Cooperative Banks

Small is Beautiful - Sometimes

  • Why it matters

    Why it matters

    Further consolidation is expected among Germany’s cooperative banks, which have seen their business model come under pressure due to low interest rates.

  • Facts


    • There are currently 994 cooperative banks, known as Volksbanken and Raiffeisenbanken, in Germany, down from over 7,000 in 1970. Their number is expected to decrease further still in coming years.
    • To compound the problem of low interest rates, the banks are struggling under the weight of regulatory costs, as small banks must fulfill the same requirements as larger ones: Analysts have calculated they had a 2.9-percent return on equity in 2015.
    • Some cooperative banks are opening new branches, contrary to the general market trend, in the hope of gaining new customers and reinforcing their proximity to the local market.
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Tegernseer Bank kassiert Strafzins von Reichen
Local cooperative banks are vanishing fast all over the country. Source: Peter Kneffel/DPA.

Raiffeisenbank Tüngental is a local community bank based in the outskirts of Schwäbisch Hall, a town in the western state of Baden-Württemberg. It’s one of Germany’s smallest cooperative banks – and it just might be the smallest bank anywhere in Europe. It has four employees, including the two members of its management board, a balance sheet total of just €27 million ($28.6 million) and around 900 retail customers.

Andreas Stein, one of the two managers, wants things to stay that way. He is keen for Raiffeisenbank Tüngental to remain independent, describing his business as a “retro bank.” The manager also wants to keep offering services such as coin sorting free of charge, something for which most other banks charge €5 these days.

“Mergers are not a solution,” Mr. Stein said.

That stands in contrast to dozens of other German cooperative banks, known as Volksbanken and Raiffeisenbanken, which are in the process of merging or planning to merge in the coming months and years.

The cooperative banks’ national association, or BVR, anticipates that there will have been around 50 mergers in total by the end of this year alone. And there are likely to be even more next year.

Handelsblatt has learned that around 70 mergers that are planned for 2017. That’s the number of mergers that have been penciled in at Fiducia & GAD, the joint IT service provider for Germany’s cooperative banks, according to sources in the industry. BVR has declined to comment.

And so the number of cooperative banks just keeps falling. It dropped to below 1,000 this year and now stands at a record-low of 994.

Bain & Company has calculated that cooperative banks achieved a return on equity of just 2.9 percent in 2015

It’s a far cry from their glorious history. The first cooperatives, similar to credit unions in the United States, were founded in the mid-19th century with the aim of enabling people to obtain financing locally. They operated within narrowly defined areas.

About 100 years ago there were 22,000 credit cooperatives and there were still around 7,000 as late as the 1970s.

According to Munich-based consultancy Moonroc, the downward trend of the past few decades is set to continue: It expects the number of cooperative banks to fall to 800 in the medium term and sees potential for only 250 in the longer run.

That’s not necessarily a bad thing – Germany has more banks per head than any other developed country in the world. And many of them are struggling to make ends meet.

One reason is that, like Germany’s public-sector savings banks (“Sparkassen”) and private banks, cooperative banks are suffering as a result of the European Central Bank’s low interest-rate policy.

The bulk of total earnings of regional banks – about 80 percent – comes from business with loans and deposits. However, margins in the lending business are contracting, while regional banks are struggling to turn a profit on their own investments. If you want to invest safely, you’ll get virtually no return – all the more so since the ECB is buying up bonds on a large scale at least until the end of 2017.


Some German cooperative banks have recently begun charging interest when private customers deposit large sums, thereby breaking a taboo in the German finance sector. The move has been triggered by the ECB’s policy, as banks are charged 0.4-percent negative interest on excess liquidity parked overnight with the ECB.

Georg Fahrenschon, the chairman of Germany’s savings banks association, has not ruled out the introduction of negative interest on large sums deposited by wealthy private clients. However, Mr. Fahrenschon has warned against the widespread introduction of negative interest rates on deposits, arguing that this could “jeopardize basic trust” in savings banks.

But there’s more bothering cooperative banks than just the extended period of low interest rates.

Small banks in particular are struggling under the weight of regulation. BVR said that the mergers among cooperative banks this year reflect the “significant burden of regulatory costs” and that the deals allow banks to become more competitive “without neglecting their ties to local communities.”

