European Consolidation

Why France, not Germany, could control European finance

53481853 Paris skyline Reuters
It may have some broader economic challenges, but France's finance sector is rising up the ranks. Source: Reuters

If continental Europe wants to compete, it could use some bigger companies. That was the conclusion French Finance Minister Bruno Le Maire in a recent interview. While he didn’t specify every sector he was thinking about, it’s a sentiment that could certainly apply to the world of finance.

That sentiment was backed on Monday by Christian Sewing, head of private banking at Deutsche Bank. Europe needs financial firms that can compete on equal footing with US rivals like JP Morgan and Goldman Sachs, he said at a financial conference in Frankfurt. No doubt that remains a goal for Mr. Sewing’s employer, which rose to become a top 5 global investment bank in the 1990s and early 2000s, but has been forced to suspend those ambitions over a painful past few years of restructuring.

Mr. Sewing should be careful what he wishes for. While Deutsche Bank continues to look inward, it could well be banks from another country that take up the mantle he suggests. Just look at Mr. Le Maire’s France, which has seen its banking sector quietly transition from a possible problem child to a profitable powerhouse at the center of European banking.

While Germany may still be Europe’s powerhouse economy, France has quietly been leveling the playing field in finance over the past few years. It’s a battle for dominance that has become all the more important in the age of Brexit, with Frankfurt and Paris vying to take at least some banking business away from London.

“The French institutions have taken advantage to expand their market share in investment banking and corporate client business.”

George Kuznetsov, consultant, Coalition

Some of this turnaround has little to do with France itself. Back at the height of the euro zone’s debt crisis in 2009-2010, French banks were being dragged down by their exposure to southern European countries. The situation had become so desperate that the French government had developed a plan behind the scenes to intervene if needed.

In the end, France’s banks showed themselves to be surprisingly resilient. No state intervention was required. And now, as the fog has lifted from the south and growth is returning, France’s big banks are among the continent’s most profitable: BNP Paribas posted a 15-percent increase in profits to nearly €8 billion in 2016.

France’s banks have also benefited from a simmering crisis elsewhere: Major rivals like Deutsche Bank in Germany and Credit Suisse in Switzerland have been forced into deep restructurings – years after southern Europe and France went through the same process – to lower their costs.

“The French institutions have taken advantage of that to expand their market share in investment banking and corporate client business,” said George Kuznetsov of the consulting firm Coalition.

Many of those gains have come at the expense of Deutsche Bank, which has tumbled down the global investment banking rankings and seen its advantage slip in one-time strengths like share and bond trading. Meanwhile, Société Générale has expanded its market share in share trading by more than 2 percentage points to 16.4 percent since 2013, according to a Goldman Sachs study. BNP Paribas has expanded its share of bond trading to 14.6 percent.

It’s a shift that Deutsche Bank is all too painfully aware of. Deutsche Bank Chief Executive John Cryan caused a bit of a stir last week when he seemed to suggest his bank should cut about half its nearly 100,000 employees. “We employ 97,000 people,” Mr. Cryan told the Financial Times. “Most big peers have more like half that number.”

It’s hard to see him following through on that rather alarmist remark. After all, his bank has had enough trouble over the past few years cutting just a few thousand employees. But it does get at a problem facing Germany’s finance sector at large: Many banks here have become less competitive and more costly to run than their European and American peers.

“Germany is still overbanked.”

Christian Sewing, Deutsche Bank

This is a problem that goes beyond Deutsche Bank. France has some structural advantages over Germany’s financial system that have helped it gain an edge in recent years, much like Germany’s economy has the structural advantage when it comes to its more flexible labor market.

For one thing, there are fewer banks in France, which allows remaining financial firms to earn more from their home market. The five largest banks’ balance sheets make up about 85 percent of the total. In Germany it’s below 45 percent. That difference has allowed France’s big banks to survive with a more diversified business model, offering a whole range of services from small-business financing to insurance to financial services to investment banking under one roof.

It’s a form of universal banking that has been out of vogue in Germany, mainly because no one bank is big enough to achieve the ecnomies of scale needed to pull it off. Added to that, BNP has at least 1 million customers in a number of European countries including Italy, Spain, Turkey and even Germany. French banks are “very well-balanced” as a result, according to Nicolas Malaterre of Standard & Poor’s.

Deutsche Bank has long been aware of the structural difference, which is why it tried to make up for it by expanding abroad. Now that it has been forced to pull back, it is trying to replicate France’s model by strengthening its presence in Germany instead. That was part of the motivation for the bank’s decision to reintegrate retail banking unit Deutsche Post rather than sell it off, Mr. Sewing said Monday.

But Germany’s financial system also has to cut down more broadly. “Germany is still overbanked,” Mr. Sewing said, noting that other countries had done a better job of consolidating their financial sectors. France has gutted its banking sector by about 50 percent, and Spain by around 45 percent in the past decade. Germany, meanwhile, has cut banks by about a third to 1,700. It still has more banks per capita than any other country in Europe.

The next consolidation step may not come from within. As Europe moves closer and closer to a so-called banking union — a set of common rules, regulations and supervision for the continent’s financial sector – many officials have said that cross-border mergers could be the way forward. The question is which country’s banks take the lead. If speculation of a foreign takeover of Commerzbank is anything to go by, it may not be Germany.

Christopher Cermak is an editor with Handelsblatt Global currently based in Washington DC. Michael Maisch, Thomas Hanke and Katarina Slodczyk of Handelsblatt also contributed to this story. To contact the author:

We hope you enjoyed this article

Make sure to sign up for our free newsletters too!