The last 15 years have provided a new lease of life for Germany’s Berenberg, the country’s oldest bank, driven by an increasingly professional and sophisticated approach to client service. The bank is now looking to expand in London, where it has targeted £500m in AuM by 2013. Maryrose Fison reports.
Not many banks can claim the title of being a nation’s oldest bank, but Berenberg enjoys the dual accolade of being Germany’s oldest bank while also having one of the most up-to-date asset allocation tools on the market.
With its origins tracing back to 1590, the Hamburg-based bank traditionally operated as a cloth trader before becoming a trading house for luxury goods such as indigo and spices and latterly a fully-fledged bank.
More than four centuries on and it has developed into a global bank with four divisions covering private, investment and commercial banking and institutional asset management. Collectively the four divisions have accumulated €21.9bn ($30.2bn) in assets under management, around 9,000 clients and 894 staff.
Much of this development has occurred over the past few decades, according to Andreas Brodtmann, one of three managing partners at the bank.
“The last 15 years have really given us a boom on the private banking side,” Brodtmann explains.
“Berenberg always came from the smaller end of the net worth individual. For example, 10 years ago we had accounts of €1m, €2m, €500,000 in size. But over the course of the past decade, we have developed from the lower end of the private banking market to the very high net worth individuals.”
The average size of a portfolio has risen almost three-fold, from €1m to €2m then to €5m now, and Brodtmann says the number of larger mandates, ranging typically from €10m to €30m, €50m to €100m, and €100m to €200m has shot up substantially.
‘Ten years ago we weren’t as sophisticated and as professional as we are today,” Brodtmann says.
“This is related to the fact that we have far more specialists in the specific divisions from research to macro-economic side; specialists in optimising portfolios, specialists who are able to optimise portfolios on a tax basis and things like that.
“Today, in our private banking division we have close to 200 specialists, compared to 50 a decade ago.”
Expansion in London
Now, with a thriving private banking business in Germany and international private banking operations in Switzerland and Austria the bank has its sights set on the UK.
Berenberg already has a base in the heart of London’s financial district on Thread-needle Street, where about 60 staff conduct the investment management business. Brodtmann, who pioneered the bank’s first international private banking branch in Switzerland seven years ago, now plans to recruit ten highly accomplished bankers to begin offering services to UK-based clients by the end of the year.
The team will work from the Threadneedle office, but on a separate floor to the investment banking division. Brodtmann says this is so as to preserve the bank’s “Chinese walls”.
“We clearly separate the trading activity on our investment banking from our private client banking,” he adds. “We even do not give the research of our investment banking to our private banking clients and this is so as to not mix interest of clients. We never want to be accused from private banking clients that we were selling stock when we were in an investment banking transaction.’
Recruitment, hiring and putting in place the IT processes to run the systems is expected to cost in the region of £2m ($3m), Brodtmann estimates and within three years the London division will be expected to have accumulated at least £500m in assets under management, at a rate of £200m per year.
Brodtmann believes the bank’s conservative capital ratio and use of cross-border EU regulations will make the bank’s services attractive to UK investors.
In anticipation of a widespread increase in capital liquidity ratios, it has opted for a core capital ratio of 13.1%, well above Germany’s current 8% requirement and the UK domestic banking average of 6% for core, tier one capital.
Future private clients, both individual and institutional, will also be covered for up to EUR50m under Germany’s deposit protection fund – the German equivalent of the UK’s financial services compensation scheme.
The bank has also committed resources to enhancing its existing asset allocation tool – the Sigma Analysis – a sophisticated quantitative tool established in-house in 2003 and founded on the modern portfolio principles and capital asset pricing model developed by Nobel prize-winning economists Harry Markowitz, William Sharpe and Merton Miller in the 1960s.
A team of 12 from Berenberg’s subsidiary Berenberg Private Capital is working on the upgrade, which is expected to be completed within six months and improve the accuracy of individual investment predictions.
“What you take into consideration is really what behavioural finance says,” Brodtmann adds. “You try to identify who is holding equities and whether these equities are in stable hands or instable hands and what the psychology of the market currently is. You take all these kinds of emotional factors into consideration and put it into a model.”
Brodtmann expects that the basic underlying theory will remain in place, but the asset prediction will be enhanced.
“Correlations between asset classes in crashes and panic situations are substantially higher than under normal circumstances and [the upgraded model will] try to better predict this,” he says.
If past results are anything to go by, then the bank’s steady attitude towards growth is on the right course. Last year, it opened two more branches in Salzburg and Braunschweig, bringing Berenberg’s branch total to ten.
Net profit rose by 38% to €65.1m, 1000 new clients used the bank’s services and assets under management rose by €1.6bn.
But in spite of the overall growth, Berenberg hasn’t been immune to the fallout from the credit crunch. Within the private banking division, net profit remained flat last year. Brodtmann says the persistently low interest rates across the eurozone – held by the European Central Bank at 1% for the past 10 months (at the time of going to press) – has contributed.
