While his German rivals scramble into new businesses - and alliances - HVB Group’s Albrecht Schmidt plans to assemble a pan-European “bank of the regions” that is retail-driven. Can he make money doing it?
By Joan Warner
May 2001
Institutional Investor Magazine
While his German rivals scramble into new businesses - and alliances - HVB Group’s Albrecht Schmidt plans to assemble a pan-European “bank of the regions” that is retail-driven. Can he make money doing it?
Among their countrymen, Müncheners are considered a breed apart: fiercely independent, idiosyncratic and, by German standards, indolent. The old Imperial Residence in the heart of downtown still evokes wacky King Ludwig II, who bankrupted Bavaria constructing gorgeous palaces and gaudy monuments. With the Alps looming cheerily on the horizon and a beer garden offering bucolic respite every few blocks, Munich has a pleasure-loving gestalt that sometimes draws disdain from northerners. The pin-striped bankers of Frankfurt - that all-business city that is Germany’s financial capital - seem out of place here. So do the tortured political souls of Berlin.
But Munich is where the eastern-born, southern-educated Albrecht Schmidt, chairman of HVB Group, as Bayerische Hypo- und Vereinsbank is now known, pursues his dream of building the first truly pan-European bank. An architect’s son, Schmidt speaks in terms of putting up an enormous house, room by room, as he sets out his strategy for turning Germany’s No. 2 bank into a Europewide juggernaut. “You lay a foundation according to a blueprint,” he says with an expansive gesture that could be figurative as well as literal, since Hypo is putting up a new headquarters downtown. “We have done that. But the house is not finished.”
Schmidt, 63, may have poured his foundation, but the neighborhood around him is changing faster than he could ever have imagined. Last month Munich-based insurer Allianz announced its impending acquisition of Dresdner Bank, Germany’s third-largest, a far-reaching deal that seems likely to galvanize a long-overdue wave of banking consolidation, reconfiguring the terrain of German finance and, inevitably, that of all Europe. No. 1 Deutsche Bank is in talks with French giant Axa about selling insurance through its branch network - another example of so-called bancassurance. No. 4 Commerzbank, which has clung to independence by its fingernails for years, is under hostile fire from Cobra Holdings, the investment group that holds about 10 percent of its shares, to get with the program and do a merger.
Under the terms of its deal, Allianz, which had been eagerly seeking a retail distribution arm, will transfer its 14 percent stake in HypoVereinsbank to Munich Reinsurance Co., the world’s No. 1 reinsurance company, in exchange for Munich Re’s shares in Dresdner. Allianz and Munich Re will also reduce their equity stakes in each other, from 25 percent to 20 percent. Thus disencumbered, Allianz-Dresdner and Munich Re-Hypo will square off far more directly than before.
But though the Allianz-Dresdner and Munich Re-Hypo partnerships both follow the extolled (yet still unproven) Allfinanz model of German financial supermarkets, they are by no means identical. Allianz wants to become a vertically integrated company, a German-style Citigroup that can be all things to all clients. It will use Dresdner’s branches to peddle its insurance products and will retain at least a partial interest in Dresdner’s investment banking arm, Dresdner Kleinwort Wasserstein.
Schmidt’s approach remains defiantly contrarian. Unlike his counterparts in Frankfurt and Zurich, he does not aspire to a global role in deal making and underwriting. His blueprint calls for a “European bank of the regions” based on Hypo’s three core businesses: corporate finance, real estate and retail.
Munich Re will sell insurance and asset management products through Hypo’s vast branch network - a network it formerly had to share with Allianz products. But it has denied speculation that it is interested in a full-scale merger with Hypo. And so far, it has been a benign shareholder. “Munich Re,” wrote Schmidt in a letter to his staff on March 31, “has demonstrated its faith in us and supported our expansion strategy.”
