WM Market Reports
The Quiet Power Of Germany's Private Banking, Wealth Market
Germany, with more than 83 million people and Europe's largest economy, has a wealth management sector to match. This publication takes a closer look at some of the players.
It is the biggest economy in the European Union, has its largest population (83 million-plus) and despite hiccups, has the kind of growth rates many “peripheral” countries on the continent will envy. It logically follows that it must have a large wealth management sector.
Germany can boast an onshore wealth management sector that rivals and in fact probably exceeds that of the UK, although it is far more domestic and less reliant on cross-border inflows than the latter country is. Some of the figures are eye-catching. According to The Germany 2014 Wealth Book study, there were 1,382,265 high net worth individuals in the country last year; they held $4.2 trillion, making that $3.038 million per head (albeit an average masking enormous variety). That population of HNW individuals rose by 4.2 per cent in 2012, partly reversing a fall in the previous year.
It is a market where the institutions don't tend to draw a great deal of non-domestic media attention apart from the very top end. Big institutions such as Frankfurt-listed Deutsche Bank and Commerzbank are well-known beyond Germany’s borders; less high-profile, but also international, are the likes of Berenberg (a bank founded in the late 16th Century). Additionally, Sal Oppenheim, which was acquired by Deutsche four years ago, is a private investment house with a venerable history and a significant name also outside of Germany. Further down the line, however, and the market is less familiar to outsiders.
"Deutsche Bank is the largest single organisation for wealth management services in Germany and offers the full range of private banking offerings and services and targets in particular the HNW individuals. The savings and loan and as well cooperative banks are very strong in the local communities and manage a lot of the money of affluents, even though many not even call it private banking. Traditional private banks such as Berenberg or Metzler are for the reasons outlined not very big given the size of the market and certainly feel the pressure of the changing dynamics and consolidation. The former private bank Sal Oppenheim was the first one (at that time the largest one) that had to move under the umbrella of a big organisation such as Deustche Bank (mainly because of terrible management mistakes)," Christian Nolterieke, managing director and co-founder of MyPrivateBanking Research, the consultancy, told this publication.
According to BaFin, (the German Federal Financial Authority), it supervises 1,850 banks and 700 financial services institutions, ranging from boutique private banks through to “universal banks” and asset managers. There were also as at the end of 2013, for latest available data, 78 domestic fund management firms and over 6,000 investment funds under the supervisor’s control.
MyPrivateBanking Research's Noltereike said German wealthy individuals and firms are strong users of local savings and co-operative banks, such as the "Sparkassen" firms. This places a bit of a ceiling on how far the private banking model can advance, he said.
"In my opinion, the strengths and credibility of the small, local banking system in Germany has proven to be a big entry barrier for the "traditional" private banks and wealth managers. (Except Deutsche Bank, which has a significant local presence as well, but also targets more of HNWs than affluents). An entry barrier that has only got higher over the past years due to the bad reputation the big banks got in the financial crisis, while the saving and loan and cooperative banks were not very much affected and involved in scandals etc," he said.
There are, even so, a number of small, often very old, private banks dotted around the country. Munich and Hamburg are particular hotspots. They serve a blend of business and individual clients, many of them drawn from the “Mittelstand” sector of small, medium-sized, family-owned firms that typically form the backbone of Germany’s economy. There are over a dozen banks, for example, whose names will start as “Bankhaus”, such as Bankhaus von der Heydt , or Bankhaus Lampe. In the case of the latter, for example, it is headquartered in Belefeld with offices in Bonn, Hamburg, Münster, Dresden and Frankfurt and has 678 staff; is also works with subsidiaries and co-operates with firms outside the country, in Austria, the UK and New York. It booked a group net profit last year of €21 million ($27 million).
There has been some M&A consolidation in this sector – perhaps unsurprisingly given issues of scale in a time of rising regulatory costs. As an example, Bankhaus Reuschel & Co was in late 2010 acquired by Donner & Reuschel AG; the bank was originally founded in 1947 and is headquartered in Munich, in the heart of prosperous Bavaria. Deutsche's own purchase of Sal Oppenheim, as previously mentioned, was a notable example of an old house being snapped up.
