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Quick Money—
Run on the Banks

Which companies will survive the Covid-19 pandemic, and which will not? Banks play a key role in this question. How DZ Bank is moving quickly to the aid of its clients.

09/2020

Shapes, colors, light—the interior of the DZ Bank building by architect Frank O. Gehry in Berlin is a work of art.DZ Bank

Covid-19 set off a domi­no effect as one nation­al econ­o­my after the other began enter­ing a cri­sis mode. Almost every day we see pub­lic pol­i­cy, busi­ness, and finan­cial experts present new facts and fig­ures about the econ­o­my. They fre­quent­ly draw com­par­isons to the glob­al reces­sion sparked by the col­lapse of the Lehman Broth­ers invest­ment bank in 2008. At that time it was the inter­na­tion­al bank­ing sec­tor that sent shock waves rip­pling through the real econ­o­my. Now it is the other way around. With busi­ness­es closed, con­tain­er ports desert­ed, trade fairs can­celled, air traf­fic at almost a stand­still, and near­ly a bil­lion peo­ple under lock­down or other con­tact restric­tions, exports have plum­met­ed and glob­al con­sump­tion stands in shock. Finan­cial mar­kets are expe­ri­enc­ing enor­mous tur­bu­lence and the price of oil is in free fall. Yet anoth­er dif­fer­ence defies com­par­i­son with 2008: the glob­al econ­o­my will fall twice as far as it did then. The Inter­na­tion­al Mon­e­tary Fund (IMF) antic­i­pates the most severe glob­al reces­sion in almost a cen­tu­ry.

Run on the banks

When many com­pa­nies began feel­ing the effects of the pan­dem­ic in March 2020 in the form of falling demand and short­ages in sup­ply, the banks saw a run on their ser­vices. “The need for liq­uid­i­ty was rel­a­tive­ly sta­ble over recent years, but finan­cial insti­tu­tions are now hav­ing to meet a steep and sud­den rise in demand,” says Dr. Stephen Hell­ham­mer, a part­ner at Porsche Con­sult­ing. The banks are scram­bling to resus­ci­tate the econ­o­my with the help of loans—no easy task given the dynam­ics of the pan­dem­ic. “On the one hand, we obvi­ous­ly have to min­i­mize risk for our­selves, yet at the same time we want to give our clients the great­est pos­si­ble sup­port,” says Stephan Ortolf, who heads the cor­po­rate cus­tomer divi­sion of DZ Bank in Frank­furt am Main. One thing is clear: not every com­pa­ny will sur­vive this cri­sis. “A cru­cial fac­tor is whether it was already hav­ing trou­ble before the pan­dem­ic, and also whether its busi­ness model will be viable in the future,” explains Ortolf. He is very well informed about the cur­rent sit­u­a­tion of many busi­ness own­ers and man­ag­ing direc­tors. “Most of our clients are sta­ble, and are also able to tight­en their belts for a pro­tract­ed peri­od of time. But they are con­cerned. No one knows, of course, how long this sit­u­a­tion will go on.”

Stephan Ortolf, Director, Corporate Customer Division, DZ Bank in FrankfurtDZ Bank

Since March, near­ly all of DZ Bank’s 250 cor­po­rate account man­agers have been advis­ing their clients—medium to large-sized com­pa­nies and multi­na­tion­al corporations—on all finan­cial mat­ters from offices set up at their homes. “Our account man­agers and loan ana­lysts are work­ing over­time right now,” says Ortolf. With­in just a few weeks, the bank had received near­ly 40,000 queries by phone and e‑mail. “By early May 2020 the virus had trig­gered an increased need for liq­uid­i­ty of 4.5 bil­lion euros,” he reports. Gov­ern­ment assis­tance pro­grams are expect­ed to cover three bil­lion euros. DZ Bank is work­ing to pro­vide 1.5 bil­lion by means of new loans, syn­di­cat­ed loans, and extend­ed lines of cred­it. “But this fig­ure could eas­i­ly end up being con­sid­er­ably high­er,” Ortolf observes.

“DZ Bank was well pre­pared for the onslaught,” says Porsche con­sul­tant Hell­ham­mer, who has been advis­ing the bank for years now. “Meet­ing these addi­tion­al require­ments prompt­ly is an enor­mous task that demands a lot from the employees—all the more so because they were mov­ing their work sta­tions to their homes at the same time. That is only pos­si­ble with dig­i­tal tech­nol­o­gy plus flex­i­bil­i­ty and moti­va­tion on everyone’s part.” Ortolf explains that in addi­tion to chan­nel­ing gov­ern­ment loans from KfW Bank, DZ Bank pro­vides spe­cial finan­cial prod­ucts such as fac­tor­ing and for­feit­ing ser­vices in con­nec­tion with assis­tance pro­grams as well as promis­so­ry notes and espe­cial­ly loans. Green bonds also con­tin­ue to be pop­u­lar. “Medi­um-sized com­pa­nies, which here in Ger­many are fund­ed pri­mar­i­ly by their own equi­ty or by [bank] loans, have a lot of needs right now,” he says. “Over time, the drop in sales and the risk of pay­ment defaults will lead to a short­age of funds. By con­trast, large cor­po­ra­tions are more diver­si­fied and have bet­ter access to cap­i­tal mar­kets. They’re also ben­e­fit­ing from the expe­ri­ence their Asian loca­tions have gained with the effects of Covid-19.”

