Roundtable: Strength of the Sparkasse

GTR and BNY Mellon gathered together a mix of German public sector banks to discuss how the country’s Sparkassen and Landesbanken can work together to better position themselves internationally.

Roundtable Participants 

• Guenther Blum, vice-president, trade finance, BNY Mellon Frankfurt
• Shannon Manders, editor, GTR (chair)
• Ernst-Josef Mesterom, Deutscher Sparkassen- und Giroverband, Berlin Market Strategy International Corporate Customer Business
• Thomas Leppin, head of international business, Hamburger Sparkasse
• Timm Raatz, head financial institutions, international business/transaction banking, HSH Nordbank
• Henry Rehkuh, head of international business, Kreissparkasse Köln
• Simone Satan, vice-president, sales & client management Germany, BNY Mellon Frankfurt
• Prof Dr Christoph Graf von Bernstorff, head of international division, Die Sparkasse Bremen & general manager, nwi nordwest international GmbH, Bremen

GTR: It is no secret that the landscape for public sector banks in Germany has changed quite dramatically and banks, both here and across the globe, are looking to position themselves better internationally. The question is, how can Sparkassen and Landesbanken better tie themselves to the sector, and facilitate expansion into trade finance?

Perhaps you could start by highlighting your institutions’ key differentiators from the competition: what are your strengths and advantages above the private banks?

Graf von Bernstorff: Savings banks have quite a big advantage compared to other banks, because they are customer orientated.

Of course, international business is not the core business that savings banks have to deal with but, if you consider the corporates and the fact that Germany is one of the main players in international business worldwide, savings banks need to be present in that area of business. Talking to customers means you have to be fluent in the typical business they deal with, such as documentary collections and payments, treasury business and, of course, trade finance. We as savings banks are not the big money centre banks; we usually do not play in that business. This is the big advantage of Sparkassen: they talk to the medium-sized and smaller corporate customers.

Leppin: The service point is also a big advantage of our group because savings banks are, in a way, the original banks for people and corporates. We do not divide corporates into large, larger and largest, but begin with start-ups and follow their development to the next level of turnover of maybe a few million. We have every piece of product in place, especially in terms of trade finance.

Mesterom: May I underlie what Christoph said with some figures? The savings banks are the market leader in SME business in Germany. We have 20,000 branches all over Germany. We have 50 million customers, which means 100 million current savings and security accounts in retail and corporate business together. We have market share of 42% in credits to German corporates. For 40% of German corporates we are the principal bank and, as Christoph said, we are close to our customers.

Last year we did an exercise with Swift Watch about our figures and market share on the import LC side, and it was 28%. That is not so bad for our position. We will come later to the export side but, for the import side, that shows we are really close to our customers, which also resulted that savings banks in Germany mainly prevented the credit crunch during the financial crisis.

Rehkuh: It is not only that we help our customers with the problems and needs they have in Germany but, about 10 or 12 years ago, we realised that our customers need to get help if they are going abroad, if they want to invest or build up a company. We can help our customers with all these matters through what is called the S-CountryDesk on the one side. On the other side, we have a German leasing company (Deutsche Leasing) active in asset financing if a company goes abroad or with vendor leasing.

GTR: Do you see much competition with the private banks?

Mesterom: We have a lot of competition at the time being in Germany with corporate business, especially SME business. There is a lot of competition because a lot of German and foreign banks are searching for a new business model, since they recognise that investment banking is not a model that has a good future. In Germany, the best business model is doing retail banking and banking for the German Mittelstand, the SMEs. A lot of banks are now searching for new SME customers, and the savings banks are the market leader. Therefore, they can find these customers at the savings banks. We know that the larger German private sector banks are using cross-border business to enter our customer relationships. There is hard competition in Germany right now.

Graf von Bernstorff: Just have a look at the typical market share. Savings banks roughly cover half of the German market, which means that almost everybody has an account with a savings bank. In the trade finance sector, people hold a current account, so they just pay everything they need to pay, in Germany and abroad, through their current account. International trade finance starts in a very simple way: corporates just work through a current account that is held with a savings bank. Having a big share of half of the market means that savings banks are the dominant banking partners.

