By Andreas Kröner
FRANKFURT (Reuters) - Cut-throat competition and decades-old banking relationships mean lenders aiming to profit from Germany's booming middle-sized companies may be chasing a mirage.
On the surface, foreign and domestic banks' expectations of selling more financial services to the thousands of German "Mittelstand" companies seem fully justified.
These often family-run, capital market-shy firms have grown rapidly to dominate global markets in speciality engineering or technology and contribute a big chunk of Germany's much-envied trade surplus of about 190 billion euros (£158.7 billion).
With the rest of Europe in the doldrums, major lenders like Deutsche Bank
They can't all be successful.
"There are so many banks piling into that business that you have to wonder if there are enough Mittelstand companies to go around," said Bundesbank Vice President Sabine Lautenschlaeger, one of Germany's top banking supervisors.
Company executives attest to bankers' ardent pitches.
"Banks are proactively approaching us in ever increasing numbers," said Stefan Wolf, chief executive of auto parts supplier Elring Klinger
The company is paying less than 1 percent for financing of up to a year, and pays only up to 2 percent for loans of up to three years. "Money is sensationally cheap," Wolf said.
But it may take more than the offer of easy credit for newcomers to dislodge the "house" banks whose relationships with their Mittelstand companies often go back decades.
Steffen Walter, chief executive of machine tool safety equipment maker Hema, uses two lenders, his local Maingau savings bank for immediate financing and Italy's UniCredit
"Our banker knows the company inside out," Walter said, stressing the ease and speed of arranging any financing needed.
"My philosophy is to be loyal to the bank, because in a crisis, I can also expect loyalty from the bank," he said.
Auditing firm Ernst & Young found in a study that while bank loans remain central to corporate funding in Germany, companies now see the reliability of loans as more important than cost.
"The Mittelstand hate it if the customer service person changes and they hate it when bank products disappear or foreign bank branches close," said Martin Fischedick, Commerzbank's divisional head for the segment.
Commerzbank, Germany's second-biggest lender, bills itself as a Mittelstand "house" bank, with around 130 billion euros in loans and credit lines to the sector.
"FAIR WEATHER BANKING"
Lately there has been an increase in foreign banks trying to muscle in, said Fischedick, who has been advising Mittelstand clients for a quarter of a century.
He reckons Mittelstand companies pay about 23 billion euros per year for banking services but banks collectively are targeting revenue of 29 billion.
"Not all lenders will reach their goals because Mittelstand business is certainly not going to grow by 6 billion," he said.
Commerzbank is targeting growth of 5 percent per year for itself, but it will need to fend off incursions from BNP Paribas, which is adding 500 staff to its business, and HSBC Trinkaus, which is widening its net beyond large clients to include companies with annual sales of 35 million euros or more.
HSBC Trinkaus aims to double its corporate client base over the next four years, from about 1,500 now, and expects a fight.
"It's not lost on me that this is possibly the most over-banked client business segment in the world," said Stephen Price, head of corporate banking at HSBC Trinkaus.
Germany's biggest lender, Deutsche Bank, said it would start handling corporate customers from 250 locations rather than the previous 70, with Co-Chief Executive Anshu Jain's personal visits to companies like Wuppertal-based vacuum cleaner maker Vorwerk underscoring Deutsche's interest.
The lender's focus is on selling multiple services to clients, with about 70 percent of corporate borrowers also using its other services.
The battle between large commercial players like Deutsche Bank, Commerzbank, BNP and HSBC, who control less than 15 percent of Germany's corporate banking market, and not-for-profit rivals in the public and cooperative sector, who control more than 60 percent, does not bode well for profitability.
Loans may be serving as loss-leaders. The average gross margin for Mittelstand loans of 1 million euros with a 5-year maturity has fallen to around 1.5 percent, while on loans of 250,000 euros to 1 million it is around 2.3 percent, banking consultant Peter Barkow calculated.
"Margin pressure usually starts with large loans and spreads down," Barkow added, pointing out that the gross margin is before banks subtract costs and provision for bad loans.
Eager banks and cheap money are a combination that could end badly because risks are not being priced in, warned Martin Faust of the Frankfurt School of Finance and Management.
"This is fair weather banking. Only the next recession will show who is being sensible in their approach," Faust said.
(Additional reporting by Ilona Wissenbach, Alexander Huebner and Thomas Atkins; Writing by Jonathan Gould; Editing by Mark Potter)