Postbank Public Offering Goes Ahead

Postbank officials on Saturday announced that they would postpone the initial public offering from Monday to Wednesday and lower the share price from between €31.50 ($37.90) and 36.50 to between €28 and €32.

"We had to go with what the market was telling us and the market is always right," Klaus Zumwinkel, the CEO of Postbank's parent company, Deutsche Post, told reporters on Sunday. He added that a couple of days of postponement for the public offering surely didn't make a difference after years of preparing the move.

Company officials are expected to raise about €2.6 billion ($3.1 billion) with the initial public offering -- €400 million less than they had hoped for to reduce debt and expand Postbank's distribution network in Europe.

Postbank will sell two-thirds of the 82 million Postbank shares to the public in addition to offering a €1 billion convertible bond issued by Deutsche Post that will pay between 2 and 3 percent interest and can be exchanged for shares in three years, Bloomberg reported.

Speculation about the success or failure of Postbank's public debut has been rife and the road to the IPO has been anything but smooth. There have been leaked memos, accusations of overpricing, scathing media reports decrying Germany's financial community as a bunch of gossips whose favorite activity is preaching defeatism, especially when it comes to financial markets. The rumor mill has only been picking up speed as the big day approaches.

But despite the criticism of a very sloppy preparation for this important stock market debut, which many hope will revive the country's moribund shareholder culture, the bank floatation has potential and a good many analysts and small investors think it could succeed. However, competition in Europe is intense and Postbank will have to prove itself before it fully gains the confidence of the financial markets.

As a private bank, Postbank, Germany's largest retail bank by customers, can hold its own with the nation's other big banks such as Deutsche Bank, Dresdner Bank und Commerzbank.

But its real direct competitors are outside Germany's borders: Banco Popular in Spain, Italy's Unicredito, Austria's Erste Bank, Svenska Handelsbanken in Sweden or the British banks Alliance & Leicester as well as the Royal Bank of Scotland. These are all institutions which conduct most of their business in the retail sector.

Efficient models

These banks are largely profitable, efficient and count among the darlings of analysts, who are fond of recommending their stock to clients, especially since the banking sector offers investors deals like never before and the private banks are, as a group, undervalued. The price-earnings ratio based on 2005 estimates is averaged at just over 10. The Postbank's price-earnings ratio is between 11 and 13.

That means as far as profitability goes, Postbank trails other European banks. "The return on equity in low compared to international competitors," Guido Hoymann of the Frankfurt-based Metzler Bank told DW-WORLD. The return on equity at Postbank is barely in the double digits. With English banks, the return lies at around 20 percent in some cases, he said, adding that French banks have a rate of about 15 percent.

The three-pillar handicap

According to Hoymann, Postbank's profitability suffers under the dominance of Germany's savings and cooperative banks, especially since the savings banks control around 50 percent of the retail banking market.

Experts largely agree that Germany's historical banking landscape, structured around a so-called three-pillar system of private banks, savings banks and cooperative banks is one of the main barriers to a much-needed consolidation of the country's banking sector. The dense network of banking branches makes Germany one of Europe's most competitive countries. That intense competition in an already fragmented market hurts profit margins in the credit business. The result: Rates of return are relatively low.

European banking champions

The view is different in the rest of Europe.

"In France, 60 percent of the market is controlled by five of the biggest banks," said Jörn Kissenkötter, an analyst with M. M. Warburg. In Germany on the other hand, the five biggest institutions only have about 20 percent of the market.

In Italy, one of the country's oldest banks, Banca Commerciale Italiana, has joined forces with five region savings banks for form Unicredito Italiano. While profits have suffered recently, Unicredito still counts among Europe's most successful banks.

British banks have also been held up as models of retail banking, although according to Hoymann, growth potential in this market "looks to be exhausted."

Spain has also proved to be a lucrative banking location. Its third largest bank, Banco Popular, is proving to be a "monster when it comes to returns," Kissenkötter said. According to the financial daily Handelsblatt, Banco Popular has an income-to-equity ratio of 37 percent. Its cost-income ratio for 2005 is estimated to come in at 33 percent. For Germany's Postbank, that figure is forecast to be 71.7 percent. Part of Banco Popular's success, according to Kissenkötter, has to do with the Spanish economy, which is enjoying a boom in the real estate market.

Postbank in pretty good shape

Banker Hoymann is not ready to take part in the widespread scepticism about Postbank's stock market debut. "There are good possibilities," he said. "After all, the bank has 11.5 million customers."

Moreover, the bank has more in deposits than it does in loans paid out and is seen by analysts to be more resistant to future banking crises than big players like Deutsche Bank, Commerzbank or HypoVereinsbank. The other big guys have focused largely on investment banking and neglected the retail sector to their disadvantage. The stock market has been flat; the private customer has suddenly become interesting again.