As soon as it comes to more sophisticated products, such as confirmation of letters of credit (LCs), it may be difficult for a typical small savings bank to follow customers’ needs but, in this case, the whole group of savings banks has subsidiaries, which are not just the leasing bank or S-CountryDesk; we have Landesbanken. Landesbanken are big enough to follow the customers’ needs. If you take the overall group combined of Landesbanken and savings banks, everything is held in place, so they can follow corporate customers’ needs easily and do everything they would need. What we have not mentioned yet is this is not just a big partnership; among all these little tiny saving banks and Landesbanken we also hold many correspondent banking relationships.

Raatz: The idea of the savings bank, as has been mentioned many times, is that they start at the very beginning of a corporate’s lifetime. From that perspective, one big advantage is that they know their client. They know what they do and they know with whom they work. They do not mind small amounts, so the main idea is not the single transaction benefit; it is the overall benefit of their relation with the client. That separates the savings banks from the private sector banks. The private sector banks always calculate on a single basis their RoEs, RAROC returns or whatever and say: ‘Well, this is an attractive business. We will do it and pitch very aggressively,’ or: ‘This is not, so we do not like it. Go somewhere else.’ Especially for the smaller clients that is definitely an important factor in choosing their bank relationship.

On the other hand, it seems to be changing a little bit, not for 90% of the private sector banks, but for one which we will not name. They obviously do not care about prices any longer. They take whatever they can to gain market share. From my perspective, this benefit is becoming increasingly small – the benefit of the attitude of the savings banks in comparison to this bank, which is really trying to gain market share. I feel this on a daily basis and a lot of other savings banks tell me the same because we sometimes pitch together. This is where we feel our advantage becoming smaller. This is where we, on the public sector side, should try to find opportunities to oppose this trend.

GTR: Is this something hurting the rest of you as well?

Leppin: Yes, we have the same problem, it is not a fair competition. It is very difficult to meet the same prices. We are strong on the import side, as Ernst-Josef said. Some of the larger private sector banks are very strong on the export side, what we would like to be in the future. They are different, but both of us are interested in the same corporate segment, more or less. Their customers may not be start-ups, but after a company is above the status of a start-up, which means €5mn turnover or more, these banks
are in.

Mesterom: I am not afraid about our import side; our relationship with our customers is strong enough. I do not think that we are losing customers on this side, but I am afraid that we are losing customers on the export side. Our position in markets abroad is not very strong. You have to see that we have six Landesbanken – HSH, LBBW, Helaba, BayernLB, Saar LB and the Norddeutsche Landesbank, including Bremer Landesbank. We have 30 or 40 bigger savings banks that are doing cross-border business for several of their own reasons. The correspondent banks abroad must see the German saving banks as six Landesbanken and a lot of independent saving banks. For them, it is very difficult to understand that they together represent 40 to 50% of the German market. Often, when we talk to correspondent banks, they have difficulty understanding how we really work. That is one point. I think correspondent banking is becoming more complex and more expensive, for several reasons – compliance, KYC and so on.

We see that there is a concentration process in correspondent banking, and I am afraid that we are not on the winner’s side in this process, at the time being.

GTR: What is it that banks should be doing?

Mesterom: That is a very interesting point. For our position abroad, it would be helpful if we were able to bundle our business. We could work with a single entry and exit point. That is a political factor we have had to consider but, until now, it has not been possible to realise it, because there is a strong competition position within our organisations, at least between several Landesbanken. At the time being, we are not in a position to bundle that business that we should really bundle.

Leppin: If you look at the savings bank financial group in total, including Landesbanken and all the other organisations, we may be the largest and strongest financial group, at least in Europe. That gives us a chance and strength, we should keep working on so we can profit more from it as well as our partners abroad. If you look from abroad to Germany, you find more than 400 savings banks and six Landesbanken and it seems that everybody is doing business on its own, more or less. We could be much stronger if we pooled our strength together in one bank.

Graf von Bernstorff: If we want to earn money, we have to look at what the customer wants and what his needs would be. The customer is definitely not interested in getting to know how many Landesbanken, saving banks and banking partners abroad we have. The corporate customer needs, first of all, financial services, loan facilities and credit facilities for his import/export business. He will also need advice and banking services.

