Financial Centre Report

Building Bridges – Frankfurt and Europe after Brexit. The new Financial Centre Report from Frankfurt Main Finance

The new Financial Centre Report, Building Bridges – Frankfurt and Europe after Brexit, from Frankfurt Main Finance has just been released. Designed as a magazine, the Main Metropolis is presented from varying perspectives and demonstrates the city’s strengths and the distinct characteristics that set it apart. The first section of the report is devoted to the many facets of the Financial Centre Frankfurt. The second part of the report, Insights, analyzes economic issues and takes a critical look at the opportunities for the Financial Centre following Brexit.

In the forward from Hessian Minister for Economic Affairs, Tarek Al-Wazir, the minister recalls the rise of Frankfurt as the most important Financial Centre in Continental Europe. He points to the multitude of challenges the financial industry faces today. Reflecting on the demands on the industry to re-invent and re-establish itself through digitization. Helping to tackle these challenges is the thriving FinTech scene in the Rhine-Main region.

Another current challenge is coping with the reorientation of the European financial sector following and finding future oriented solutions for this. The title of the Financial Centre Report, Building Bridges, is born from this challenge. The report explains how Frankfurt and the Rhine-Main region are helping to future-proof the European Financial Sector and continue ensuring it can efficiently support the real economy.

The publication from Frankfurt Main Finance casts a spotlight on the Financial Centre Frankfurt and introduces insights that work together to paint an impressive and coherent picture. After the lighter, more personal look at the Main Metropolis in the first section, the following half delves into a fact-based analysis of the Financial Centre Frankfurt and the region. Readers will appreciate the careful exploration of the day’s pressing topics: What does Brexit mean for Frankfurt? The current and future relationship between the real economy and banks. What is the state of long-term financing and how will the German economy be affected by Brexit?

Crumbs or Pie? How much will Frankfurt’s property market benefit from Brexit?

A recent study from Deutsche Bank Research has just been released which outlines the potential effects of Brexit on Frankfurt’s property market. The study examines the Financial Centre Frankfurt’s office and residential markets, current and future pricing trends, as well as trends in demand and availability. Furthermore, the analysis from Deutsche Bank compares several European financial centres, showing that Frankfurt is in several ways an obvious and affordable choice for financial services relocated from the United Kingdom.

Executive Summary

“In view of the high level of political uncertainty surrounding the United Kingdom’s decision to leave the European Union, it will be some years until the size of the Brexit pie, i.e. the relocation of companies and employees, can be determined fully. Regardless of the final outcome of the negotiations between the UK and the EU, the city of Frankfurt is likely to benefit.

Frankfurt is already continental Europe’s main financial hub, and compared to other European cities, it can boast a range of additional advantages such as low rents and residential property prices, good infrastructure and a highly dynamic economy. However, considering the strengths of its European and also non-European competitors, Frankfurt will end up with only a piece of the Brexit pie.

Frankfurt’s property market would gain considerable momentum even if only a relatively small number of British companies and employees moved here. Growth in employment in the wake of Brexit should stimulate demand for office space, thus contributing to a reduction in vacancies and rising rents in the office market close to the city centre. Following the referendum on Brexit, we have raised our average rent increase expectations in the top segment to over 2% per year by 2020 (double what had previously been anticipated for the 2018-2020 period).

Bottlenecks have existed in the housing market for some years. A large demand overhang – the shortage of housing runs to several tens of thousands of homes – and a lack of undeveloped land are the main reasons why prices have risen by around 25% since 2009. An additional Brexit effect could drive prices up significantly. The rule of thumb in this context is the price per square metre increases by EUR 25 for every 1,000 missing homes. Assuming additional demand for 5,000 homes, residential property prices will increase by EUR 125 or around 4% compared to current levels.”

The complete study from Deutsche Bank Research can be downloaded here.

New edition of Banking Business in Germany

The financial crisis, extensive regulatory requirements and the impending Brexit confront the international and national banking sector with daunting challenges. Yet, uncertain as the environment may be, the German market still offers opportunities to international banks and investors keen on setting up a branch or subsidiary in Germany.

The updated 5th edition of the guide to the Banking Business in Germany is a mine of information for international decision-makers and industry observers as well as bankers from abroad, already located in Germany and their headquarters in their country of origin. In the current edition of the guide, which is written in English and runs to more than 400 pages, financial services experts from PwC and the Association of Foreign Banks in Germany elucidate the manifold amendments and specifics of the German regulatory framework. They also furnish an overview of ongoing developments in the German banking system as well as deposit guarantees, labour law and taxation.

Equally beneficial for English-speaking banking representatives is a glossary, explaining common abbreviations in German banking usage, such as “GroMiKV”, short for “Großkredit- und Millionenkreditverordnung” or “Large Exposure Regulation”. No less helpful is a comprehensive index for easy guidance through the new publication.

At the book presentation on 14 October, Dr Andreas Dombret, member of the Executive Board of the Deutsche Bundesbank, addressed a large gathering of members of the Foreign Banks Association on the impact of Brexit on banking and banking supervision. His remarks highlight the relevance of these and other issues for international business leaders, who regard Germany as an important financial location now and especially in the future.