People close to the action in Munich say that Schmidt was never a favorite of Allianz chairman Henning Schulte-Noelle, who objected to Schmidt’s handling of the local merger that created HypoVereinsbank in 1997. So although Schmidt is not crowing about it, he is known to be delighted to have broken his bank’s ties with Allianz. “Schmidt has now got everything he wanted,” says a Hypo insider.
While the northern banks fling money into higher-profile, higher-margin and higher-volatility wholesale investment banking operations, Schmidt is methodically buying market share in his trio of traditional activities through acquisitions. He made his biggest cross-border deal in July 2000, spending $6.6 billion to buy Bank Austria. On April 12, just days after the Allianz-Dresdner announcement, he said he would propose issuing 260 million new shares to raise as much as $19 billion, making it clear that he wants a fatter war chest. The move would also reduce Munich Re’s stake in Hypo to about 15 percent from the 25.7 percent it would own after the swap with Allianz is finalized.
Schmidt’s bank-of-the-regions strategy calls for banks that retain their local identities - Hypo’s acquisitions keep their names - hooked together by a single technology platform and offering Hypo’s product menu as well as their own brands. (In March the bank officially changed its own name to the universally pronounceable HVB Group, although its branches around Munich will still sport their familiar HypoVereinsbank signs.) At the same time, Schmidt is overhauling his core divisions to boost their margins. And his managers are devoting their most serious efforts to product innovation.
So far Hypo’s game plan is unique on the Continent. British retail house Lloyds-TSB Group boasts an enviable 29.1 percent return on equity, but it has stuck to its home turf. In Scandinavia, Finland’s Merita has become a regional commercial banking juggernaut by merging with Sweden’s Nordbanken and Denmark’s Unidanmark, but the Nordic nations are far more homogeneous than the rest of Europe. On the Continent most of Hypo’s competitors, from Paris to Zurich, have given up trying to turn retail banking into a goose that can lay golden eggs. And although Europe’s banks are increasingly forming partnerships and signing distribution agreements to expand their geographic presence, HypoVereinsbank is the only one with the explicit goal of going pan-European with all its products and services.
That puts Schmidt in the spotlight. And what is all the more remarkable about his approach is that he has yet to show he can make much money. In Germany, where publicly held retail banks still compete with the government-subsidized Landesbanken and Sparkassen, shareholders are clamoring for lower costs and beefier earnings. Schmidt has targeted a 15 percent return on equity by 2003, the year he will retire. His troops have a long march to reach that goal, especially if the European Central Bank continues to resist an interest rate cut for the euro zone, and the region’s economy weakens. Hypo’s overall ROE came in at 9.2 percent for 2000 - just 8.5 percent without adjustment for amortizing goodwill - and a miserable 3.6 percent for 1999.
Despite considerable internal restructuring and promised savings from consolidation with its merger partners, HypoVereinsbank has a cost-income ratio of 59.7 percent. (Bank Austria’s number, consolidated with Hypo’s only since December, is higher.) Thanks largely to the massive salaries the Frankfurt banks pay their investment bankers, the average cost-income ratio for Hypo’s northern rivals is 80 percent. But in the U.S. and the U.K., ratios for universal banks are closer to 50 percent.
During an interview in his sixth-floor office overlooking Munich’s vast English Garden, Schmidt emphasizes that Hypo beat his cost-income ratio target of 60 percent for 2000. And he says the Bank Austria merger will save E320 million ($285 million) annually by 2003 through reducing regional overlap. But some analysts say the E500 million worth of savings shareholders expected from the in-country merger between Bayerische Vereinsbank and Bayerische Hypotheken- und Wechsel-Bank that gave birth to HypoVereinsbank more than three years ago have been only partially realized - a result that the bank denies.
Nevertheless, Schmidt has a good chance of proving that his singular strategy can work. Not only is he underspending his German rivals on investment banking, but he is also investing in less risky businesses. “I like HypoVereins best of all the German banks,” says Evangelos Kavouriadis, European banking analyst at Sanford C. Bernstein & Co. in New York.