Small banks must fulfill largely the same requirements as larger institutions, and those demands have increased since the 2008 financial crisis. As a result, many heads of small banks spend more than half of their working hours ensuring that the bank complies with all rules.

Both of these factors have dire consequences. Bain & Company management consultancy has calculated that cooperative banks achieved a return on equity of just 2.9 percent in 2015. The Bundesbank puts this figure at 7.3 percent, but the German central bank’s figures are higher only because it has included precautionary reserves in banks’ results. Analysts at Bain also believe that a wave of consolidation is “inevitable.”

“The medium-sized banks could keep going it alone, but they prefer to look for a partner while they’re still in a good position to negotiate”

Ralf Teufel, Chief executive, GGB Management Consultancy

The situation is similar for Germany’s public-sector savings banks. While there were 413 Sparkassen at the end of 2015, the number dropped to 403 this fall. According to information received by Handelsblatt, the IT service provider had been notified by September of around 20 additional mergers scheduled for next year. Although the number of mergers fluctuates and some deals can fall through, these figures are well above the average for the last 10 years.

And what’s more, mergers are not expected to get any easier. Ralf Teufel, head of management consultancy GGB, warns of difficulties ahead.

“At the moment, medium-sized Volksbanken and Raiffeisenbanken are often merging with very large neighboring institutions. Those mergers generally make sense,” he said. “The medium-sized banks could keep going it alone, but they prefer to look for a partner while they’re still in a good position to negotiate.”

But he added that there were other banks that no one wanted to merge with, “because they’re in a worse position and a merger brings no added value.” That will become a problem for the industry, he said.

Tüngental’s bank manager Mr. Stein sees another obstacle to mergers: He believes that large banks are “not at all flexible enough.” He has fundamental concerns that it would not be in line with the cooperative banks’ model for many of them to merge and become ever larger.

Cooperative banks' earnings do not necessarily increase as they get bigger.

That’s why Mr. Stein wants to fight for his bank’s independence. He has received support from Berend Gortmann, head of Volksbank Niedergrafschaft and spokesperson of an association representing small and medium-sized cooperative banks. Mr. Gortmann said that mergers are “not the solution per se,” and explained that cooperative banks’ earnings do not necessarily increase as they get bigger. “We are increasingly seeing that very large banks are also looking at mergers.”

Mr. Stein is focusing on growth and proximity to customers. He believes that only those banks that are close to customers will do more lending business and that gaining more new business is the only way to cope with low interest rates. That worked this year: Raiffeisenbank Tüngental’s loan portfolio grew by 13 percent, with the important figure of net interest income also rising. The bank will also earn significantly more, even if its post-tax profit for 2015 was only €111,000.

Mr. Stein is adopting an unusual approach to attract more business. While German banks are closing hundreds of branches, Raiffeisenbank Tüngental opened a second, albeit very small, branch in October in the neighboring town of Wolpertshausen, where the much bigger VR-Bank Schwäbisch Hall-Crailsheim had closed a branch. The mayor of Wolpertshausen had approached Mr. Stein in the hope that his bank would step in.

“I decided straight away that we would go ahead,” he said. The only requirement was that the new branch, which opens just once a week, was to be accommodated in the Wolpertshausen town hall rent-free.

Raiffeisenbank Tüngental manager Andreas Stein has enough reasons to be in a celebratory mood. Source: Handelsblatt.

Mr. Stein has won praise for his strategy. “Raiffeisenbank Tüngental is doing everything right. It’s opening a new branch and opening up new earnings and customer potential, without incurring any significant additional costs,” said Stephan Vomhoff, a consultant who advises regional banks. “Tüngental is a perfect example of the problems faced by very small banks,” Mr. Vomhoff told Handelsblatt. While the area in which they operate is limited, they actually need to grow in order to survive in the long term.

Raiffeisenbank Tüngental has gained about 50 new customers in Wolpertshausen and is set to grant five new real estate loans. Those are large figures for the small bank, which will have issued around 60 home loans by the end of this year. Sixty percent of the bank’s loans go to retail customers and 40 percent to businesses, many of which are farmers.

“Our business model is on the upswing again,” Mr. Stein said. He expects customers to keep visiting the bank’s branch in future. If necessary, the bank can also come to them: It delivers cash to older customers’ homes every two days if required. The service is free of charge – that goes without saying.


Elisabeth Atzler is the banking correspondent of Handelsblatt. To contact the author:

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