If you then look at what the banks can deliver, savings banks are strong because there are many of them, so it counts that we are big in size and number, because we can deliver those services at almost every place in Germany. This addresses the point that service counts: being present in the market. We keep saying in international business that, if someone has documentation and a letter of credit, this is sometimes handled through Frankfurt or Hamburg but, if you go to the countryside, there are all these saving banks. We have to be strong there. We have to follow the customer and look at his needs, and be there to find out how that works.

GTR: We have talked about the importance of following your customers. What exactly are customers asking for and what are they concerned about?

Raatz: I think it is pretty general. First of all, they expect a regular service that you could probably expect from any bank, at least in Germany or Europe. It is very difficult for us to differentiate within the banking systems, whether private, public or whatever. We definitely have to offer 100% service. What comes next is of course pricing. That is an issue that every corporate has on a daily basis, especially the treasurer or head of finance. They have in their personal objectives for the year pretty clear targets they have to fulfil, one of these is definitely to reduce the cost for banking services. If we want to be competitive, we have to accept this. Matching that issue in the very competitive environment is a difficult target for us. Differentiating here in Germany is hardly possible.

When it comes to the international network, I hope that, sooner or later, we can free ourselves from the EU regulators so we are able to act a little more internationally again. That is definitely something we have to solve.

Rehkuh: The only way to help our customers is to look for co-operating banks abroad, with which we could work, and banks similar to the German savings banks, which are focused on their small and medium-sized companies and customers, and interested in a long-term relationship.

GTR: Exactly how important are partnerships with international banks, in terms of achieving your goals?

Graf von Bernstorff: The only way we can be active abroad is through correspondent banks. Deutsche Bank, for example, holds some 10,000 correspondent banks worldwide. The largest savings banks here hold roughly 2,000-odd.
We can cover almost every important market if we want to, financially, with the flow of banking business, but what the customer needs in international banking is relationship banking. We do not need just technical services; we need people. Correspondent banks cannot just be people, because they are available for technical banking services. We need people.

We are on our way to finding people with BNY Mellon, because we have tried to do that with a big corporation to cover very important markets, especially in Asia.

Satan: It is important to have partnerships. Partners that offer the services that are needed, with a strong international footprint, with the necessary system capabilities, dedicated staff and expertise we have talked about.

Blum: Our advantage is we have been in these markets for over 40 years and we have robust business processing capability. We are constantly maintaining these relationships with correspondent banks on a non-competitive basis. That means that we are not viewed by those local banks in the region as competition with their business. Our mission is to support the banks, so the banks are our clients. We earn our fees on this basis. We are in a competitive environment and we know exactly what our tasks and our roles are. We are focused on the delivery of transaction services, rather than on implementing a corporate banking relationship.

We are going to concentrate in certain regions in terms of correspondent banking, because regulations, compliance and political developments force the question of AML and ethical business. This forces us to drastically shorten or curtail many relations and do some heavy due diligence work on with whom we can do trade transactions.

Graf von Bernstorff: If you look at the German export market as such, it is fascinating to see that roughly two thirds of German exports go to the European market. It is not just to Asia, South America or any other part of the world; two thirds of the overall German exports’ flow of business go to Europe. This is why one of my colleagues mentioned the S-CountryDesk. This is an original idea from German savings banks.

We started with the European Union and nominated members of our group to cover one single market, just to be as competent and excellent as possible, and know everything about that market, be it banking, how to invest in that country, found a company, open an account – just anything that could be of interest for a German exporter to Europe. It is not just worldwide business. We have to consider that two thirds of our business is European business.

GTR: What are your clients’ most pressing needs today?

Raatz: In terms of international trade business, what is definitely pressing is that quite a number of countries are due to regulations not acceptable to most banks. For example, Iran theoretically offers lots of opportunities we simply can’t follow to buy into a relationship and further business. But other countries, like Pakistan, Egypt and others, are still very high risk, where the risk appetite is very limited in the market. That is definitely one issue you face in discussions with your clients. They always come and say: ‘China is fine, but everybody can do China, as everybody has limits available.’ If we can talk about third, fourth or fifth tier banks in China, we can get into better discussions with those clients than talking about the large Chinese banks. It is the same with some Russian names or those out of the CE region; that is something where we see clients have needs. They are active and do business in that area. They are niche and very active in those markets: especially German medium sized and sometimes small companies.