Hypo’s strength lies in the fact that it offers the markets a clear story, not a hot one. Investors and analysts in Europe and the City of London appreciate that Schmidt doesn’t use his shareholders’ money to pay guaranteed bonuses for masters of the universe who may or may not deliver deals. (Although its American depositary receipts trade on the Nasdaq in New York, U.S. institutions hold only a fragment of the free float.) In addition, Schmidt has a reputation for driving a hard bargain when he’s negotiating an acquisition. “People see Hypo as a sensible bank,” says Niall O’Connor, who covers European banks for Deutsche Bank in London. “It’s perceived as a defensive play, fairly safe and cautious.”
Schmidt has two more years in which to turn that perception into something more exuberant. The Leipzig-born lawyer already has altered Europe’s financial landscape during his 34-year tenure at Hypo. By engineering the union between German mortgage bank rivals Bayerische Vereinsbank and Bayerische Hypotheken- und Wechsel-Bank in 1997, he catapulted Vereinsbank, which he then ran, out of its distant fourth-ranked position behind Frankfurt’s Big Three: Deutsche, Dresdner and Commerzbank. That same year, Schmidt bought FGH Bank, the Netherlands’ third-largest mortgage financier, in a move that made HypoVereinsbank Europe’s biggest real estate lender.
His acquisitions in Eastern Europe and the Netherlands have put Hypo among the Continent’s top three banks by assets. And the Bank Austria purchase cemented Hypo’s market presence in Central Europe, where it owns the dominant Polish and Hungarian banks. Now Schmidt wants to bring customers in France, northern Italy and Spain under Hypo’s roof. He has a small, strategic stake in Madrid-based Banco Popular and is said to be shopping in northern Italy. And he recently spoke eloquently to analysts about the desirability of closer ties among French and German banks - vividly echoing the rhetoric of the makers of European economic and monetary union a few years ago.
Ironically, Deutsche Bank was in part responsible for Hypo’s retail-driven strategy. In 1996 the Frankfurt giant bought a 5 percent stake in Vereinsbank and signaled its interest in a merger. “That’s when we knew structural change was starting in the German banking sector,” says Norbert Juchem, 48, head of Hypo’s international markets division and a member of the bank’s Vorstand, or management board, since 1991. The Bavarians, recalls Juchem, didn’t like the idea of taking orders from Frankfurt, and their reluctance helped catalyze the merger of the mortgage banks. Now, he says, “we’re not sitting on the investment banking island. We’re leveraging our customer base.”
HypoVereinsbank derives roughly 18 percent of its E1.87 billion in operating profit from real estate lending, 26 percent from retail banking and 26 percent from corporate finance. Only 4 percent comes from asset management. Hypo is a big player in the capital markets (26 percent of operating profit) and offers investment banking products and services to its midsize corporate customers. But Schmidt and his colleagues on the Vorstand emphasize that they’re not competing for bulge-bracket business. “When Deutsche Telekom goes public or there’s a huge industrial merger, we’re not going to be the lead manager,” says Dieter Rampl, head of Hypo’s corporate finance division.
Instead, Hypo is leveraging its traditional lending relationship with Germany’s Mittelstand - companies with revenues of $15 million up to roughly $100 million, which account for 95 percent of Hypo’s corporate finance business - into the more lucrative role of IPO underwriter and M&A adviser. “We’ve known these companies for ages,” says Rampl, a 53-year-old Munich native who joined the old Vereinsbank back in 1968, switched to Frankfurt-based BHF Bank in 1987 and was recruited back to Vereinsbank by Schmidt seven years later. “Now we’re trying to get a mandate to restructure their liability side.” As Hypo expands, Rampl and Schmidt believe it can play the same role for midsize companies all over Europe.
