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Wealth report: Germany - turmoil prevails

A staff reporter

15 February 2005

Wealth management in Germany is undergoing considerable upheaval, with the larger banks changing their strategies and the smaller private banks suffering from acute competitive pressures. Foreign competition from the US investment banks and the major Swiss banks has added to the industry's woes. All this is happening at a time when markets are weak and 'Germany's fascination with equities is waning fast. Despite the demise of the Neuer Markt and global equity meltdown, Germany's rich are still very wealthy. Germany contains around 30 per cent of Europe's millionaires — by far the biggest total of any country in the region. German households with more than €500,000 in disposable assets number at least 500,000 and this is set to grow considerably over the next five years, largely as a result of the continued divesting by business owners. There are plenty of super rich in the country as well, with Merrill Lynch and Cap Gemini Ernst & Young, estimating there are around 4,000 individuals with more than €30m each. Not surprisingly, banks in all shapes and sizes have been salivating over the local wealth management market for some time. As with so many wealth management markets, the German landscape is highly fragmented. The big four commercial banks — Deutsche Bank, Bayerische Hypo-und Vereinsbank, Dresdner Bank and Commerzbank — control just 20 per cent of the market. Deutsche and Dresdner remain the dominant players in the country's private asset management industry, both controlling around 80 per cent of the big four's share of the market. But the big four banks have been chopping and changing their wealth management strategies during the last year and are increasingly going for the very wealthy in an attempt to gain margin. Most recently, HVB, Germany's second largest bank, re-launched its wealth management operations under a single brand, HVB Private Banking. The strategy is designed to unify the bank's production and adviser services, which were previously split between its private client business and its wealth management sector. The bank has also signalled that it is going for the high net-worth market, rather than concentrating its resources on the affluent sector. "We are known in Germany for our real estate business and to a lesser extent private client business, but we very much want to see private banking as a major area of our bank," a spokeswoman for HVB told Private Client Management. Commerzbank is also revamping its private banking operations and going for the wealthy in an attempt to gain more business. It has set up three private banking operations in the offshore centres of Switzerland, Luxembourg and Singapore and is targeting clients who have either a salary of $500,000, and/or liquid assets of $1.25m. "We want to strengthen and expand private banking as its own business and, since 1 June, we've opened private banking centres in 20 places in the big cities in Germany. We've done private banking for a while and have up to 10,000 customers but we wanted to separate it from retail banking to enhance the profile," a spokesman for the bank told Private Client Management. Deutsche is also targeting the very rich, bringing in a top Goldman Sachs banker, Ivo Schwartzkopff, to spearhead its ultra-high net worth push earlier this year. But it has also attempted to streamline its operations by merging much of its mass affluent strategy, Deutsche Bank 24, and asset management together. It has placed its head of private wealth management, Pierre de Weck, in London and made considerable changes to its management structure during the last six months in an attempt to reinvigorate its private banking business. State banks dominate the savings market Germany's 12 state banks (Landesbank) are sitting on the largest pool of savings in the country — approximately 80 per cent — and much of this money is mass affluent and high net-worth. The imminent removal of state guarantees, which will open the market up for many savings products, has prompted the state banks to tag on wealth management businesses in recent years. But, says one leading consultant, "few are offering much more than plain vanilla products and they will face considerable pressure from the commercial and foreign banks when the state guarantee is eventually removed." The small are struggling Smaller private banks in Germany are coming under considerable acquisition pressures as they struggle to meet international capital requirements under the forthcoming Basel II agreement. Some are selling out. Most recently, Delbrück & Co sold out to ABN AMRO, as the bank struggled under mounting loan defaults. Another to sell was Schroder Munchmeyer Hengst to HSBC Republic; and then there is the ongoing saga with Schmidt Bank, which had to be rescued from collapse last November and is currently selling off parts of the business, mostly recently its Swiss subsidiary. Gontard & Metallbank, a Frankfurt private bank, is facing closure and down the road one of its counterparts, Bankhaus Metzler, has shut its Amsterdam and New York offices. The Basel Accord, while still under discussion, is 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 are already out of the market and have focused on other areas for this reason," one German private banker said. Some of the smaller private banks are competing well in the German wealth management sector. Those that stand out include Merck Finck & Co, MM Warburg and Sal. Oppenheim. These banks are finding successful niches, usually by targeting the very rich or adding mass affluent strategies. They have also bought businesses or formed strategic alliances with other financial services firms to offer improved services. Merck Finck, the Munich-based private bank, bought the German private banking operations of Westdeutsche Landesbank Girozentrale earlier this year. MM Warburg acquired Hamburg-based Marcard, Stein & Co —one of Germany's oldest private banks. In July, Sal. Oppenheim signed a joint venture with Prumerica Financial, targeting the country's burgeoning mass affluent market through mutual funds. Foreign players have also moved into the market with vigour, although global and domestic economic woes have slowed their ambitious plans in recent months. Earlier this year, Morgan Stanley opened offices in Frankfurt, Berlin and Munich to target Germany's wealthy. Goldman Sachs and JP Morgan have also opened private banking operations in Frankfurt, and Merrill Lynch in 1991 snapped up a 30 per cent share of Sannwald Jaenecke & Cie, a mergers and acquisition firm in Munich, to allow its private client group to take advantage of growing corporate finance activity in Germany. The US banks can offer considerable product choice and access to global markets to a much greater extent than many of their German counterparts. Yet they lack the contacts and relationships, analysts say, which are so important in the German private banking market, and this could limit their success. The Swiss have also targeted Germany as a major private banking market, particularly as they attempt to gain market share in European Union countries, as onshore/offshore pressures mount. Bank Vontobel recently opened a private banking office in Munich to complement its existing operations in Frankfurt. Both UBS and Credit Suisse have beefed up their existing operations in Germany in recent months. Taxing issues Germany's high tax rates have been a big boon for offshore centres such as Switzerland and Luxembourg. The government estimates that around $270bn is avoided in taxes annually and a great deal of this money ends up in Swiss bank accounts. In the lead up to the last German federal elections, there was considerable talk of the possibility of using a tax amnesty in an attempt to attract at least a percentage of this money back to help bolster flagging state finances. The proposal was squashed, largely because of opposition from Hans Eichel, the German finance minister. "I won't stand for the idea that people who have not paid their taxes should get special treatment and not pay as much as honest tax payers," Eichel said, just before the election. He added that under current law, people who admitted their tax evasion to the authorities could already do so without punishment if they repaid the taxes plus interest. Eichel argued that harmonising savings tax in the EU would be a more effective way of getting German money back from tax havens. The prospect of harmonising savings with the EU and other countries looks to be some way off. A tax amnesty might still be on the agenda, say analysts, but few German or Swiss banks are concerned about the eventual outcome. "We are well placed no matter what happens on the tax regulatory front. The big Swiss banks might suffer, but they have a good enough understanding of the German market not to lose out significantly," one Frankfurt private banker said. Updated October 2002.