That’s why I would rather buy Deutsche Bank shares than Commerzbank shares
It may sound crazy to say that I would prefer Deutsche Bank (WKN:514000) shares to any other stock. For now it seems almost impossible to find anything positive about Deutsche Bank.
In fact, though, there's one point I like better about Deutsche Bank stock than Commerzbank (WKN:CBK100) stock.
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Why retail and corporate banking has become difficult
This point refers to retail and corporate banking. Virtually everyone, whether an individual or a business, needs banking services like a checking account, a demand deposit account or a custodial account.
Every now and then you need a loan. Be it for building a house or if companies need money for an investment. But how exactly do banks make money with these services?
Banks make their money in two main ways. One is by charging fees, such as for using a checking account. On the other hand, from the difference between interest received on loans and interest paid, for example, for overnight or term deposit accounts.
So you pay for a real estate loan, for example, about 2% interest. A call money account yields, if you're lucky, 0.5% return. The difference is the income of the bank. Of course, employees, investments and so on must be paid from it, so the interest rate difference is not one-to-one with the bank's profit.
Before the Internet existed, it was not uncommon to use all financial services at your local bank. Checking account, demand deposit account, and if available, the home loan as well. Comparing the different conditions was tedious, because many branches had to be visited to get an offer.
In short, banks engaged in retail and corporate banking had it pretty easy. Customers were reluctant to switch, ensuring that banks could set terms however they wanted, as long as they didn't overdo it too much.
Times have changed with the triumph of the Internet, in more ways than one. On the one hand, customers can compare conditions online within a very short period of time. For many products, there are even price comparison portals that will spit out the most lucrative provider within a fraction of a second.
Secondly, the Internet has given direct banks, i.e. institutions without branches, a tailwind. These were around before, but transactions over the phone are, well, not to everyone's taste. The Internet greatly simplifies communication between direct bank and customer.
So the ease of comparison and increased supply have significantly lowered customers' inhibitions about switching certain services, putting more focus than ever on one thing: terms and conditions!
In the private and corporate customer business, conditions have thus become practically the only factor that counts. If my bank charges me two euros a month for account maintenance today, I'll switch immediately. Because I can have it for free. And I believe that more and more people are thinking and acting in this way.
That makes the private and corporate customer business to a leg-hard business – unless you are the bank, with the lowest cost structure. I do not believe that institutions like Commerzbank or Deutsche Bank with their expensive branches have a particularly low cost structure.
This is exactly why I would rather buy Deutsche Bank shares than Commerzbank shares. Because Commerzbank is much more dependent on retail and corporate banking than Deutsche Bank is.
Here's how big the retail and corporate banking share is
A look at the annual reports of the two banks shows that Commerzbank is practically exclusively active in private and corporate customer business, while at Deutsche Bank it accounts for less than half of earnings.
| Retail and corporate banking as a percentage of total revenues | |
| German bank | 38,5 % |
| Commerzbank | 98,2 % |
Source: Annual reports 2017
Anyone who invests in Commerzbank today must be aware that it is at the mercy of fierce competition, in which more and more the conditions determine victory or defeat.
I believe that this development is far from over. While older people today continue to rely more on their local bank, no matter how much the daily deposit yields, younger people are already taking advantage of the Internet's capabilities.
Twenty years from now, the young will become the old – and they'll still be comparing terms online. And the old of today will no longer exist. So for traditional branch banks, icy times could be ahead. And that would hit Commerzbank harder than Deutsche Bank.
Why I would buy neither one nor the other
Still, I wouldn't buy Deutsche Bank stock today either, even though it's active in some other segments besides retail and corporate banking, such as investment banking.
That's great for now, but unfortunately I have absolutely no idea about these deals. So neither Commerzbank stock nor Deutsche Bank stock is going into my portfolio for the foreseeable future.
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Thomas Brantl does not own any of the mentioned shares. The Motley Fool doesn't own any of the stocks mentioned above.