Rival German Banks Forced to Share Branches in Cost-Cutting Drive

(Bloomberg) --

Walk into the newest branch of Frankfurter Volksbank, and the counters are lit in baby blue. But enter the building the next day, and they’ve turned bright red. It’s not a design gimmick -- rather, the lender’s biggest rival has moved in.

After competing for decades, Frankfurter Volksbank and Taunus Sparkasse, two local banks with combined assets of 17 billion euros ($19 billion), will from Thursday share as many as 17 branches near the German banking capital to cut costs amid changing customer behavior. Two days a week, Sparkasse employees will occupy the offices in the bank’s signature red, with Volksbank advisers taking over on two different days in blue.

“It shows you how serious the situation is when two banks agree to a cooperation that would have been unthinkable not too long ago,” said Friedrich Heinemann, an economist at the ZEW research institute in Mannheim.

German lenders are under increasing pressure from tighter regulation, low interest rates, slowing economic growth and clients defecting to digital-only products. They returned just 1% on equity after taxes last year, according to a study by consultancy Bain & Co. That’s far below the European average of 7% and the 12% their U.S. peers generated.

“Lenders have no choice but to close more branches and cut more jobs,” said Walter Sinn, a consultant at Bain who co-wrote the study. “German banks must first restructure, then consolidate.”

The two banks, which together operate about 140 staffed branches, will invest as much as 5 million euros in shared locations and close some individually operated offices to reduce overlap. They promise to remain competitors.

The country’s banks are turning to desperate measures to fight the onslaught. Some lenders are now charging retail clients for holding money in their savings accounts, breaking another taboo after five years of negative rates imposed by the European Central Bank. The number of German bank branches has declined by a third over the past decade to just below 28,000 last year.

However, compared to some other countries -- especially in Northern Europe -- Germany has still a very dense network with 3.6 branches per 10,000 people, nearly double the ratio in the U.K., according to a study by consultancy Oliver Wyman. That’s partly because the country’s banking sector is highly fragmented, the report found.

Germany had about 1,600 credit institutions at the end of last year, according to data compiled by the European Banking Federation. That’s the highest number in the euro-zone, suggesting there’s ample room for consolidation. Yet mergers -- which could cut costs -- have proven to be difficult, with talks between Deutsche Bank AG and Commerzbank AG collapsing earlier this year.

Sharing branches could help German lenders improve their bottom line.

Taunus Sparkasse‎ und Frankfurter Volksbank, founded more than 100 years ago, say they met no resistance when they presented regulators with their plans, which include separate IT infrastructures to safeguard customer information.

“Banking secrecy and data protection are fully guaranteed,” said Eva Wunsch-Weber, who heads Frankfurter Volksbank, which has more than 90 branches and 12 billion euros in assets. “With this model, we’re providing a courageous and innovative answer to the current challenges of our industry.”

To contact the reporter on this story: Stephan Kahl in Frankfurt at skahl@bloomberg.net

To contact the editors responsible for this story: Daniel Schaefer at dschaefer36@bloomberg.net, Stefan Nicola, Andrew Blackman

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