The 5th edition of Banking Business in Germany can be purchased here.

On the Continent Financial Centre Frankfurt Pulls Ahead

Frankfurt has taken the lead amongst the financial centres in continental Europe. In their 10-year anniversary study, Financial Centre of Frankfurt – Making Further Headway, Helaba economists found Frankfurt to be ahead of other European financial centres. Frankfurt especially leads in terms of institutions like the European Central Bank, outstanding IT-infrastructure, comparably low rent and cost of living and the excellent transportation network.

The Financial Centre Frankfurt scored particularly well in two core areas. First, the city has made substantial progress in terms of financial research and teaching, even gaining in international stature. The combination of Frankfurt’s Goethe University and Frankfurt School of Finance & Management offers a top-quality range of teaching and research opportunities. Next, concerning trends in the financial sector, digitalisation is the dominating theme. Technological change in the finance industry is being primarily by FinTechs and large internet corporations. Efforts in the continued expansion of Frankfurt and the surrounding region as a German and European FinTech hub have not gone unnoticed. Helaba’s Chief Economist and Head of Research, Dr. Gertrud Traud explains, “For Frankfurt to maintain and develop its position, expanding the city’s status as the German and Continental European fintech hub as well as further strengthening its intellectual infrastructure in respect of a financial centre’s capacity for innovation will be of crucial importance.” One significant achievement in this area will be the forthcoming FinTech hub, slated to open in September 2016.

In their current assessment of the financial centres of Frankfurt, Paris and London, Helaba’s economists applied five core criteria, which they consider indispensable for an international financial centre to position itself successfully in the long term. These are: banks, stock exchanges, finance-related teaching and research, trends in the financial sector as well as location-specific qualities.

Download the complete study.

Support for Planned Merger between Deutsche Börse and London Stock Exchange from Majority of German Financial Industry

According to a recent survey of financial institutions and service providers by the Center for Financial StudiesCenter for Financial Studies, 63% of the companies surveyed are fundamentally in favor of the planned merger between London Stock Exchange (LSE) and Deutsche Börse. However, 35% of respondents would only support the merger in case of a Brexit if the holding’s headquarters were to remain in Frankfurt and therefore in the euro area. 18% of respondents only view the merger positively provided that Britain does not leave the EU. Just 9% support the planned merger unreservedly. By comparison, 25% of the respondents are against a merger in any case.

Financial industry expects the stock exchange merger to negatively impact the Financial Centre Frankfurt if the holding is based in London

A majority of the financial industry agrees that a combined stock exchange holding with its headquarters in London would negatively impact the Financial Centre Frankfurt. The consequences are rated as negative by 64% in case of a Brexit, and by 57% in case Britain remains in the EU.

“The financial industry is convinced by the industrial logic of the merger, although negative impacts on the Financial Centre Frankfurt are foreseen if the holding is based in London,” Professor Volker Brühl, Managing Director of the Center for Financial Studies, interprets the results.

The Financial Centre Frankfurt would benefit from a Brexit, despite negative expectations for the EU and UK economies

In case the majority of the British public votes to exit the EU on 23 June, the impacts on economic growth are expected to be negative in all affected countries. A large majority of the respondents (82%) believe the British will be hit hard. By comparison, only half (48%) anticipate negative consequences for the EU. By contrast, 69% of respondents expect the Financial Centre Frankfurt to emerge as a major winner from a Brexit scenario.

According to polls carried out in the UK, the outcome of the referendum remains entirely open. In Germany the majority of survey participants (62%) expect the British public to vote to remain in the EU.

The possibility of a Brexit leading to other countries exiting the EU is regarded as unlikely by just over half the respondents (51%), while 41% would expect other countries to follow suit.

“Of course we are not in favor of a Brexit. It would not only be detrimental for Great Britain, but also Germany and Europe as a whole. But should it come to pass, it would clearly be an opportunity for Frankfurt as a Financial Centre, as confirmed in the survey,” explains Hubertus Väth, Managing Director of Frankfurt Main Finance e.V.

CFS Index Falls Sharply: Sentiment of Financial Institutions Reaches Low Point

Financial industry posts sharp decline in revenue and earnings growth

The CFS Index, which measures the business climate of the German financial industry on a quarterly basis, falls significantly by 4.2 points to 108.7 points in the first quarter of 2016. The decline is largely attributable to the weak development of revenues and business volume and the reduced earnings power of financial institutions and service providers. This development therefore confirms the expectations of the companies, which had already forecast declining growth in the previous quarter. In particular, the sentiment of the financial institutions has now reached a low point at 97.9 points, although they are expecting earnings to take an upturn in the current quarter. The investment volume of the financial institutions increased in the first quarter, while the number of employees remains stable at a low level.

“The expectations of the financial institutions regarding future earnings performance this year remain modest and illustrate the level of uncertainty on the capital market,” Professor Jan Pieter Krahnen, Director of the Center for Financial Studies, interprets the results. Dr. Lutz Raettig, Chairman of the Executive Committee of Frankfurt Main Finance e.V. adds, „Growing investment volumes and stable employment levels in financial institutions are a positive signal for the Financial Centre Frankfurt.”