Of course, a comparatively modest emphasis on investment banking sounds brilliant when there’s a bloodbath going on in the equity markets. In the last quarter of 2000, Hypo took a far milder profit pounding than did Deutsche, which earns nearly 60 percent of its revenues from investment banking and does more proprietary trading. The same thing will happen when first-quarter numbers come out in mid-May. “Investment banks looked good two years ago,” laughs Schmidt. “Now we look good.” Since the beginning of 2001, HVB’s shares have risen modestly, from E59 to about E64. Deutsche’s have dipped from E89 to E86.
In addition, botched mergers last year left all three Frankfurt banks with egg on their faces. Deutsche had already circulated a crowing internal memo when its much-vaunted deal with Dresdner fell through at the 11th hour in March 2000. Then, after Dresdner and Commerzbank failed to join forces, both seemed relegated to also-ran status in the race for critical mass. Although both management boards have approved the Allianz-Dresdner marriage, investors are so skeptical about the fickle Frankfurt banks’ track records with mergers that the markets have largely shrugged off the deal. By comparison, Schmidt’s smooth and nearly publicity-free cross-border purchase of Bank Austria won wide approval for being a logical fit at a good price.
Yet Schmidt and his team are aware that success requires more than just avoiding their peers’ mistakes. They are revamping Hypo’s main business lines both to pare fat and to maximize cross-selling and internal synergies. Besides restructuring the individual divisions, they are fostering “joint ventures” between them, avoiding conflicts of interest by splitting profits.
At the same time, Schmidt is working to raise the bank’s profile among investors. On March 22, when he presented final financial results for 2000, he unveiled a new logo that keeps the traditional, Nike-like “swoosh” but formally changed the bank’s name from HypoVereinsbank to HVB Group. Schmidt hopes the more user-friendly tag will alert non-German customers and shareholders that Hypo has moved beyond its borders - as switching to the name HSBC Group did for Hongkong & Shanghai Banking Corp. in 1991.
He’s also giving Hypo a snazzier silhouette locally. Right now Hypo’s 12,000 Munich employees work in 40 different buildings scattered throughout the city, and Schmidt’s office is in a modest six-story complex on the outskirts of town. So the bank is investing some E700 million in a 20,000-square-meter development on downtown’s upscale Theatinerstrasse that will house offices, apartments, shops, cafés and Hypo’s impressive collection of postwar German art. It’s scheduled for completion in 2003.
The point, says Schmidt, is not to centralize the Munich operations or even to get all the Vorstand members working in one location. Rather, Schmidt wants to give HVB Group a flagship building commensurate with his vision of a European “bank of the regions.” That catchphrase, adopted in preference to the more Anglo “superregional bank,” deliberately echoes a Brussels-born locution familiar to every consumer on the Continent: “a Europe of the regions.” Like the architects of the expanding European Union, the Hypo team sees a continent bound together financially but ever sensitive to the political and economic realities of its components. “You don’t have a European bank yet,” says corporate finance chief Rampl. “But it will come. If I have a good product, I can sell it all across Europe, thanks to the single currency.”
That is certainly the concept behind Schmidt’s determination to position Hypo as the Continent’s “modern retail bank.” He and his board believe that beating the competition to market with new products is more important than being frugal. “We try to be first and early,” says Stephan Schüller, 49, head of retail banking and online services. “Maybe it will take two or three years to make money. But if we’re late, we’ll never make money.”
So, for instance, Hypo was the first German bank to embrace open architecture in mutual funds. Its Activest unit offers 35 funds through 20 distribution partners, including American International Group, Franklin Templeton Investments, Pioneer Group and Putnam Investments, as well as Deutsche’s DWS Group and Commerzbank’s ADIG Investment, which Hypo formerly co-owned. And this summer, Hypo will relaunch its retail clients’ Internet portal, adding features such as live, online investment advice, personalized start pages and live, online investment advice.
