Cooperative Banks

Climbing the Ranks of German Banks

  • Why it matters

    Why it matters

    Cooperative banks and credit unions have become significant players on the German banking landscape. As mergers and regulations increase, however, their future is in question.

  • Facts

    Facts

    • Since the financial crisis, no other banking group has performed as well as Germany’s roughly 1,000 cooperative banks and credit unions.
    • This year alone could see 80 mergers of credit unions and cooperative banks; jointly, the banks have become Germany’s second-largest banking force after Deutsche Bank and ahead of Commerzbank.
    • In 2016, credit unions, cooperative banks and Raiffeisen banks took in a combined $7.6 billion before taxes. For DZ Bank alone, this figure stood at $2.5 billion.
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    Audio

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Bank
The sky looks bright for Germany’s booming cooperative banks. If it weren’t for all those pesky clouds. Source: Picture Alliance

Angela Merkel usually has other priorities than to attend the annual conference of the National Association of German Cooperative Banks (BVR). But this year, however, the chancellor will honor the annual banking bash in Berlin on Wednesday. Not to be upstaged, Ms. Merkel’s electoral challenger, Social Democratic leader Martin Schulz, will also come to the conference.

There’s good reason behind the unusual attention lavished on the BVR on behalf of Germany’s political A-listers: no other banking group has performed as well as Germany’s roughly 1,000 cooperative banks, Raiffeisen banks and credit unions and their central institute, the Frankfurt-based DZ Bank. Since the outset of the global financial crisis, these banks have together grown at a stronger clip than their competitors – and that without scandals and trials.

This development is particularly noteworthy in that cooperative banks, Raiffeisen banks and credit unions were long viewed as minor, provincial institutions in the German financial world. In the meanwhile, however, DZ Bank has become Germany’s second largest financial institution behind listed rival Deutsche Bank and ahead of the former number two, Commerzbank.

“As head of the bank, I can in most cases tell customers right away whether or not they’ll qualify for a loan.”

Andreas Stein, head of the Tüngental Raiffeisen Bank

To be sure, there’s also good reason behind this shift in reputation and fortune: while many competitors were forced into damage control in order to extricate themselves from the financial crisis, credit unions and their ilk emerged from the crisis unblemished and were able to focus effectively on growth.

The little things, too, make a difference: customers can become members at their respective cooperative banks or credit unions – leading to increased lending and business opportunities. “Members use more of a bank’s services and therefore contribute more significantly to the bank’s success,” says BVR chief Gerhard Hofmann.

Cooperative banks and Raiffeisen banks find their origin in the 19th century, when cooperatives tried to promote savings among ordinary citizens. At the time, local authorities also set up savings banks with the same aim. In addition to so-called state banks, or Landesbanken, the institutes make the German banking market distinctly different from many other countries in the world.

31 p05 Cooperative Banks – Enormous growth-01

Though cooperative banks and credit unions are often smaller than traditional savings banks, called Sparkassen in German, they are able to manage risks effectively through efficient divisions of labor and ingenious systems. These qualities, however, have not always been subject to praise. Hans-Peter Burghof, a banking and financial services professor with the University of Hohenheim, told Handelsblatt that credit unions and cooperative banks have received far more attention since the financial crisis. “The understanding has grown that we need the often boring-looking but stable cooperative banks,” he said.

For his part, Wolfgang Kirsch, head of DZ Bank, isn’t prepared to rest on his laurels; instead, he’s looking to drastically increase his bank’s market share of corporate clients. He knows that the days of easy growth for his group are numbered. Zero and negative interest rates are eating into the margins of his core business, and regulators are introducing increasingly stringent measures. This bureaucratic complexity is forcing smaller cooperative banks and credit unions to merge with larger ones. Many in the industry fear that this poses a significant threat to the local character of the BVR’s institutions.

The value of this local character, according to Tüngental Raiffeisen bank head Andreas Stein, is not to be underestimated. “The big advantage of a small bank is that the customer can always speak with someone who has the competence to make deals and conclude contracts,” said Mr. Stein, who runs one of Germany’s smallest banks, in rural Baden-Württemberg. “As head of the bank, I can in most cases tell customers right away whether or not they’ll qualify for a loan.”

At the other end of the spectrum, Mr. Kirsch, who has steered DZ Bank as the central institute for credit unions, cooperative banks and Raiffeisen banks for the past 11 years, identifies a different mission: “Growth is a necessity.” Although managers like Mr. Kirsch and Mr. Stein see the financial landscape from different perspectives, both want to ensure that the unlikely success story in the German banking scene continues: the rise of the cooperative banks and credit unions as central players in the market. Both bankers are well aware, however, that this success story could meet an unhappy ending if the European Central Bank continues on with its loose monetary policy and if overzealous regulators aren’t reined in – at least when it comes to their approach to smaller banks.

“The group works like a kind of intelligent bread dough that rises in all the right places.”

Wolfgang Kirsch, chief executive, DZ Bank

While Mr. Kirsch has growth in his sights, he also recognizes the value of his group’s ethos. “We shouldn’t make ourselves out as bigger than we are,” he said with a view toward international business. The bottom line, however, is that his group’s institutions have become really big. Since 2008, credit volume in Germany has increased by 48 percent to roughly €596 billion. Traditional savings banks, on the other hand, have increased their lending volumes by just 27 percent during this time.

In 2016, credit unions, cooperative banks and Raiffeisen banks took in a combined €6.8 billion, or $7.6 billion, before taxes. For DZ Bank alone, this figure stood at €2.2 billion. In addition to outstripping their counterparts in terms of profitability, BVR institutions have become the darlings of ratings agencies, with only the government-funded development bank KfW enjoying a higher rating.

While its merger with its sister institution WGZ Bank helped turn DZ Bank into Germany’s second largest financial institute, smaller-scale fusions pose a significant threat to cooperative banks’ and credit unions’ lifelines. This year alone could see a further 80 mergers of credit unions and cooperative banks. With that, the number of such institutions would drop to roughly 700, a ten-fold decrease compared with 40 years ago. Many in the group view this as a worrying trend: “I consider the high number of mergers and branch closures a disaster,” says Mr. Stein. “This can lead to the collapse of the cooperative system and our organization,” he fears.

Mr. Kirsch, on the other hand, is more sanguine about mergers. For him, they actually make sense as long as large cooperative banks don’t harm or abandon their founding principle and maintain their cooperative self-image. “The group works like a kind of intelligent bread dough that rises in all the right places,” he quipped.

 

Elisabeth Atzler is banking correspondent for Handelsblatt. Yasmin Osman is a financial editor with Handelsblatt’s banking team in Frankfurt. To contact the authors: atzler@handelsblatt.com, osman@handelsblatt.com

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