An issue for many German banks is that their gross margins are low, given the risk-adverse nature of many wealthy German individuals, according to Christopher Wheeler, an analyst at Mediobanca in London. On the positive side, such banks tend to “keep the costs down”, he said. He gave the example of Sal Oppenheim, a bank that had had a gross margin of 50 basis points, but also a cost-income ratio of 50 bps.
As with Swiss old-timers such as Pictet & Cie (founded in 1805), a number of German banks have a long history, surviving wars and depressions along the way. An example of a bank with a long history is Bankhaus Hauck & Aufhauser Privatbank; it is born out of banks that came together, with one of the original firms founded in 1796. Another name with offices across the country is the wonderfully-named First Fugger Privatbank. Other banks operating in this sort of space include Merkur Bank; MM Warburg & Co, and Otter M Schroeder Bank (based in Hamburg).
Other players include the likes of Hypovereinsbank, which is part of the Italian UniCredit empire and which delivers private banking, among other services. One bank that presents itself as serving high net worth clients with active business interests, is BHF Bank (est. 1854), a firm which according to its website is a “modern private bank for internationally minded Mittelstand entrepreneurs and their families”. This firm recently got a top ranking in German publication Handelsblatt’s “Elite Report” for its wealth management offering. It logged €700 million in net new money in the first half of this year and has €39.5 billion of client AuM, making it a middle-ranking player on a par with, say, the wealth arm of UK-listed Royal Bank of Scotland.
There is a significant family office segment in Germany; names include Dr Hellerich Family Office (Munich); S&P Family Office (no relation to Standard & Poor’s); AlpView Capital Partners; BTV Group (Munich); K5 Advisors (Hong Kong, Germany) and Spudy & Co Family Office (Hamburg, Munich). There is also a large constituency of investment houses.
Germany’s economy has on the whole been the most robust of the main EU states and that has translated into the sort of HNW population growth seen above. An important issue for wealth managers in Germany has been how German federal and state authorities haven’t been shy in recent years to hammer German clients stashing undeclared money in Swiss accounts, deterring locals from taking this route.
That said, in a recent conversation with Vontobel, the Zurich-listed bank, it was pointed out to this writer that a large chunk of Germans like to use Swiss banks for reasons entirely unconnected to tax issues but rather around issues such as experience and market reach. With that in mind, it was interesting to note how Credit Suisse, Switzerland’s second-largest bank, sold its German private bank to Bethmann Bank, part of ABN AMRO, giving the latter a useful additional foothold in the economy. Vontobel – as reported by this publication recently – has pointed out that given the potential risks to Switzerland being frozen out of some markets, it has kept an important booking centre in Germany, seeing it as Europe’s most stable economy.
In a country with a top income tax rate of 45 per cent – the same as for the UK - and inheritance tax and gift tax rates of 7 per cent to 50 per cent, the need for efficient tax planning and wealth transfer is clearly essential. With IHT, for example, a person can secure significant relief by transfer of business interests and shareholdings; there are reliefs on certain gifts and real estate interests. Germany doesn’t have a domicile rule as in the UK, so one won’t find a market for “non-doms” living some of their time in the country, often for tax reasons.
Germany doesn’t have a wealth tax (in contrast to, say, France). An individual with his/her tax residence in Germany is subject to German income tax on worldwide income but double taxation can be generally avoided as the country has entered a number of treaties with other jurisdictions to address the problem. On IHT and gift tax, Germany has double-taxation deals with Denmark; France, Sweden, Greece, Switzerland and the US.
One factor to consider in looking at Germany’s wealth management arena is that trusts – as they are generally understood in the Anglo-Saxon legal sphere, such as the US and Britain – are not recognised in law (source: Berkeley Law).
All things considered, Germany is and remains a major, if
overwhelmingly, domestic wealth management force. It isn’t in the
limelight as much as those of Switzerland, the UK, US or for that
matter, Asia. And one gets the impression that Germans are very
happy with this state of affairs.