Financial quiz time: What is the name of the bank with the greatest number of investment portfolios in Germany? The answer: Deutsche Wertpapier Service Bank, or DWP-Bank for short.
Once a year, customers of the country’s cooperative banks, most of its savings banks, and more than 30 private financial institutions get a brokerage statement. It may look like it’s coming from their own bank, but really it comes from DWP.
In 2013 alone, more than 21 million securities transactions were processed through the unknown banking giant. It is the market leader in Germany in securities processing, with 440 direct clients, 1,500 affiliated German banks, and about 5.3 million managed portfolios. The German financial regulator BaFin has rated DWP-Bank as systemically relevant.
But size alone does not guarantee success. The bank is facing major problems and is now seeking help in the form of an alliance with DekaBank, the central asset manager for the more than 400 local savings banks spread across Germany.
A slump in its core business, failed expansion dreams, and management board members being fired have meant tough times for DWP in recent years. Fifty percent of the institution belongs to the cooperative DZ Bank. The other half is owned by a handfull of Germany’s savings banks, or Sparkassen, each with their own interests. It is this half that may fall into DekaBank’s hands, according to financial sources.
The problems at DWP are chronic, but not all home-grown. Germans have become wary of investing in the stock market – the number of processed transactions recently was down almost a quarter from the level from 2011. Though the benchmark DAX stock index in Frankfurt has continued to reach new record highs, more and more people have in fact turned their backs on equities.
By the end of 2013, a mere 8.9 million Germans held stocks or mutual funds – which was 600,000 fewer investors than a year earlier. As a result, fewer securities had to be managed and coffered, meaning that fewer required the DWP to take care of paying interest or dividends.
The DWP shareholders from the savings banks want to sell their shares to DekaBank, according to sources in financial circles
But strategic mistakes and internal squabbles have also plagued the sleepy German giant.
In 2012, the DWP formed a joint venture with the Dutch KAS Bank. Their ambitious goal was to conquer securities processing in the Netherlands and later in half of Europe. But the high-flying plans collapsed because the markets apparently did not have as much in common as previously thought.
Last summer, both banks put a hasty end to the joint venture. Management board members Markus Walch and Karl-Martin Brahm departed, and the DWP was forced to launch a cost-cutting program.
It was expensive for DWP to dissolve the joint venture with the Dutch bank, and the €20 million in costs have likely strained its annual profits for 2014. At times the bank has been at risk of breaking up, insiders said, but such plans never made it that far. Splitting the business would have been incomprehensible at a time when pressure on profit margins has compelled most banks in the German financial industry into more cooperation, not less.
Things have since gone in a new direction. A partial takeover bid by DekaBank could help put an end to some of DWP’s internal conflicts.
According to sources in financial circles, DWP’s shareholders from the savings banks want to sell their shares to DekaBank instead. Currently, this half of DWP’s shares is spread among a savings bank association in North Rhine-Westphalia and three state-backed banks. These shares would be bundled into one stake held by Deka.
The deal would have wide-reaching consequences. “The takeover of the DWP shares by Deka is currently a topic of intense discussion. It would be a logical decision,” said an insider from the DWP shareholders, who declined to be named.
For one, Deka would be an equal partner with the DZ Bank, which holds the other 50 percent of DWP. The deal would also eliminate a deep-seeded conflict of interest. The individual savings banks that currently own shares have had an incentive to push for high dividend payouts, even if this hasn’t made much sense of late. DWP’s limited profits mean it hasn’t been able to offer dividends in recent years.
With the involvement of Deka, analysts say that DWP could once again focus on low prices to the advantage of the customers. The reason is that Deka has the interests of all savings banks – DWP’s primary customers – at heart.
Though the step seems logical, it may not be a sure-fire success, because the savings bank world is usually too at odds to produce amicable, strict, rational decisions. Germany’s savings banks have long formed a loose network, but each have their own interests.
Above DekaBank sits the German Savings Bank Association, DSGV. The two have acted coy about the rumors so far. A takeover is not up for discussion “at the moment,” according to sources from Deka.
Deka is also a reluctant hero, and has yet to fully agree with the move. Its thinking is that DWP can play a more important role in the savings bank organization in the future, but Deka is also concerned about saddling itself with the risk of being involved. Some within the bank point to the fact that DWP recently took over the securities processing of 50 savings banks in the state of Baden-Württemberg as a sign that synergies are possible without Deka’s assistance. Many reportedly would prefer to continue with this policy of taking small steps at consolidation rather than a major partnership.
Everything is reportedly taking place behind the scenes. Deka, DWP and representatives of the shareholders all declined to comment officially on the issue. At some point though, the three parties will have to come out and say exactly how they plan to make DWP profitable for the future.