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Foreign banks challenge German lenders for local corporate clients

Three foreign banks are emerging as competitors to Commerzbank AG and Deutsche Bank AG in German corporate banking, having rapidly expanded lending and outperformed the top two domestic leaders in that segment in 2016.

HSBC Trinkaus & Burkhardt AG, a subsidiary of HSBC Holdings Plc, the German arm of BNP Paribas SA as well as ING-DiBa AG, part of Dutch ING Groep NV, have all followed expansion strategies in German corporate banking since 2013 and are looking for more growth this year.

ING-DiBa grew its corporate lending by 67% year over year to €25.9 billion in 2016 and by 77% to €15.5 billion in 2015. Having focused on consumer credit and construction finance for years, ING-DiBa began gradually expanding in corporate banking in 2011 and launched a real offensive in the segment after 2013, when it had credit volume of just €7 billion. In 2017, ING-DiBa aims at raising corporate lending by 10%, outgoing CEO Roland Boekhout said at an earnings presentation in early February.

Corporate banking was the biggest growth driver for ING-DiBa in 2016, accounting for roughly 25% of the lender's total pretax profit of €1.23 billion. In 2016, the bank increased its corporate client base in Germany by 30 to around 130, Joachim von Schorlemer said in an interview with German Finance magazine in March. Siemens, Heidelberg Cement, Uniper and Evonik are among ING-DiBa's corporate clients in Germany.

HSBC Trinkaus & Burkhardt, which prefers to call itself HSBC Germany, expanded corporate lending in Germany between 2013 and 2016 as a way to win more corporate clients. This year, the bank plans to capitalize on its growth strategy by offering more products to its extended client base.

"The entry card for a new relationship with a corporate client is credit. We have raised new credit business by about 20% per year since we launched our growth initiative in 2013," HSBC Trinkaus & Burkhardt's CEO Carola von Schmettow said in an interview. "The competition in the German credit market is extremely strong at the moment, the margins are too low on a risk-weighted basis to make money with just lending. So in our corporate segment we are looking for clients who are willing to do more business with us," she said.

HSBC is also benefiting from HSBC Holdings Plc's strong global positions, especially in Asia. Compared to Deutsche Bank's six locations in China, the HSBC group has 170. In its latest credit rating update on the bank in October 2016, Fitch noted that HSBC Germany's close integration with its parent group's global network, the group's geographic diversification and the marketing of HSBC products "represent a competitive advantage in the mature German corporate banking market."

BNP Paribas set out with a new four-year growth plan in Germany in April 2013, aiming to grow revenues to €1.5 billion from €1.1 billion by 2016. "We surpassed the target, booking €1.6 billion for 2016 and have added nearly 150 new clients in Germany over the last three years, which represents a 25%-plus increase since 2013", BNP Paribas Germany said in an emailed comment.

Better positioned to fight for market shares

Although the three foreign competitors are still far away from market leadership in Germany, 2016 earnings reports suggest they have managed to overcome the market challenges better than the top players Deutsche and Commerzbank.

Commerzbank and Deutsche, which rank first and second by market penetration in German corporate banking, according to research published by financial services industry consultancy Greenwich Associates, are facing a number of other challenges. Apart from dealing with profitability dampers such as low interest rates and growing regulatory and operating costs, both banks are still going through radical restructuring programs, including a management overhaul at Deutsche and discussions between Commerzbank and the German Works Council to cut thousands of jobs in Germany.

Greenwich's research highlights several factors that could increase competition in German corporate banking even more and put smaller competitors in a better position to challenge larger domestic lenders.

European corporate banking is undergoing significant structural change due to the large number of corporate customers that are either reallocating assets within their existing banks or allocating business to entirely new providers, Greenwich notes in its European Large Corporate Banking and Cash Management survey for the first quarter of 2017. Across Europe, the proportion of large companies expecting to switch banks remained steady at 39% in 2016 and 2015, up from 31% in 2014, the survey shows.

One of the key drivers of that change is uneven economic development in Europe, which pushes more companies to pull out of weaker economies such as Italy and France. This increases competition for corporate clients between banks in strong economies such as Germany, according to Greenwich.

On top of that, the largest pan-European lenders will continue to operate under severe capital constraints, forcing them to prioritize client relationships based on earnings outlook. In the process, they will have to determine if future profit potential warrants a continuation of those relationships in their current form, Tobias Miarka, managing director of Greenwich Associates said.

The survey shows BNP Paribas as the leader in European top-tier corporate banking by market penetration with a 61% share, followed by HSBC group with 52% and Deutsche Bank with a 42% share.