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Western EuropeAugust 3 2003

Signs of greatness

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As industry, insurance companies and asset managers alike relocate to Munich, Bavaria’s capital is biting at the heels of Frankfurt as a financial centre of importance. Jan Wagner reports from Munich.

Germans are not especially known for their cultural pride. But, as anyone familiar with Germany can attest to, the one exception to this rule is the south German state of Bavaria.

Bavarians have ample reason to be proud. Starting with economics, Bavaria has gone from an agricultural backwater after World War II to the wealthiest state in the nation today. Its industrial base includes such well-known companies as the technology giant Siemens, the luxury car maker BMW and DASA, the aerospace company that is part of EADS.

Bavaria’s prosperity is further fuelled by its insurance industry. The state capital, Munich, is home to at least 80 insurance companies, including Allianz, one of Europe’s largest, and Munich Re, the world’s largest re-insurer.

With the Alps on its southern border, Bavaria also has some of Germany’s most attractive geography. Outdoor sports, such as skiing and hiking, are popular. And let’s not forget the beer, another big source of local pride. Bavarian brews are, arguably, the best in Germany, as any visitor to the famous Oktoberfest festival in Munich can appreciate.

International edge

Yet, as Frankfurt’s financial community has come to understand, Bavarian pride does not stop at the state’s borders but extends to the world of international finance. The reason: Munich has grown from just an insurance capital to become the nation’s second-largest financial centre behind Frankfurt. Compared with other European financial centres, Munich is on par with Milan and Madrid.

“Munich is a very attractive alternative to Frankfurt for finance professionals, as the quality of life here is very high. There are beautiful lakes near Munich, and, of course, the Alps are only an hour away,” says Martin Hüfner, chief economist at Munich-based HypoVereinsbank (HVB), in an interview with The Banker. “On the other hand, finance professionals are expected to work as hard here as anywhere else.”

Transformational events

There are two main explanations for Munich’s transformation into a major European financial centre. The first has to do with bank mergers involving Munich institutions. In 1998, Bayerische Hypotheken-und Wechselbank merged with local peer Vereinsbank to form HVB, Germany’s second-largest bank in terms of assets. HVB then became one of Europe’s three top banks according to the same measure when it acquired Bank Austria-Creditanstalt in 2000.

In early 2001, Allianz took control of third-ranked Dresdner Bank, a Frankfurt institution, to create a new German banc assurance giant. Two of Germany’s biggest banks – that is with assets totalling more than e500bn – have, therefore, been governed from the Bavarian capital for the past two years.

The second explanation concerns asset management. Due in large part to the massive amount of insurance income accumulated by Allianz and Munich Re, the scale of asset management in Munich is unparalleled elsewhere in Germany. According to the latest figures from the Bundesbank, there were e1320bn in assets under management in Munich in 2001, e1000bn of which were booked at Allianz and Munich Re.

Christine Bortenlänger, an executive at the Bavarian bourse in Munich, says: “Particularly in the last two years, Munich’s importance as a financial centre has grown significantly. It is now number two in Germany. The distance to the number one ranking has, moreover, certainly shrunk since Allianz took control of Dresdner Bank.”

Even so, the securities exchange that Ms Bortenlänger helps to run has not done much to elevate Munich to its current status. With estimated turnover of around e110bn, the lion’s share of which is for bonds, the Bavarian bourse remains behind second-ranked Stuttgart and far behind first-ranked Frankfurt.

That Munich is Germany’s second-largest financial centre is, moreover, not obvious to anyone who has seen its financial district. Unlike the one in Frankfurt, largely a collection of bank towers, Munich’s district is small and quaint. Starting roughly from the Bavarian bourse, it encompasses only a few streets, the best known of which is the Pacellistrasse.

Consistent with the aesthetics of the city, the bourse and many of Munich’s banks inhabit buildings that are reminiscent of the Italian Renaissance or the Baroque period. Allianz and Munich Re are not located in the financial district but opposite each other in the Königinstrasse, a street in the fashionable quarter of Schwabing.

There are 153 domestic and a dozen foreign banks in Munich, half the total in Frankfurt. According to the Bundesbank, Munich’s banks transacted e830bn in 2001 – about a third of the e2500bn transacted by Frankfurt’s banks that year. Together, Munich’s banks and 80 insurers employ around 68,000 people.

On Frankfurt’s heels

Munich’s achievements as a financial centre have prompted much bolder characterisations of the city than either Mr Hüfner’s or Ms Bortenlänger’s. A good example was a guest article that appeared in the financial daily Börsen Zeitung in March and no doubt caused several exclamations to be heard from Frankfurt’s bank towers. Citing the results of a study by the business consultancy McKinsey, the author, an asset manager affiliated with Munich Re, claimed that Europe’s key financial players could “no longer be found in Frankfurt, but rather in London or Munich”. Frankfurt, the author continued, also had not gained much from the installation of the European Central Bank there, since most ECB watchers were based in London. “All this proves that Munich has substantially narrowed the gap between itself and Frankfurt,” wrote the asset manager.

Even the business weekly Wirtschaftswoche, whose editor-in-chief is known for his partiality to Munich, declared in early 2002 that following Allianz’s takeover of Dresdner: “The Königinstrasse has become the true power centre for high finance in Germany.”

