German Banks Bottom of European League

The consulting firm Accenture has just drawn up a comparison of Europe's top fifteen banks, and the findings make sobering reading for Germany's top four banks – Deutsche Bank, HVB Group, Commerzbank and Dresdner Bank. These institutions occupy the lowest places in the pan-European rankings, based on efficiency and the esteem in which they are held on the capital markets.

The consultancy sums up the four institutions as inefficient and over-costly, and it says they're guilty of systematically eroding value.

A comparison of 2001 results shows that German banks aren't coping with the economic downturn as well as their rivals in neighboring countries. Deutsche Bank, Commerzbank and Dresdner Bank barely managed to post a full-year profit, and they even slipped into red figures in the last quarter of the year.

In the view of Dieter Hein, a banking expert at Crédit Lyonnais, Germany's private-sector banks will never be as profitable as their rivals in neighboring countries until two specific structural problems are resolved.

The first concerns the competition that they face, particularly in retail banking, from public-sector rivals, who benefit from state support. The second is the inflexibility of Germany's employment laws. "In times of crisis, banks cannot cut their costs with the necessary speed," Hein argued.

But a glance at the situation in Spain suggests that the factors Hein singles out do not fully account for the poor showing that Germany's big banks are turning in. After all, Spain's public-sector savings banks are just as powerful as Germany's, and its employment laws are just as rigid. All the same, the country's big three private-sector institutions – Bancos Santander, Vizcaya Argentaria, and Popular – are among Europe's most profitable.

In the view of many experts, Germany's banks are to a large extent the architects of their own misfortunes. For a long time, they failed to carry out the necessary cost-cutting and to address strategic weaknesses, but the massive revenues seen in the stock-market boom of the late 1990s protected them from having to face up to the consequences.

Experts on German banking, such as Lars Lundqvist at Sweden's SEB, points out that German banks' failure to address their weaknesses has its roots in the special economic conditions created in the country as a result of German unification in 1991.

Unification created an economic boom, and this inured Germany from the effects of the economic recession that hit other European countries; but whereas banks in those countries introduced austerity measures that have stood them in good stead ever since, Germany's banks remain flabby in comparison.

To back up his view, Lundqvist points to the relative density of branch networks. The ratio of branch offices to clients is 1,600:1 in the case of German banks, and 5,000:1 in the case of Swedish.

And consolidation of the German market is long overdue, he argues.

Whereas there has been a series of mergers in Spain, Scandinavia and England, Germany can point only to the merger of two big Bavarian banks to form HVB, Germany's number-two banking group.

Now Germany's big banks are stepping on the cost brakes. A total of 30,000 jobs are to be cut, 17,000 of them in Germany. And they are also reducing their exposure to risk by introducing a more restrictive lending policy – a policy that's making it much harder for small and midsized businesses to raise money.

But in the view of Accenture partner Norbert Linn, this action is not only too late; it's also insufficient. "Cost cutting alone is not enough," he reasons. "Banks must also adapt their business model," he argues.

But there's little sign of a readiness to undertake this kind of strategic rethink. Instead of specializing in certain areas, the German banks are continuing to aim for market leadership in all areas of business.

In the case of Dresdner (photo) and Commerzbank, the two smaller institutions, it has clearly been difficult to agree on a niche strategy, while neither bank is large enough to hold its own as a universal bank.

Dresdner is now a unit of insurer Allianz, following the two groups' 2001 merger aimed at creating a new bancassurance giant.

Meanwhile, analyst Hein at Crédit Lyonnais notes that Deutsche Bank and HVB Group, Germany's largest and second-largest players respectively, are responding to problems on the domestic market by expanding on to foreign markets.

Deutsche is well on the way to becoming a global investment bank, but it clearly has no idea what to do with its retail unit, Bank 24.

HVB, meanwhile, has adopted a "bank of the regions" strategy that has led it to build up its presence in Austria and east-central Europe, but it has experienced difficulties in integrating Bank Austria, which it acquired in 2000.

This all seems a little haphazard when compared with the clearly focused strategies pursued by some of the big European rivals. Switzerland's UBS and CSFB, for example, are specializing in investment and private banking, while the big Spanish banks are concentrating on their strengths in retail banking and on the Latin American markets.

Time will tell whether such a clear focus is really a recipe for success, but it's certainly what the markets want.

Punished for their lack of strategic focus, German banks are so weakly capitalized that not even Deutsche can feel safe from the threat of a hostile takeover bid.