“When you are in the private banking business you have clients who have a large part of their assets in cash particularly in times when the markets do not look too good and you cannot just earn an interest margin when the absolute level of interest is 0.5%,” Brodtmann says. “In an interest environment of 4% or 5% it is absolutely fair to charge 0.25%. But when rates are only 0.5% or 0.75% you cannot just take 0.25% as a margin. This is quite a burden on every private bank.”
The bank also has a long-standing policy of paying for expansion from its own balance sheets, with the costs of setting up two new branches further limiting the division’s profit margins. Brodtmann says this is a natural result of the bank’s growth cycle.
“You always have phases as a private bank when you invest substantially or when you feel that your business is so well-set that you just grow and because of that will have higher profits from an operation,” he says.
He estimates that the cost of setting up each branch is on average between €1m and €2m, with around two thirds of the cost arising from human resources, and the remainder spent on IT systems and the legal costs of applying for an EU passport – the essential licence needed to provide investment advice.
Private banking clients
The proliferation of branches is indicative of the bank’s sustained client growth over the past decade. Unlike in the UK, where most private wealth originates from individuals with backgrounds in the financial services, Brodtmann says Berenberg’s clients come from a rich tapestry of professions.
“It is the typical Mittelstands [medium-sized] companies from all the different kinds of sectors: we have clients who have made their money from engineering, from the car industry, the technology industry – it is an extremely broad split across all major industries,” Brodtmann adds.
“You have retired people who have sold companies, others who have been chief executive officers of German DAX-listed companies, some who own companies and successful lawyers, advisers, consultants.”
In fact the client base for private banking is so broad that it has recently set up a dedicated team to deal with the bank’s relatively new celebrity clients. The celebrity desk was founded about two years ago, although Brodtmann says this is not a major part of the business.
But the area that continues to see the most growth, is the charity sector-foundations as they are technically referred to in Germany- followed by family office business.
“This is a very rapidly growing client segment for us,” he says. “If you subdivide to private banking, this is one of the fastest growing groups in our case. The family office business is also fast growing group.’
Once a client comes on board, they have a range of private banking services to choose from, spanning discretionary management, advisory services, mutual fund management and unit trusts. On average, a client who uses the bank’s discretionary services will wait between two and four weeks before a portfolio mandate is drawn up and agreed, and pay a fee of 1% on assets under management although this varies dependent on portfolio size.
The bank has also increased the number of investment advisers it has in regional branches – a move it credits with increasing overall group profitability last year- expanding on its historic concentration of advisers in Hamburg.
Impact of regulation
As the rest of Europe fights to keep its head above the parapet in the wake of widespread market contractions, Germany too has not been untouched by the tightening regulatory requirements imposed on financial institutions since the onset of the economic crisis.
Since January, under new MiFID requirements, all authorised investment advisers at German financial institutions have been required to provide a “memorandum of advice” to clients, allowing potentially for any transaction to be revoked within seven days. Brodtmann says it is here that having the right IT systems in place can really help.
“[Under the new MiFID rules] it means if a client gives an order over the phone or the investment adviser has given a recommendation – for example, ‘buy Siemens because of these reasons’ – under specific preliminaries the client has a right to say within seven days, ‘Actually I thought about it twice after the market came down. I do not agree with you. Please cancel the transaction’,” he explains.
“The trade is then only valid when the client signs a memorandum. To cope with that you obviously have to be extremely efficient in your IT and secondly you have to have clients whom you trust.’
The concept of trust flows into the lifeblood of the institution, and manifests itself most prominently in the ownership structure. Brodtmann, like co-managing partners Dr Hans-Walter Peters and Hendrik Riehmer are all personally liable partners.
Under the personal liability partnership, not only are the three partners responsible for the financial wellbeing of the bank, but even if they leave to pursue other interests, their liability runs on in the case of a delayed damage.
Brodtmann says having this vested interest in the health of the bank is a good motivator for continuing along the safe and consistent path of performance.
“As fully liable partners we do not have a basic salary,” he says. “We only earn the first penny if the bank is profitable. Full personal liability in Germany means that you are liable with whatever you have on the private banking side. You may profit over 10 years from strong bank results, but may loose it all in the 11th. We are very much service focused and not margin driven.
“Although you might not have a majority of a stake in the bank, you are the active body. So, in that respect, it makes a lot of sense that you are remunerated when you are successful and you are not remunerated when you are not successful.
“And it guards against leaving a mess behind. You can’t say, ‘OK I have had 10 nice years here’ and leave and in the 11th year we have a financial crisis. Your personal liability does not end when you leave, it goes on for another five years.”
While the regulatory landscape across Europe may continue to look uncertain, Berenberg’s conservative, low-risk approach which has safely steered it through four centuries of social, political and economic change looks set to keep it in a steady course going forwards.