The shape of private banking for Germany's smaller institutions is changing, and many must take stock of their situation, and re-evaluate their strategies. Private Client Management talks to three smaller private banks to see how they are faring, and how they expect to compete in a world under threat by the Basel II capital adequacy requirements and an environment increasingly dominated by banking giants, such as Deutsche Bank. The outlook for many small private banks is not good, and some are in dire financial straits. Schmidt Bank, for example, was bailed out last year by a commercial bank consortium that bought a 68 per cent share in the troubled bank for €1. Delbrück & Co. recently sold its 46 per cent stake in Maerki Baumann to Raymonde Syz-Abegg to help ease its widely reported financial troubles and has been in talks with investors to help prop it up. Gontard & MetallBank in Frankfurt announced a loss of €50.3m at the end of its financial year in September 2001 and send out an SOS to potential investors for a lifeline. Konrad Becker, banking analyst with Munich private bank Merck Finck & Co., told Private Client Management that the Basel II capital adequacy rules effect each bank depends its loan and credit portfolios. "According to Basel 2, the risk of each bank is about the risk of capital requirements to the client. It's not easy to give a general answer at this stage. But if I see a private bank trying to act like a universal bank and offer loans to corporate clients, I expect capital requirements for them will increase because they don't have a rating for such loans, and will be in the highest risk class and have the highest need for equity. If they want internal ratings, they must spend money building up their systems internally, or buy it, or their clients must offer it from places like Standard & Poor and Moody's, but most mid-sized German banks don't have this," he said. In addition, the Basel accord, while still under discussion is also having a serious effect on many private banks, as they have to re-think their strategies away from the loans business to private client services. " If smaller private banks want to survive, they have to get out of the loans business and focus on other areas because the risk is too high. Sal. Oppenheim and Hauck [& Aufhäuser & Co.] are already out of the market and have focused on other areas for this reason," a German private banker, who wished to remain anonymous, told Private Client Management. "Basel II has affected us already, but the how it affects organisations will depend on the size of the bank. We're in a pool of about 50 banks that were in the loans business for the Mittlestand, Germany's small- to medium sized enterprises. I think though, it will have more effect on banks like the Sparkassen and Volksbanks because they have more Mittlestand customers," Patrick Kiss, head of investor relations at Gontard & MetallBank, said to Private Client Management. But the forecast is not all doom and gloom. Many smaller private banks, such as Merck Finck & Co. and Metzler Bank from Frankfurt are competing efficiently in a marketplace dominated by private banking powerhouses such as Deutsche Bank's Private Client and Asset Management group and Dresdner Private Bank. Merck Finck's Becker said finding a niche is a smaller bank's only viable alternative. Firms should try to develop niches on two strengths: their reliability, and their position in the market. "They should focus on HNW clients. We define niche as offering personalised services, and specialising in tailored solutions. The strength of private banks is their personal contacts and their advice. These are very expensive, and you have to concentrate on HNW clients where you can rely on offering services at higher prices, otherwise you can't compete on economy of scale," he said. "Deutsche Bank, for example, has huge IT systems, and around 12m private clients. There is no way smaller banks can compete with this. What you have to do is specialise on the types of relationships you have with your clients, so you can charge higher prices for your services. If you don't reach this, then you have no future," said Becker. Metzler is an independent, family-owned private bank which provides financial services in five main areas: securities, both in research and brokerage; corporate finance; asset management; a financial markets consultancy, and private banking. It also boasts a large IT department and offers IT software to bigger banks and medium-sized organisations. But do not call it a niche bank. "This word is taboo. We are not a niche player, but are a strong competitor in our five areas of business. We have concentrated our areas of business," said a spokesman for Metzler. "Metzler competes successfully with the giants of German banking in each of these areas, because of its long-term approach to private client management, and its decision to focus and specialise in the five select sections of the financial services industry. It doesn't run a mixed shop," he added. In the 70s, Metzler looked at the smaller private banks in England and America, such as Schröders, and saw that the capital investment market was the important market to get into. Metzler has a long-term approach to strategy, and only has seven shareholders, so there is no need to switch strategy suddenly in order to meet Q3 targets, for example. The partners are like a team, and can look after customers over the long term, the spokesman explained. "We have a lot of high net-worth private clients, and are familiar with the issues that concern them, and have the experience to address the issues. Our clients fit well within our business, and feel that we understand their needs. Several of our key clients are families who have banked with us for three or four generations, and it's important that we keep the next generation. What's important too, is the quality of our consultancy. We're not out to make a quick buck. We can advise independently, and with a long-term approach. Clients are not obliged to buy our financial products, and we advise our clients with what is best for them. If a client is not yet profitable, but will be profitable in five years, then we will also stick with that client," he added. Gontard & MetallBank has suffered heavy losses, but is rebuilding itself with a successful focus on private banking for medium net-worth individuals, and on M&A consulting. "We focused mainly on the Neue Markt, and our expertise was on IPOs. We're reducing risk activities, private equities, loans activities and IPOs, and are now focusing on our core businesses, which is asset management, investment banking and trading," Kiss said. As part of its refocus, Gontard is building a special unit in wealth management, and is doing well with that, he added. "We have new clients, and more than €400m assets under management. We are offering two main services for our private clients, one is the wealth management service. Clients must have a minimum of €250,000 to invest, and they delegate their funds to the asset manager, who makes the decisions about how best to invest their funds. The other is more of a wealth advisory service, where the managers merely advise the customers on the best ways to invest their money. Clients must have €150,000 to open this form of account." Kiss also recognised that the way to build up Gontard's private client business is through making personal contacts. The bank will be active at the Invest 2002 trade fair in Stuttgart in March. "We also have a lot of personal contacts in Frankfurt, because wealth management is a very personal business for asset management," he explained. Gontard's prospects are looking more promising than in September last year. This is mainly due to its change in strategy but it is still looking for investors. The bank started its capital increase in the beginning of February. "We have investors which take part of the shares that the normal investors do not take. These investors guarantee our capital increase. Our biggest shareholder is Gold-Zack, which has about 45 per cent of new shares from the capital increase. We are looking for another strategic partner in future, like Gold-Zack, which can help us find money and new business," added Kiss.