How the mighty are fallen. Just a few years ago, giant Deutsche Bank was the most powerful financial institution in Europe. Its major German rivals weren't far behind. Today, if planned mergers in France, Spain, and Italy go through, Deutsche's $28 billion market capitalization will rank it only No. 20 among European financial institutions. It is worth barely a third as much as top-ranked London-based rivals Lloyds Bank plc and hsbc Holdings plc.
These sorry statistics show how quickly the common currency has changed the rules in European banking. These days, investors judge banks on a Europewide basis, so the Germans' faltering strategies and anemic profits don't measure up. And the more stock the shareholders dump, the more vulnerable Germany's banks become. As rivals build clout with megamergers, the Germans' weak share prices mean that they can't afford to make deals with successful prospective partners elsewhere in Europe, let alone in the U.S. Unless the Germans focus on boosting their stock, they'll wind up the losers in the bank wars raging across the Continent. "With each deal announced elsewhere, the pressure mounts," says J.P. Morgan & Co. analyst Stuart Graham in London.
Investors are tired of seeing German banks put off the consolidation that their counterparts elsewhere have undergone. For instance, the market has pummeled No. 4 Commerzbank for trying to remain independent rather than let itself to be bought by a bigger rival such as Deutsche or Dresdner Bank. Shareholders are also sick of the failure of the German banks to live up to all the promises they have made--as in the case of the newly merged HypoVereinsbank, which unexpectedly took big writedowns on real estate loans and operations in emerging markets.
MISGUIDED ASPIRATIONS. What's needed now is radical action. German state governments could help by privatizing the huge state banks they now subsidize. However, the private banks must stop using government inaction as an excuse for their own shortcomings.
On behalf of investors, analysts are calling on the banks to cut costs by giving up on grand aspirations in investment banking, reducing exposure to low-margin corporate lending, and paring back branch networks. That will require mergers--hostile ones if need be. And it will require delivering on promises to investors rather than breaking them. The alternative is for the Germans to become the also-rans of European banking.