At a Glance

The DZ Bank Group

… is Germany’s second-largest banking group, with assets of around 560 billion euros. It is the leading institution in the network of around 850 cooperative banks—the “Genossenschaftliche FinanzGruppe Volksbanken Raiffeisenbanken”—which owns a majority share of it and for which it functions as a central bank.

Oversight expands scope

Ortolf phones or holds video con­fer­ences with his clients on a daily basis. Speed is of the essence. “We seek the best pos­si­ble solu­tion for each and every cus­tomer, and are will­ing to take risks in the process—if they are care­ful­ly con­sid­ered. After all, we can only over­come this cri­sis togeth­er,” he says. DZ Bank and other finan­cial insti­tu­tions are also ben­e­fit­ing from a tem­po­rary loos­en­ing of cer­tain equi­ty and loan-relat­ed require­ments by the Ger­man finan­cial reg­u­la­to­ry author­i­ty BaFin and the Euro­pean Cen­tral Bank. Experts esti­mate that has gen­er­at­ed an addi­tion­al cred­it capac­i­ty of up to nine tril­lion euros.

Not every loan appli­ca­tion is suc­cess­ful. Some com­pa­nies fall through the cracks. Eval­u­a­tions con­sid­er a num­ber of fac­tors such as cred­it his­to­ries, cap­i­tal resources, loan amounts, rat­ings, and prospects for the respec­tive sec­tors. “Our cred­it poli­cies have strong safe­guards, of course,” says Ortolf. “But the cur­rent adjust­ments mean that we actu­al­ly have more lee­way right now in our deci­sions. A com­pa­ny that was in good shape before the cri­sis but is now los­ing rev­enue or defer­ring pay­ments is not auto­mat­i­cal­ly given a red light. Instead what we try to do is assess on an indi­vid­ual basis what the ‘post-coro­na’ out­look will be—to the extent that’s pos­si­ble.”

The project with Porsche Consulting

Digital preparation

In addition to blending solidarity and empathy with solid risk management, DZ Bank also needs to be quick in its response. To master the wave of virus-related tasks even more effectively, it worked with Porsche Consulting to set up a virtual environment within just a few weeks. This combines all the information and major applications into a system that account managers can use while working from home. An electronic signature tool is expected to accelerate work by enabling seamless document transfer. DZ Bank also benefits from numerous digitalization initiatives in the past. Before the crisis it had already worked with the management consultancy to introduce digital credit files. In addition, a standardized process for the corporate customer sector is being set up to continuously evaluate all processes and derive improvements.

Innovation as a lifeline

The extent of the pandemic’s con­se­quences for the glob­al econ­o­my will depend above all on the dura­tion of the virus-con­tain­ment mea­sures and the step-by-step rein­tro­duc­tion of nor­mal social and eco­nom­ic rou­tines. But Ortolf is opti­mistic. “I’m con­vinced that the inno­v­a­tive power of Ger­man com­pa­nies will out­last the cri­sis. More­over, we’re going through a high-octane ver­sion of the dig­i­tal trans­for­ma­tion right now. This boost will gen­er­ate new ideas and busi­ness mod­els for us all.”

Survey

Mid-sized businesses worried

DZ Bank wanted more precise knowledge about how medium-sized businesses in Germany are doing, so it surveyed more than 1,000 companies in April 2020. One in five respondents had already applied for government assistance. More than half had furloughed employees. Eight percent had already cut jobs or were planning to do so at the time of the survey. But 60 percent were using company vacation shutdowns to avoid layoffs due to overtime.Twelve percent reported having restructured their business models during the shutdown. These include primarily smaller companies with annual sales of less than five million euros. In light of the current recession, most of these companies are viewing the future in substantially more pessimistic terms than before. While three quarters of them described their situation as “good” or “very good” before Covid-19, now only half do. Companies in the metal-building, mechanical engineering, and automotive industries as well as in service industries like the trade fair, restaurant, and tourism sectors have been especially hard hit. Those in the construction, chemical, pharmaceutical, and plastics industries as well as agriculture are considerably more confident. They are largely unaffected by the negative ramifications, or—like some parts of the food and IT sectors—are even seeing higher sales.
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