The dire results for several US investment banks in the second half of 2007 inevitably set the tone for coverage of the leading players in Germany. Dresdner Bank was no exception. Write-downs of €1.275bn on the asset-backed securities (ABS) trading book of investment banking arm Dresdner Kleinwort cut the group’s overall operating profit to €710m for 2007, down from €1.35bn in 2006. Speculation intensified in March 2008, when Allianz split Dresdner Kleinwort into a separate wholesale bank, with the rest of Dresdner focused on private and corporate client (PCC) activities.
Speaking to The Banker before the split was announced, Caspar von Blomberg, Allianz’s head of banking strategy, urged observers to look beneath the alarming headlines. “If we leave aside the part that was affected by the crisis – which was about 10% of the investment bank – this was one of the best years that the bank has ever delivered in terms of creating profits, both for the entire PCC segment, but also for large parts of the investment bank,” he said. In the first half of 2007, Dresdner Bank was contributing 20% to the overall operating profits of its owner, Allianz Group, he added.
Dose of scepticism
There are plenty of sceptics. One is a former Dresdner Kleinwort equity analyst, who was there during and for several years after the Allianz takeover in 2001. He maintains that the insurance giant’s head office in Munich was most interested in Dresdner’s PCC activities, and above all in its asset management arms, which have now been fully absorbed into Allianz Global Investors. “What they did not need was the investment bank, and that’s the part that is losing them all of the money now. But who is going to buy an investment bank from them in these conditions?” he asks.
For Stefan Best, director of financial institutions ratings at Standard & Poor’s (S&P) in Frankfurt, it is unclear how far Dresdner Kleinwort can be aligned with the broader aims of the rest of the company, or how it can strengthen its competitive position in the international market. The ratings agency has also signalled that Allianz’s policy of reallocating profits from Dresdner to the parent company is eroding the bank’s own potential. “As long as Dresdner underperforms and does not meet the economic value-added target of the group, it is likely that Allianz will continue to upstream capital in the form of dividends,” says Mr Best.
S&P downgraded Dresdner’s long-term credit ratings one notch after the separation was announced. “The legal separation creates further uncertainty about the future of Dresdner Bank but we believe that Allianz will remain supportive as long as it is the majority owner of the bank,” says Mr Best.
Mr Blomberg is quick to defend Allianz’s distinctive dividend policy, emphasising that Dresdner is treated no differently from other group operating entities, including the insurance businesses. “Irrespective of what has happened over the past six months, Allianz is strongly willing to have Dresdner growing organically. There is always enough capital to provide for opportunities to grow, there is no limitation and there will continue to be no limitation. Funds will also be available for smaller acquisitions,” he says.
Not that he is anticipating that Dresdner will snap up overseas assets at bargain prices thanks to the credit crunch. “There were foreign investors buying banks in Russia 12 months ago who were paying six or seven times book value. These banks are now worth three times book, which gives you an indication of how extremely volatile banking assets are, and therefore it is clearly not the time to do that,” says Mr Blomberg.
“Beyond that, I do not see a major strategic fit with anyone that would make me say ‘let’s do this in any case’ because it is so hugely synergetic.”
Bancassurance leverage
Mr Blomberg acknowledges that there is still room to leverage the bancassurance model to greater effect, but also underlines Allianz’s commitment to all aspects of Dresdner’s business, including investment banking. “Most of the public perceives Dresdner Bank/Allianz as a pure cross-referral business relationship in Germany, but it goes far beyond that.”
He gives the example of variable annuities, which is one of the fastest-growing product segments of Allianz’s life assurance business. “Guess who provides for the dynamic hedging in that product? Dresdner Bank. Those are the issues, especially on the financial engineering side, where the closeness between an insurance company and a bank can really be of benefit in our particular situation,” he says.
He also expects Dresdner to play a role in the insurance derivatives and risk transfer market that is still at a relatively early stage of development.
At the other end of the product scale, Dresdner is planning to launch a direct retail banking arm in Germany this month that will be fully integrated with the group’s other distribution channels. Mr Blomberg is confident that this move will bring the bank significant growth in a client segment where it has not previously had a strong position.
Beyond Germany, the group has already opened banking operations in France, Italy, Bulgaria and Hungary in recent years. It is planning to expand into Poland this year and is in the process of applying for a licence in India. This retail expansion, both in Europe and in emerging markets, has tended to occur under the Allianz flag and, Mr Blomberg notes, focused on catering for insurance customers because of the strong existing franchise and high-profile branding, for example through sports sponsorship. India is a special case because the regulator does not allow insurance companies to apply for a bank licence.
Made in Germany
The group’s private wealth management (PWM) activities are a more substantial exception because this unit is expanding under the Dresdner brand. It is also one segment that has been making foreign acquisitions, buying two small wealth managers in Belgium last year.
Anton Simonet, Dresdner’s head of private wealth management, says that the bank’s “made in Germany” brand has played to its advantage with the conservative high-net-worth client base that has been shocked by the events on financial markets since mid-2007.
“There is a change of attitude among clients; they want to know about profits, about capital, and if there are hidden risks. We have quite some advantage because the Allianz Group made some of the highest profits in Europe and, although Dresdner Bank had some losses in one unit, it still made a profit overall,” says Mr Simonet. This reputation is reinforced by a focus on onshore banking, he adds.