The retail division includes private banking for high-net-worth individuals - a market widely considered one of Europe’s most promising. Hypo conducts most of this activity through small, private banks in Switzerland and Frankfurt. But in January 2000 the bank acquired Madrid-based wealth-management specialist Banco Inversión, giving Hypo a toehold in Spain’s fast-growing high-net-worth market. Altogether, Hypo’s private banking operations have $14.7 billion in assets under management.
Schüller, meanwhile, is rolling out investment products for rich Germans who like to speculate. In the past decade such clients have favored Eastern European real estate, thanks to tax breaks. But the government is gradually removing those incentives, and property in the former East bloc is less popular than it was right after the Wall came down. Among Hypo’s alternatives are innovative closed-end funds, including one that invests in small power plants, another that buys shopping centers in the U.S. Sunbelt and a third that takes stakes in Hollywood movies. (Hypo clients helped bankroll Mission Impossible II.)
The retail jargon for Schüller’s sales approach is “multichannel,” meaning that clients can get what they need in person, by telephone or online. In fact, heavy spending has given Hypo’s customers some of the most innovative banking services in Germany, especially over the Internet. The bank invested E250 million last year in its e-commerce unit, called Webpower, and will spend a further E220 million in 2001. It has upwards of 1 million online customers - about 18 percent of its retail customer base - with more signing on at a rate of 100,000 a month.
Although online services are technically in the retail division’s bailiwick, Webpower is run like a separate company. It has its own little building next to a rushing stream, and its atmosphere suggests a start-up, with open-plan workstations, ample daylight, a Foosball table and a young, late-working staff. The Silicon Valley echoes are no surprise: Webpower’s director, Hans-Gert Penzel, got his Ph.D. in economics and informatics from Stanford University and still loves to vacation in California.
But Penzel is no computer geek. A McKinsey & Co. veteran and former head of Hypo’s business development, he has a consultant’s big-picture concept of the Internet. “E-business and banking actually go together,” he says. “Our product is pure information.” Besides developing in-house systems, Webpower incubates new businesses, often in partnership with other companies. Last fall it launched PlanetHome, an Internet portal that lets customers shop for real estate and for mortgages from 19 providers besides Hypo. In partnership with Rostock-based Norisbank, Hypo offers online car financing and other personal loans. And Webpower’s latest project, memIQ, is being developed with Mannesmann to provide secure electronic transfer of such private documents as credit card statements and phone bills. PlanetHome and memIQ are likely to go public eventually as stand-alone companies. “Start-ups have a big advantage with Hypo’s name behind them,” says Penzel.
Indeed, one of the bank’s biggest success stories is Direkt Anlage Bank, Germany’s first online discount brokerage service. Launched in 1993 and spun off in November 1999, DAB is the country’s leading online mutual fund distributor and the market leader in business-to-business brokerage. After spending $780 million to buy France’s Selftrade.com, the service boasted 435,000 online accounts as of February 2001.
All the digital development takes a toll on the retail division’s results: Its cost-income ratio stands at 71 percent. Schmidt announced on March 6 that he would close up to 165 of Hypo’s 1,110 retail branches in Germany this year and reduce its 20,000-strong retail staff by 800, for a projected savings of E60 million beginning in 2003. But the bank clearly needs to keep paring its branches.
Restructuring has been much more forceful in the bank’s other divisions. In February, for example, Hypo announced it would combine its four main real estate subsidiaries, plus its own mortgage business, into a single entity, to be called HVB Immobilienbank and traded separately on German exchanges as of October. The bank expects the consolidation to save E160 million a year beginning in 2004, nearly 30 percent of the real estate division’s current cost base. Besides cutting overhead, the new organization will shave 3 basis points off the cost of refinancing the E23 billion to E50 billion worth of Pfandbriefe (Germany’s version of collateralized mortgage bonds and the country’s No. 2 debt instrument) that Hypo issues annually, estimates Konrad Becker, an analyst at Munich asset management firm Merck Finck & Co.
