Not Your Grandmother's Bank

Berenberg Bank's increasingly risky business

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Modern banking at an institute with roots dating back to 1590. Source: Company

Berenberg Bank, based in Hamburg, is regarded as the last of Germany’s venerable, private banks. Founded in 1590, it is the second-oldest bank in the world, with a long tradition of catering to wealthy clients. However, in recent years, the bank’s business has veered away from its traditional business toward a focus on riskier investment banking. The shift has raised questions about the sustainability of its growth model and whether the privately-owned bank has at times skirted regulations in an effort to boost profits.

Almost all of Berenberg’s key indicators show growth, but there are cracks behind the facade: investigations by the public prosecutor’s office, an exodus of long-standing employees from key positions, top managers reportedly working in isolation from each other and financial performance that is not as robust as may seem with only a cursory glance at the figures.

Berenberg’s transition to investment banking has been overseen by Hendrik Riehmer, a manager with a somewhat maverick reputation who oversees operations together with the 62-year-old Hans-Walter Peters. The two men, who jointly own a 26.1 percent stake in the bank, have a difficult relationship, people familiar with Hamburg’s finance sector said. An asset manager, who declined to be named, said he believed their fraught relationship is, in fact, a key risk to the entire bank. The two executives declined to comment.

Compounding what appears to be friction within the leadership ranks, the bank has lost a number of high-ranking managers of late, with some setting up their own asset management businesses and a couple of others joining Merck Finck & Co.

Berenberg was mentioned numerous times in the “Panama Papers” leak for managing offshore accounts for clients.

At the same time, the bank, which counts the Berenberg family and a few wealthy individuals as its other shareholders, faces a myriad of potential legal troubles. In one case, public prosecutors suspect the bank may have helped external investors acquire large blocks of shares in three listed companies – Tele Columbus, WCM and Pfeiffer Vacuum – while not declaring the transactions to stock market regulators. So far, only one trader at the bank is thought to be targeted by the investigation. A spokesperson for Berenberg refused to comment on the investigation.

Insiders also said Berenberg’s investment banking business is too closely linked to its asset management activities, which is regarded as a no-no in the sector. “Shares are moved from investment banking over to asset management or funds,” said one former banker at Berenberg. Several people very familiar with the bank also said that knowledge about forthcoming transactions could have been used to improve returns for selected wealthy clients. “This information is false,” Berenberg said in response to the accusations. “Our equity capital markets division does not pass on any shares to other parts of our company.”

Berenberg was also mentioned numerous times in the “Panama Papers” leak for managing offshore accounts for clients. The bank has denied any wrongdoing related to the revelation, and, last December, it said prosecutors closed an investigation of employees into suspected aiding of tax evasion.

Additionally, all is not as well as it may seem when it comes to Berenberg’s financial performance. Although the bank boasted of a record profit of €161 million ($192 million) for 2016, up 55 percent from the previous year, this figure was derived from individual financial statements, which do not provide a comprehensive account of all business activities. The consolidated statement shows a less robust profit of €110.4 million, up from €100.2 million in 2015.

What is potentially concerning about those figures, however, is the limited degree to which the bank’s profits derive from successful banking. In 2016, Berenberg earned around €413 million from commissions and interest, a drop of some 12 percent from the previous year. At the same time there was a rise in costs, including for the hiring of 175 new employees. Expenditure is likely to increase further with a new office in New York.

In the end, Berenberg recorded a 10 percent increase in consolidated profit largely thanks to non-recurring income from the sale of shares in the fund platform Universal-Investment and the payout of reserves from subsidiaries.

One piece of good news for Berenberg is its equity buffer of just under €380 million, which, in relation to its total assets of around €6 billion, is seen as ample, at least as long as the bank continues to make a profit.

Even with all of the challenges Berenberg is now facing, there are rumors that a fundamental shakeup could be in the cards. Mr. Riehmer’s goal, according to a former associate, is said to be to “cash in” and float on the stock market his division, which encompasses the bank’s investment banking and research activities. The bank, however, denies there are any such plans.

This article first appeared in the German weekly WirtschaftsWoche, a sister publication of Handelsblatt Global. To contact the author: christof.schuermann@wiwo.de

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