Like Mr Blomberg, Mr Simonet is not anticipating further major acquisitions in his field, as most mid-sized private banks had limited exposure to the subprime market, so there is little pressure for consolidation. Instead, his next targets may be independent financial advisers in Germany and the UK, as the introduction of the Markets in Financial Instruments Directive (MiFID) in the EU encourages small operators to consolidate with a bank that has financial market expertise.
In today’s volatile environment, Mr Simonet expects brisk business from advising private clients upon assessing the performance and risk profile of their existing asset managers, and consolidating their holdings where appropriate.
Bigger footprint
Beyond the core EU market, Mr Simonet says that he is looking to expand PWM activities into regions where Dresdner Bank “already has many friends” as well as an operating licence, especially central and eastern Europe, and in the Middle East states, such as Dubai. He hopes to expand Dresdner Bank PWM’s representation in the Asia-Pacific region as well, but warns against the hype surrounding opportunities in China. “Everyone is talking about the high growth rates but it is still a very difficult market in which to operate,” he says.
In addition to the strong group balance sheet, Mr Simonet says that his division has a competitive advantage from being able to offer a wide variety of solutions to clients using the resources of the group as a whole, including Allianz Global Investors and Dresdner Kleinwort.
“We can offer mutual funds; we can offer special types of insurance such as art insurance or yacht insurance; we can provide financing for property acquisitions overseas. We have to do more advertising, but these solutions are not just my ideas – they are things that we have been asked for by clients,” he says.
There are some products that are proving harder to sell, however. Mr Simonet says that the uptake of alternative assets has been limited by private investors’ caution, even though absolute return funds should be particularly attractive in a falling market. “We have to convince our clients that we are being conservative – this is not just about particular banks, it is an industry question. We all have to win back the trust of the clients,” he says.
CONSERVATISM PAYS OFF FOR COMMERZBANKRoman Schmidt, global head of corporate finance at Commerzbank, is not an advocate of the investment banking model that has come to dominate the US. In recent years, US players have reaped rewards from principal investment activities, but Mr Schmidt prefers to stay focused on the bank’s traditional role as an intermediary.In today’s environment, Commerzbank’s conservative approach is paying off. It did not hold off-balance-sheet asset-backed securities exposure and it had steered clear of the largest syndicated loan deals that major investment banks proved unable to sell on after the credit crunch hit. Commerzbank has not disclosed the value of leveraged loans still awaiting syndication on its own books but the figure is thought to be less than €40m.“The market has been left more to the regional players. If you are a New York- headquartered bank that has lost a few billion [dollars], then your credit policy in Frankfurt is simply to be more restrictive.” He says that the aim is to grow into that opportunity organically. “We want to show our expertise first, then we can justify being in on new deals.” About 40% of Commerzbank’s corporate finance activity is outside Germany, and the bank ranked seventh as bookrunner in the Europe, Middle East and Africa region for the number of deals transacted in 2007, up from 11th in 2005. The bank is making inroads into central and eastern Europe (CEE), especially in the debt markets. After the acquisition of Forum Bank in Ukraine last year, about 8500 of Commerzbank’s 35,000 staff will be based in the CEE region. “Competition is strong but the number of players in the region is small,” says Mr Schmidt.Another area where he feels the bank’s expertise has already been well established is in the field of equity derivatives (see Roberto Vila), and here he underscores the advantages of managing a small, coherent regional team that hires specialised staff wherever they are available in Europe. He relates an anecdote about a private school in the UK that apparently improved teacher productivity dramatically, simply by operating a zero-tolerance policy on pupil discipline. Similarly, he seeks to avoid internal friction.“There is no London office versus Frankfurt office mentality,” he says.
DZ BANK FINDS ITS NICHE
| For Stefan Rensinghoff, the head of structured finance at DZ Bank, his institution’s solid foundations in the German co-operative banking sector have rarely been more valuable than they are now. “Customers we have been looking to acquire for some time are approaching us and saying ‘because you don’t have a liquidity problem, we’d like to give you some more liquidity,’” he says. |
He has also taken the chance to acquire assets with a good risk profile, where these are being sold at a discount by cash-strapped US investment banks.Mr Rensinghoff’s department at DZ is distinct, set up to enhance profitability by exploring capital markets opportunities outside Germany. Consequently, 95% of its business is overseas, including 35% elsewhere in Europe, 21% in Asia and 26% in North America. This means that he cannot entirely escape the consequences of the credit crunch, but he believes that DZ’s transparent approach to asset securitisation is a model of prudence for the market. “Our due diligence on the individual asset classes that we are securitising is very tight and we have not incurred any losses in that customer-related business,” he says.DZ Bank did announce temporary write-downs of about €1.36bn on investments in asset-backed securities, but Mr Rensinghoff explains that these were in refinancing portfolios intended for liquidity management. The losses therefore have not had implications for DZ’s asset-backed commercial paper programme, which is in relatively good health due to the low loss experience on securitised assets.Mr Rensinghoff says he also wants to focus on niche areas that are less affected by the financial market cycle, especially public-private partnerships (PPPs). A recent request from the government of Singapore for DZ to act as an adviser on PPP projects entrenched the bank’s global leadership position, and Mr Rensinghoff observes that the expertise effectively flows in reverse on this subject, from his overseas operations into Germany itself. “Most of the world has gone further with PPP deals than Germany and we have structured many of those deals, so we are coming back home with the power to demand a role in the development of this market within Germany.”