On the income side the new bank will focus on expanding Hypo’s mortgage activities outside Germany, where margins on institutional mortgages are 73 basis points, compared with 100 in the Netherlands and 100 to 150 in the U.K. Real estate division head Claus Nolting, 49, thinks that given the chronic inefficiencies of the domestic property market, other German banks will imitate Hypo’s reorganization. “We’re breaking with a long, successful tradition, going from market-share-driven to profit-driven,” he says. “It’s a completely new approach.”
HVB sorely needs a new approach to real estate. The discovery of nearly E9 billion worth of bad loans on Hypotheken- und Wechsel-Bank’s books after its merger with Vereinsbank led to the resignations of its former chairman, Eberhard Martini, at the end of 1999, and most of his management board. (Today HVB’s Vorstand consists entirely of Vereinsbank veterans and new blood.) It also forced the merged HypoVereinsbank to set aside a total of E5 billion in loan-loss provisions in 1998 and 1999 and to create a real estate workout unit that is still dragging down group profitability. Schmidt - and most outside observers - say Hypo has put the worst of its property losses behind it, although some worry that Bank Austria’s portfolio could hold surprises in the form of exposure to Eastern Europe, Russia and Southeast Asia. After the real estate unit posted a miserable 6.7 percent return on equity in 2000, Nolting is forecasting an ROE of closer to 9 percent this year.
To get there he knows he has to look outside Germany. As the government gradually cuts tax incentives for property investment, real estate must increasingly compete with other asset classes. By many estimates, new lending for development dropped about 25 percent in 2000, and economists don’t expect the pace to pick up this year. Nolting admits that oversupply was a problem in the Eastern states, and he’s now focusing on high-end markets in France, Italy and the U.K. Hypo has also been aggressive in the U.S., where its portfolio is valued at more than $8 billion, mostly in big cities like Chicago, New York and San Francisco. By 2004 Nolting hopes that 35 percent of his loan book will be non-German, up from 23 percent now.
He is also going over his portfolio with a fine-tooth comb, with the intention of shrinking it slowly, largely through securitization. And he is likely to get rid of unprofitable clients, a process that Merck Finck’s Becker thinks could buff up Hypo’s real estate P&L this year. “We still have too many loans that are sound but don’t meet profitability requirements,” says Nolting.
If the beleaguered real estate chief thinks he has a tough task ahead, he can look for encouragement to Vorstand colleague Rampl, who put his corporate finance division through a hellish restructuring program after it turned in a pretax loss of E155 million in 1998, thanks to write-offs on corporate loans in a tough economic environment. Rampl reduced his staff by 900, boiled seven regions down to three and cut branch operations. The result has been an impressive turnaround: Hypo’s corporate finance unit posted an aftertax ROE of 12.2 percent last year and a cost-income ratio of 45.6 percent, down from 54.3 percent in 1999. More important, Rampl is boosting the quality of his division’s earnings: Thirty percent of revenues are now fee-based.
The bank is also aggressively pushing private equity financing; it has a handful of venture capital subsidiaries in partnership with other companies, including a life sciences fund with Boehringer Ingelheim, an information technology fund with AT&T Corp. and a workout fund with Munich-based Roland Berger Strategy Consultants. Rampl’s next Holy Grail is junk bonds - a market still in its infancy in Germany.
But while he works full-time to sell new finance products to his core customers, Rampl wants to keep their loan business, too. To wring more profits out of his old-fashioned relationships, he has revamped his division’s approach to risk management and loan pricing. “Used to be, one guy was in charge of lending to all the companies from A to L, alphabetically,” Rampl says, shaking his head. Now he has teams of industry experts who tailor financing to the borrower. Loan-loss provisions fell to E359 million in 2000 from E416 million the previous year. “I’m very pleased with the performance of corporate finance since 1999,” says Schmidt quietly - a sentiment Rampl seems to interpret as a challenge to keep the momentum going.