Global misfortunes

However, amid such difficult times in the world market and with equities, foreign banks such as Merrill Lynch and Citigroup of the US have greatly scaled back their business in Germany. Institutions such as the US investment bank Goldman Sachs that are risking some slight expansion, are doing so in Frankfurt and not in Munich. This is because the Bavarian capital, as the small number of foreign banks there shows, does not rank as an international banking capital.

More critically, though, the three main pillars of the financial centre of Munich, HVB, Allianz and Munich Re, have been hit hard by the sluggish global economy and bearish equity markets of the past two years. Last year was particularly painful for them. During 2002, HVB swung to a staggering pre-tax loss of e821m, while Allianz’s net loss totalled e1.2bn largely because of the troubles at Dresdner Bank (see The Banker September 2002, p130). Munich Re managed to stay profitable in 2002 but only because of asset sales.

So, as they scramble to restore profitability by cutting costs, divesting non-performing assets and laying off staff, these institutions are hardly in a position to go after finance professionals of any kind or pay much attention to FPMI (see box overleaf). Also FPMI has lost two of its most prominent supporters since Albrecht Schmidt resigned as chief executive of HVB in January and Henning Schulte-Noelle followed suit from Allianz in late April.

“I think one of the main reasons why the initiative has lost steam is the current economic climate. One promotes a city as a financial centre to attract professionals and that’s very hard to do right now, ” says Wilfried Hauck, managing director at Allianz Dresdner Management (ADAM), in an interview with The Banker.

Mr Hauck is not the only member of Munich’s financial community who, either openly or tacitly, acknowledges that FPMI has done little to enhance Munich’s status as Germany’s second-leading financial centre. Franz-Christoph Zeitler, a Bundesbank director who was located until recently in Munich branch, for instance, declined to be interviewed for this article, saying that it was “not the right time”. He has been relocated to Frankfurt, suggesting that he is no longer closely involved with FPMI.

Early days

Meanwhile, Markus Neuner, an official from Munich’s chamber of commerce who sits at the FPMI roundtable, told The Banker that if it was not cared for more, the initiative would not develop further. “Our initiative is like a child that has been born but has only made it to Kindergarten,” he says.

He believes that the initiative could, in particular, be used to revive Munich’s venture capital industry which, prior to the bursting of the technology bubble in 2000, was the biggest in Germany. “In this way, the young initiative would do much to help small and mid-size companies in and around Munich, many of which are in the tech or biotech sector,” he says.

To help the initiative further develop, Mr Neuner favours setting up a central office that would co-ordinate the promotion efforts in Germany and abroad. At the same time, he is sceptical that the idea will ever get off the ground. “Given the current economic situation, there is simply no funding and very little will to do something like this.”

Yet Mr Hüfner, who has attended meetings of the roundtable, dismisses the notion that FPMI was a failure. He argues that the initiative was not designed necessarily to lure foreign banks and English-speaking finance professionals to Munich. “It does not make sense to compete with Frankfurt in this regard. It would be crazy to do so as the two cities are only 400 kilometres apart and Munich, unlike Frankfurt, is not a stock exchange centre,” he says.

European role

Beyond the roundtable and a website, the point of the initiative, according to Mr Hüfner, is to underscore the role that Munich now plays in European finance. “What we are trying to communicate is that while Munich was formerly just an insurance capital, it is now to Frankfurt what, say, Boston is to New York due to its huge asset management industry,” he says.

Except for the caveat that Boston does not operate a stock exchange and has far fewer insurers than Munich, Mr Hüfner’s comparison is fairly compelling. Frankfurt’s financial district, with its skyline of bank towers and renowned stock exchange, resembles lower Manhattan, although it is clearly not as bustling and does only a fraction of the latter’s business.

Munich, on the other hand, has become so well associated with asset management that when the Boston-based asset manager State Street recently entered the German market, it settled in the Bavarian capital and not in Frankfurt. If times improve, this could be a sign of things to come.

Initiative for the financial centre of Munich

The pride that Munich’s financial community exudes has not only been expressed in newspaper articles, which may or may not be taken seriously. Shortly after Allianz’s takeover of Dresdner in early 2001, two senior figures from the community decided that a promotion campaign was needed to sell Munich’s story better in Germany and, hopefully, abroad.

Franz-Christoph Zeitler, a Bundesbank director in Munich branch until recently, and Otto Wiesheu, Bavaria’s economic minister, came up with the Initiative for the Financial Centre of Munich (FPMI). The initiative was not new but was modelled after previous efforts for the benefit of Frankfurt, led by former Deutsche Bank chairman Rolf E Breuer and, more recently, Frankfurt’s city government.

FPMI had three chief aims. First, a roundtable comprising senior officials from Munich’s financial community was to be created to discuss ways to further strengthen the city’s position in finance. Second, Munich’s educational infrastructure would be expanded to include a business school and a finance research centre. The third and most significant of the aims was to compete head-on with Frankfurt and other European financial centres in encouraging more foreign banks and English-speaking financial professionals to settle in Munich.

Roughly two years since its launch, FPMI has met its more modest aims. Officials from 27 Munich-based financial institutions meet three to four times annually to discuss the state of their financial centre. A low-budget website detailing the initiative and providing a calendar of events for Munich’s financial community is online. And the University of Munich has added a business school of sorts.

Yet in fulfilling the third aim, which these days is crucial to building a financial centre of repute, the initiative has been an enormous flop. Some in Munich’s financial community attribute this to a lack of co-ordination. But the reason has more to do with the world economy and equity markets, which have been particularly vicious to financial centres worldwide in the past two years.

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