* Banks target booming Mittelstand in weak European backdrop
* Competition driving down margins on loans to Mittelstand
* Long-term banking relationships may be tough to break
By Andreas Kröner
FRANKFURT, Jan 13 Cut-throat competition and
decades-old banking relationships mean lenders aiming to profit
from Germany's booming middle-sized companies may be chasing a
On the surface, foreign and domestic banks' expectations of
selling more financial services to the thousands of German
"Mittelstand" companies seem fully justified.
These often family-run, capital market-shy firms have grown
rapidly to dominate global markets in speciality engineering or
technology and contribute a big chunk of Germany's much-envied
trade surplus of about 190 billion euros ($260 billion).
With the rest of Europe in the doldrums, major lenders like
Deutsche Bank, BNP Paribas and HSBC
have stepped up their focus on the Mittelstand,
challenging the likes of Commerzbank and public sector
lenders which see them as their traditional customers.
They can't all be successful.
"There are so many banks piling into that business that you
have to wonder if there are enough Mittelstand companies to go
around," said Bundesbank Vice President Sabine Lautenschlaeger,
one of Germany's top banking supervisors.
Company executives attest to bankers' ardent pitches.
"Banks are proactively approaching us in ever increasing
numbers," said Stefan Wolf, chief executive of auto parts
supplier Elring Klinger, based in southern Germany.
The company is paying less than 1 percent for financing of
up to a year, and pays only up to 2 percent for loans of up to
three years. "Money is sensationally cheap," Wolf said.
But it may take more than the offer of easy credit for
newcomers to dislodge the "house" banks whose relationships with
their Mittelstand companies often go back decades.
Steffen Walter, chief executive of machine tool safety
equipment maker Hema, uses two lenders, his local Maingau
savings bank for immediate financing and Italy's UniCredit
to support his operations in Italy and Romania.
"Our banker knows the company inside out," Walter said,
stressing the ease and speed of arranging any financing needed.
"My philosophy is to be loyal to the bank, because in a
crisis, I can also expect loyalty from the bank," he said.
Auditing firm Ernst & Young found in a study that while bank
loans remain central to corporate funding in Germany, companies
now see the reliability of loans as more important than cost.
"The Mittelstand hate it if the customer service person
changes and they hate it when bank products disappear or foreign
bank branches close," said Martin Fischedick, Commerzbank's
divisional head for the segment.
Commerzbank, Germany's second-biggest lender, bills itself
as a Mittelstand "house" bank, with around 130 billion euros in
loans and credit lines to the sector.
"FAIR WEATHER BANKING"
Lately there has been an increase in foreign banks trying to
muscle in, said Fischedick, who has been advising Mittelstand
clients for a quarter of a century.
He reckons Mittelstand companies pay about 23 billion euros
per year for banking services but banks collectively are
targeting revenue of 29 billion.
"Not all lenders will reach their goals because Mittelstand
business is certainly not going to grow by 6 billion," he said.
Commerzbank is targeting growth of 5 percent per year for
itself, but it will need to fend off incursions from BNP
Paribas, which is adding 500 staff to its business, and HSBC
Trinkaus, which is widening its net beyond large clients to
include companies with annual sales of 35 million euros or more.
HSBC Trinkaus aims to double its corporate client base over
the next four years, from about 1,500 now, and expects a fight.
"It's not lost on me that this is possibly the most
over-banked client business segment in the world," said Stephen
Price, head of corporate banking at HSBC Trinkaus.
Germany's biggest lender, Deutsche Bank, said it would start
handling corporate customers from 250 locations rather than the
previous 70, with Co-Chief Executive Anshu Jain's personal
visits to companies like Wuppertal-based vacuum cleaner maker
Vorwerk underscoring Deutsche's interest.
The lender's focus is on selling multiple services to
clients, with about 70 percent of corporate borrowers also using
its other services.
The battle between large commercial players like Deutsche
Bank, Commerzbank, BNP and HSBC, who control less than 15
percent of Germany's corporate banking market, and
not-for-profit rivals in the public and cooperative sector, who
control more than 60 percent, does not bode well for
Loans may be serving as loss-leaders. The average gross
margin for Mittelstand loans of 1 million euros with a 5-year
maturity has fallen to around 1.5 percent, while on loans of
250,000 euros to 1 million it is around 2.3 percent, banking
consultant Peter Barkow calculated.
"Margin pressure usually starts with large loans and spreads
down," Barkow added, pointing out that the gross margin is
before banks subtract costs and provision for bad loans.
Eager banks and cheap money are a combination that could end
badly because risks are not being priced in, warned Martin Faust
of the Frankfurt School of Finance and Management.
"This is fair weather banking. Only the next recession will
show who is being sensible in their approach," Faust said.