He will get a major assist from Juchem’s international markets division, which is largely powering the transition from old-style lending to modern finance for Hypo’s corporate customers. With an ROE of 23 percent, international markets is also the repository of Schmidt’s highest hopes for improving Hypo’s overall results. Juchem’s task is to give Hypo’s retail, corporate and institutional customers access to the global capital markets in the form of new financing instruments.
For individual investors that has meant a slew of new equity-linked mutual funds. Under an exclusive licensing agreement with the Deutsche Börse, Hypo is the sole European provider of listed funds linked to Germany’s major stock indexes. It’s also one of five licensees providing funds linked to the Europewide Stoxx index family. Over the past three years, the bank has sold E500 billion worth of equity-linked funds and certificates, becoming No. 1 in European market share for this asset class.
Other new products are aimed at the institutional market. Last June, with Viennese subsidiary Schoeller Capital Management, Hypo launched Germany’s first long-short equity hedge fund, the Lion Global Opportunity Fund. This year the bank will introduce the HVB Value Protection Fund, a guaranteed long-short equity fund-of-funds that aims to raise E1 billion from institutional investors and eventually offer a retail counterpart.
One of Juchem’s most potent weapons in the battle to diversify out of plain-vanilla finance is Stephan Bub, the 42-year-old, Frankfurt-born rocket scientist who started Hypo’s risk management business in 1993 and is largely responsible for inventing its structured-finance products. Formerly head of the bank’s modest Americas and Asia unit and newly appointed to the Vorstand, Bub still works in New York and flies to Munich for the board’s Tuesday morning meetings. With a Wall Streeter’s panache in slicing and dicing bonds, he is bringing the concepts of securitization and syndication to Germany. “My basic goal is to shorten the period in which assets lie around stinking up our balance sheet,” he says.
Schmidt is going to need all the risk management he can get over the next couple of years. Some analysts fret that, although Hypo is less exposed to the troubled equity markets than are many rivals, it’s still plenty exposed - a fairly frightening prospect in the medium term. “It may not be an investment bank, but it’s definitely a capital markets play,” says Deutsche Bank analyst O’Connor. Others worry that Hypo may not have done its due diligence on Bank Austria’s loan book. Attendees at the March earnings announcement were unconvinced by Schmidt’s explanation of BA’s credit quality. “People are nervous because we’ve been through this once before,” says Piers Brown, Commerzbank Securities’ banking analyst in London. “And Bank Austria has always been quite an opaque institution.”
There’s also skepticism on several fronts about Schmidt’s merger strategy, especially about whether he can squeeze savings out of consolidation. “If they couldn’t deliver cost savings with the HypoVereinsbank merger, how can I be confident they can deliver with Bank Austria, where there is much less overlap?” asks Sanford C. Bernstein’s Kavouriadis. And some observers think Schmidt needs to manage his acquisitions more tightly. By allowing them to maintain strong local identities, he runs the risk of forfeiting too much control over performance. “Bank Austria is still holding its own press conferences, which is a bit weird,” says Brown. “If Hypo doesn’t tie things together, the market is going to say, ‘What’s the point?’”
Yet Schmidt seems serenely confident in his master plan as he approaches retirement. Bank insiders say that it’s too early for succession rumors to begin swirling but that Schmidt has his Vorstand members competing to turn in winning performances from their respective divisions. In the interim, investors expect more big changes to Hypo’s portfolio, especially after Germany abolishes the 50 percent capital gains tax that has kept banks from unloading corporate assets. Earlier this year Schmidt hired Goldman, Sachs & Co. investment banker Stefan Jentzsch to supervise the sell-off of $100 billion worth of industrial holdings.
These days, when Schmidt talks about a construction site, you have to wait until he finishes his sentence to be sure whether he’s talking about the Theatinerstrasse project or his strategy for Hypo. “This is not a prefab house,” he says. “It’s always in progress.” As European banking reshapes itself, he will want to make sure that his legacy is an enduring monument, not another Bavarian white elephant.
