FRANKFURT: Deutsche Bank's plan to sell Postbank is unlikely to be the only painful decision facing German retail finance this year. Deutsche is preparing to sell the unit at a one-off loss to increase future group profitability, reduce regulatory capital requirements, and return to a slimmer "universal" model where retail plays a lesser role, financial sources said.
Deutsche Bank's decision in 2008 to dive deeper into retail banking has backfired, with the purchase of Postbank for some 6 billion euros ($6.4 billion) turning into a costly management distraction which could be hard to sell.
Germany's retail banking market, the most fragmented in Europe, is a low-profit battlefield where layoffs, branch closures and consolidation are unavoidable even after Deutsche scales back its involvement.
Rivals Commerzbank and HVB, owned by Italy's UniCredit, are also inefficient when compared to elsewhere in Europe, each with its own painful legacy of takeovers gone awry.
"Even if the outcome is just the sale of Postbank, it looks likely to be accompanied by a sizable winding down of the residual business, which is an admission that German retail banking is such a challenging market for shareholders," said Omar Fall, equity analyst at Jefferies Securities in London.
Commerzbank's retail operations have an efficiency ratio -- which compares costs to income -- of 85 percent, followed by 74 percent for HVB and 73 percent for Postbank, according to Citibank research. Spanish banks, by contrast, operate more efficiently with a ratio on average of 46 percent.
These three private-sector players combined claim only 15 percent of deposits compared to roughly 58 percent nestled with the savings and cooperative bank segments.
All are reducing branches, with HVB boasting the goal of closing half its outlets and Commerzbank saying it would gradually reduce the number of sites as clients migrate toward online banking.
Price competition is ferocious because public sector competitors owned by state governments face less pressure to deliver profits.
According to the study by Citibank, profitability of German retail banks as measured by their pre-tax profit margin is the lowest in major European markets at 22 percent.
CULTURAL COMPLICATIONS
Complicating the equation are cultural factors. In Germany, financial prudence is celebrated and that ethos reflected on most high streets, where ultra-cheap supermarkets like Aldi and Lidl boast a market share of around 43 percent compared to 10 percent elsewhere in Europe.
Electronics deep discounter Saturn ran a popular ad campaign for years with the motto: "Stinginess is Cool!".
Nor are Germans interested in buying stocks or other investments that could boost banks' fees.
The number of Germans who own stocks or mutual funds has declined to 13 percent of the population in 2014 compared to 20 percent in 2001, according to a study by equity markets lobby group DAI.
This cultural conservatism has hindered banks' ability to sell products to customers lured in by the promise of low- or no-fee current and savings accounts.
The result for Deutsche is clear: Postbank with its cost-conscious customer base and 1,100 branches will be sold and a large number of the group's 730 own-branded branches closed, financial sources have told Reuters.
Postbank itself, whether purchased by a strategic investor or re-floated on the stock market, will also face cost pressure.
Low interest rates and growing competition by online financial service providers like PayPal pose big threats.
"As for the future, we have zero interest rates and falling net interest margins and rising political and regulatory compliance costs -- so profits are not looking good going forward," said Neil Dwane, chief equity investment officer for Europe at Allianz Global Investors.
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