This is something where I am pretty sure the savings banks on their own have difficulties in following their clients’ requests. The next step are the Landesbanken which have a little wider range with a bigger appetite, but that is still an issue as transactions occur only randomly and too seldom to run credit limits profitably.

Leppin: Risk is one of the big points, but every savings bank has its own policy about risk ideas. That is one of the big issues we have. As Timm said, it is more or less the same, so you can go wherever you like and get China risk everywhere. Germany is a very over-banked market, as is clear to everybody. Our customers are usually linked to more than one bank. Banks offer more or less the same services, which makes it very difficult to distinguish our products from theirs. We come back to what Christoph said: we have to keep on improving our service and maybe create some financing ideas that are not so common with the larger banks. That is what we are talking about to give the benefit to the customer. We should be better than or differ from the private banks, and that is a big challenge. I have worked for more than 25 years at private banks and they are well-known for all the financial products. That is another issue.

Another point for me personally is that we have to look not only at the world outside Germany, but at Germany directly. The question is: what can we do for our customers? Is the customer who is planning to invest or export to China even thinking about the savings bank? I would say he is not today. He thinks about other banks. The savings bank is good for mortgages, savings accounts and all these things. That is another point that we have to work on, in my opinion, we need to have better marketing for savings banks in Germany. We can do a lot. As Timm says, we have a risk appetite and we can do more or less everything the larger private banks can do, but first we have to enter the mind of our customers and do a few important things. This is still a challenge.

Blum: If I may come in at this point, especially in the LC business, I often find that if there is a choice from a buyer to allocate from the opening or issuing side a bank, where he wants the LC to be advised, he has a selection of banks. It is most likely that the issuing bank has a strong correspondent bank relationship or that the advising bank offers other special services to that bank.

Mesterom: The advantage of large German private banks in this context are their BICs, as one example, which everyone knows. We have 6 Landesbanken and 423 different BICs. We are trying to harmonise them, but it is too expensive. You have to change everything.

Blum: We, as BNY Mellon, are one of the largest clearers, whose BIC is known to so many correspondents in this world. We could help the savings bank system, that pillar of German banking, to make this name familiar to the import world abroad.

GTR: How can Landesbanken and Sparkassen ensure that they remain able to respond to the client needs we have already identified?

Raatz: Line up. That should be the idea, simply for the reason that no one in this sector is big enough to cover the world. That is for sure. Somehow, we have to align our networks, competences and capabilities to support our clients. Of course, being a Landesbank we offer these services to savings banks for their interest. We see the savings banks as our client, as we have a very strong interest in a long and stable relationship with them. Without it, we cannot survive. It is pretty simple. We have no retail business. That is our main funding in Germany, so we need a strong relationship with the savings banks. We should try to supporting them in whatever their requirements are.

Leppin: I would say that the world is good, because we can cover nearly all risks in our financial group. The larger risks could be taken by Landesbanken, other risks could be taken by Haspa or one of the other savings banks as well. If I were a customer, I would be satisfied with my savings bank or Landesbank account. That is my opinion. Our big advantage is that we are very close to the customer and this is a people’s business. In addition, we have to keep our high service levels in order to differentiate us from other banks and if we even create some innovative products then I am sure we are on the road to success.

Graf von Bernstorff: Savings banks must not stop strengthening their abilities. They must not stop talking to their customers. They must not stop asking the customer what he needs. They have to offer services. They must be present. They can do everything, or almost everything, either through the Landesbanken or through their banking partners abroad but, sometimes – and this is really an experience we have nowadays – people just sit back and wait for the customer to come in, ask the question, make a demand and then he is granted a credit. He is granted a credit? It is incredible that we still talk in that language. We have to be active; we must not stop that.

Rehkuh: Only a few in our organisation know how high performing the savings bank or organisation can be. It is an idea, but it is an illusion to look for the idea to be as competitive as Deutsche Bank, just because of their name. This name, Deutsche Bank, is there once and there is no change of getting it twice. The point is that each corporate customer advisor of a savings bank has to be confident that the savings bank has a solution for the needs of his customer, so that he can be self confident enough to claim for the business the customer has.

Mesterom: I can put it in a nutshell with two words. The first word is ‘co-operation’; the second word is ‘co-operation’. We have to strengthen our cooperation within our group and with our big partners. None of us is big enough to play the whole world.