In line with the financial industry’s expectations in the previous quarter, revenues/business volume took a downturn in the first quarter. The corresponding sub-index for the financial industry falls by 11.4 points to 110.5 points. The revenues of the financial institutions, at 104.5 points, are significantly lower than in the first quarter (-12.9 points). Service provider revenues, at 116.5 points, are down 9.9 points on the previous quarter, and a sustained decline in growth is expected in the current quarter. The financial institutions, on the other hand, are anticipating a slight upturn.

Earnings growth also declined in the first quarter, as forecast by the survey participants. In particular, the earnings sentiment of the financial institutions has hit a low point. The corresponding sub-index falls by 10.3 points to 97.9 points, although they are anticipating an upturn in the current quarter. The sub-index for service providers stands at 112.8 points, down 8.5 points from the first quarter. A slight downward trend is expected to persist in the current quarter.

Financial institutions increase investment volume and keep employee numbers stable at a low level

The financial institutions raised their investment volume in product and process innovations in the first quarter of 2016 and they plan to continue this positive trend in the current quarter. The corresponding sub-index rises by 3.9 points to 112.5 points. The service providers, on the other hand, show a small decline in investment growth of 1.6 points to 113.6 points. This slight downturn is expected to become more pronounced.

The financial institutions kept their employee numbers almost unchanged at a low level. The sub-index for this group falls by just 1.0 points to 99.0 points. The service providers hired fewer new employees in the first quarter of 2016 than in the previous quarter. The corresponding sub-index falls by 4.2 points to 111 points. While the financial institutions’ outlook for the current quarter remains virtually unchanged, the service providers are anticipating a stronger decline in recruitment in the second quarter of 2016.

The international importance of Germany as a financial centre is seen to be on the decline. The corresponding value falls by 3.8 points to 116.1 points. This decrease stems from the opinion of the financial institutions. The corresponding sub-index for this group stands at 113.5 points, down 7.2 points from the last quarter. The service providers’ assessment remains almost unchanged, down just 0.4 points to 113.5 points.

About the Center for Financial Studies
The Center for Financial Studies (CFS) conducts independent and internationally-oriented research in important areas of Financial and Monetary Economics, ranging from Monetary Policy and Financial Stability, Household Finance and Retail Banking to Corporate Finance and Financial Markets. CFS is also a contributor to policy debates and policy analyses, building upon relevant findings in its research areas. In providing a platform for research and policy advice, CFS relies on its international network among academics, the financial industry and central banks in Europe and beyond.

About the CFS Index
The CFS Index is compiled from a comprehensive quarterly survey among 400 decision makers in the German financial sector (return about 50% on average). The survey contains four questions about the participant’s view on different business parameters (business volume, earnings, employment level and investment volume in product and process innovations). The answers to the questions may be given as “positive”, “neutral”, or “negative” and a response is requested for the previous and the current quarter. Due to construction, the maximum index value is 150, the minimum index value is 50; a value of 100 signalizes a neutral business sentiment. The survey-panel consists of enterprises and institutions of the financial industry and selected companies that profit from the financial sector.

ICFRMx

ICFx Frankfurt Rhine-Main Indices

The ICFx Frankfurt-Rhine-Main indices reflect the listed economic strength of Frankfurt Rhine-Main region and illustrate the region’s diverse economic structure.

One can easily see the economy is strong in Germany’s third-largest metropolitan area: to start, in July 2012, the indices significantly outperformed the DAX, M-DAX, S-DAX and Tec-DAX price index over the past five years, beating all other German indices. A clear signal for companies considering settling in the region.

In total there are three indices

  • ICFx Frankfurt-Rhein-Main with 45 companies
  • ICFx Frankfurt-Rhein-Main with 30 companies
  • ICFx Frankfurt with 17 companies

The indices are calculated and published by the ICF Bank AG. They were designed by ICF and Frankfurt Economic Development GmbH in cooperation with FrankfurtRheinMain GmbH.

Admissions Criteria for the Frankfurt-Rhine-Main Index are:

  • A large number of employees must be employed in the Rhine-Main area.
  • The headquarters or a larger office must be located in the Rhine-Main area.
  • The company must be listed on the Frankfurt Stock Exchange.

To the indices: http://icf-markets.de/

CFS Index

CFS Index Edges Down

CFS Index: Financial institutions expecting decline in revenues and earnings, despite positive quarterly results

The CFS Index, which measures the business climate of the German financial industry on a quarterly basis, edges down 0.9 points to 112.9 points. The expectations deviate strongly from the current positive situation of the surveyed financial institutions and service providers. The firms’ revenues and business volume are significantly increasing. On the other hand, the financial institutions in particular are anticipating a strong decline in the current quarter. However, the investment volume is to remain almost unchanged. Job cuts at the financial institutions are also proving more modest than expected. The score of 100 on the jobs parameter now indicates a neutral sentiment, following significant personnel reductions in 2015. Read more