in Germany.
Looking at the German private banking market in particular, Prinz predicts: “Germany will remain one of the most attractive wealth management markets in Europe. Despite being fragmented and mature, the German private banking market will continue to show sustainable growth rates.
“Based on this positive market assessment and outlook, Germany is among Julius Baer’s defined core markets. Therefore, Julius Baer will continue to invest in its strong and profitable German market. What’s more, the ongoing consolidation within the German private banking market may offer additional growth opportunities for strong and established players like Julius Baer.”
Naeve adds: “As a result of regulation, low interest rates and increasing investment pressure due to ongoing digitisation, we expect the industry to be exposed to permanent and strong consolidation pressure; however, we believe we are very well prepared with a robust business model, and intend to use this phase to gain additional market share.
He concludes: “We will focus in particular on making our processes as efficient and cost-effective as possible, and on consistently ensuring outstanding product quality.”
