* French banks want to tap in to Germany's faster-growing
* Small and medium-sized companies offer long-term potential
* French banks have to overcome suspicion and local loyalty
By Andreas Kröner and Lionel Laurent
FRANKFURT/PARIS March 19 France's big banks are
embracing an unlikely challenge - to prise away some of
Germany's mighty Mittelstand of small and medium-sized
enterprises (SMEs) from their local banking partners.
BNP Paribas, France's largest bank by assets,
wants to boost its German business by over a quarter by 2016. To
achieve that, it will have to pick off select SMEs, which in
Germany make up about 18 percent of the economy outside
financial services, compared with 6 percent in France and 7
percent across the European Union.
If a bank can establish a relationship with such Mittelstand
companies - often highly specialised manufacturers - it can mean
a partnership stretching for decades, making it a valuable
source of earnings despite low profit margins.
But Germany's SMEs already have long-standing partnerships
with local lenders that pass on their lower funding costs.
BNP does not aim, therefore, to usurp the Mittelstand's
so-called house banks, usually a local savings bank or
co-operative bank, but instead take on large national players
such as Commerzbank, Deutsche Bank and
UniCredit's HypoVereinsbank, which support firms' more
Germany's savings banks have over 40 percent of the
Mittelstand market, followed by co-operatives with around 20
percent. Private banks such as Deutsche Bank, Commerzbank and
BNP have around 14 percent.
"The idea to expand business with middle-sized companies
isn't new ... (but) it makes a lot of sense for us to target
bigger 'Mittelstand' companies more intensively, because we can
meet their needs around the world," said Torsten Murke, the
deputy chairman of BNP's German operations.
That means courting people such as Christian Sedlatschek,
the chief financial officer of Meggle, a Bavarian dairy with
worldwide sales of 1 billon euros, who already does business
with 10 banks and is loath to change.
"Banks have to know our company, they have to enjoy our
trust, and they have to take care of us intensively," he said.
In 2013, BNP won more than 100 new corporate customers in
Germany, attracted by its international network, Murke said.
"Turkey is a good example. It is a main trading partner of
the German economy, and more than 5,000 German companies have
invested in Turkey," he said. "We are working on a closer
cooperation between BNP branches in both countries."
BNP, active in Germany since 1947, is planning on hiring 500
more staff in Germany by 2016 and is aiming for revenues to rise
to 1.5 billion euros by then from 1.1 billion in 2012.
YEARS OF GROWTH
Germany's size, economic strength and financial conservatism
mean it remains a potentially profitable market, provided banks
can break into the tight-knit Mittelstand world.
The German economy is around a third larger than France's
and expected to grow by 1.8 percent this year, according to the
European Commission, compared with 1 percent for France and 1.2
percent for the euro zone.
There is also the scope to sell more products. Despite its
large size, Germany's capital markets remain relatively small,
with corporate bond issuance of $579 billion in the 10 years to
2013, compared with $666 billion in France and $664 billion in
the UK, according to Thomson Reuters data.
French banks, after shedding risky assets and boosting their
loss reserves in the wake of the financial crisis, are keen to
expand beyond their sluggish home market.
In addition to BNP, Societe Generale is also
looking to attract more German corporate clients after raising
1.5 billion euros ($2.1 billion) in retail deposits from its
German brand Gefa in 2012.
Germany currently accounts for around 4 percent of Societe
Generale's annual turnover.
"Societe Generale sees Germany as a growth market for years
to come," said the bank's Germany chief, Guido Zoelle.
"Our main focus is companies that are active on capital
markets and that are active in countries where Societe Generale
has a big footprint, such as France, Eastern Europe, Russia or
Credit Agricole is also considering expanding its
local consumer operations in Germany, according to a banking
source familiar with its strategy.
"The attraction would be to get more deposits from Germany
and to offer more universal banking products," the source said.
Credit Agricole declined to comment.
SUSPICION AND TRUST
While large German companies are usually comfortable working
with foreign banks, small and medium-sized firms can be wary.
"There is suspicion that these banks will withdraw from the
German market in case of a new crisis," said Bernd Supe-Dienes,
who along with his brother Rudolf runs an industrial cutting
tools manufacturer in Overath, a city in the Rhine-Ruhr region,
Germany's industrial heartland.
"We've been working together with most of our banks for 40
or 50 years," said Supe-Dienes, the third generation to manage
the family firm, which has annual revenues of around 45 million
euros and relies on a local savings bank and Deutsche Bank for
its banking needs.
Stefan Wolf, CEO of Elring Klinger, a publicly
listed car parts supplier with yearly turnover above 1 billion
euros, said he was "always open" to working with new banks, but
if his usual banks can match the product, there is no contest.
Elring Klinger now pays 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, reflecting the thin margins on offer.
French banks face another hurdle in that their cost of
funding is higher than German banks. French banks pay on average
0.6 percent more than their German counterparts to sell
short-term debt to investors, further hitting profit margins.
There is also plenty of competition, with over 1,800 lenders
in Germany, far higher than in any other eurozone country and
more than three times the number in France.
BNP's strategy of using its international network to drive
growth is a path well worn by HSBC Trinkaus, a unit of Europe's
largest bank, which, though bought by London-based HSBC in 1992,
traces its history back to Duesseldorf in 1785.
HSBC Trinkaus is aiming to double its corporate client base
over the next four years, from about 1,500 now. To meet that
goal it is emphasising its network in Asia and Latin America,
and also widening its focus beyond large clients to include
smaller companies with annual sales of 35 million euros or more.
Commerzbank and Deutsche Bank are also upping their game,
with Commerzbank targeting growth of 5 percent per year in the
Mittelstand market, and Deutsche expanding the number of
locations it deals with corporate clients to 250 from 70.
Stiff competition from local players has prompted
speculation that BNP might look at acquisitions to make its mark
in Germany, particularly as it has finished shedding risky
assets, unlike German rivals such as Commerzbank and Deutsche.
The French bank recently agreed to buy Polish bank BGZ for
$1.4 billion, but sources close to BNP have played down the
often-cited prospect of it buying the German government's 17
percent stake in Commerzbank.
Kepler Cheuvreux analyst Cyril Meilland said in a note to
clients that a more likely alternative target could be IKB, one
of Germany's first banking casualties of the financial crisis,
today owned by private-equity group Lone Star.
BNP declined to comment.
German banks are taking the competition in their stride.
"It's not surprising that corporate banking in Germany
attracts competitors," said Stephan Winkelmeier, finance chief
at BayernLB, one of Germany's largest state-backed banks. "(But)
we live by word-of-mouth recommendation. Our business with
existing clients is growing, and we are winning new clients as
($1 = 0.7214 Euros)
(Writing by Carmel Crimmins; Editing by Will Waterman)