East May Stall German Thrust

As 1992 approaches, a $2.7 trillion-asset German banking machine stands ready to roll deeper into neighboring territory. The sole variable that could slow its thrust into Europe's planned single financial market is the massive task of digesting the crumbling banking system in eastern Germany.

Toward that end, some western German bankers are snapping up branch networks in the east. Others are proceeding more cautiously. But all agree the process will create new opportunities and harness more horsepower for the German jackhammer.

"We will soon see the light at the end of the east German tunnel," said Hilmar Kopper, chairman at Deutsche Bank AG, Germany's largest bank. The creation of a unified banking system will allow the country to develop "into an engine of economic growth in Europe."

Eastern Germany "is a new market, with vast untapped need for credit, advice, and an array of financial products and services," according to Robert Law, an analyst with Shearson Lehman Brothers' London affiliate. "The east also represents a relatively cheap base of deposits and unskilled labor."

Frankfurt analysts estimate the process of consolidation could mean a gain of up to 10% for the potential, domestic German banking market.

The German banking system comprises commercial, regional, and savings institution. Among other European entities, French banks hold $2.4 trillion in assets, while the British control $1 trillion.

Germany's Big Three - Deutsche Bank, Dresdner Bank, and Commerzbank - together have a 9% share of the domestic market and $597.42 billion in assets. But including offshore assets booked in Luxembourg, their market share jumps to nearly 20%.

Table : Germany's Top Five Ranked by assets; dollars in millions Year ending Percent World 12/31/90 12/31/89 change rankDeutsche Bank $266,286 $202,607 31.4% 11Dresdner Bank 186,936 145,666 28.3 22Commerzbank 144,166 113,017 27.6 29Bayerische Vereinsbank 137,747 102,350 34.6 31

Deutsche

Genossenschaftsbank 136,453 109,354 24.8 33

Source: American Bank

Going Different Ways

The big banks have paced different paths in the east, which last year chalked up a $135 billion gross national product. Deutsche Bank and Dresdner Bank - Nos. 1 and 2 in the German rankings - have been the most aggressive players. Both have swallowed large, branch networks from the East.

Deutsche Bank's assets last year jumped 31.4% to $266.29 billion, while those of Dresdner Bank rose 28.3% to $186.94 billion.

Through acquisition, Deutsche has gained 150 eastern German branches. By contrast, No. 3 Commerzbank has set plans to service more than 60 eastern cities but decided not to acquire any infrastructure.

Frankfurt analysts project this lower-profile approach will cost Commerzbank some $140 million a year, compared with much higher figures for Deutsche and Dresdner.

Acquisition Going Well

Mr. Kopper said Deutsche Bank's largest acquisition in the east - that of Deutsche Kreditbank, the former state banking group - has quickly established solid footing. In the 10 months after the combination, he said, Deutsche Bank has built up more than 900,000 banking accounts and 75,000 safe-custody accounts in the east. The bank's customer base in the area totals more than 600,000.

Deutsche Bank also has sold 25,000 mortgage savings contracts and some 7,500 life insurance policies in the east, Mr. Kopper said.

Currently, he said, the bank's loan volume in the region totals about $1.1 billion. A large percentage of that number comprises startup and other loans to East German companies that are being privatized. By 1992, the bank plans to amass a network of 230 branches in the east, Mr. Kopper said.

Apart from size, the largest German banks have another edge over highly regulated banks in the United States, Japan, and other nations: a universal banking structure that enables them to engage in a range of commercial and investment banking activities.

The big German banks are moving to cross-sell products in sectors such as private banking, insurance, home-loan finance, and brokerage for homeowners. Universal banks account for roughly 75% of business volume in Germany.

According to the German central bank, foreign banks' share of assets amounts to just 7.5%.

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