By Anjuli Davies
FRANKFURT (Reuters) - Global banks are quietly building up their investment banking teams in Frankfurt as the German deals market hots up, boosting the city's chances of being one of the financial centers to benefit most from Britain's vote to leave the European Union.
A surge of Chinese investment in Europe's largest economy and an expected pick-up in merger activity across Germany's chemical, manufacturing and drugs industries have prompted banks to base more staff in Germany. This is contrary to the usual approach of putting most of their deal-makers in London.
The trend puts Frankfurt in a good position to benefit from any shift of banking activity out of London after the Brexit vote, already bolstered by playing host to the European Central Bank and the EU's second biggest capital market, city and banking industry officials say.
"Germany is becoming a much more important market because it represents an increasing share of the global banking fee wallet," Alexander Doll, CEO of Barclays Germany (L:BARC) told Reuters.
When Britain leaves the EU it is widely expected that financial firms based in London will lose their "passporting" rights - an EU system that lets them operate across the bloc but be under the supervision of just one country's regulators.
That's prompting other financial centers like Paris, Dublin and Luxembourg to encourage banks, insurers and fund managers to build up outposts in their cities and obtain "passports" there.
Unlike other European countries, Germany has so far refrained from 'rolling out the red carpet' to bankers by offering big tax breaks or sending major government officials on big promotion trips, relying instead on a more low-key approach.
FOOT IN THE ZONE
With London still expected to remain a major financial center in Europe after Brexit, Frankfurt is marketing itself as a city where firms could base some operations without encouraging a mass exodus.
"Banks are looking to keep the bulk of their operations in the UK but some are hedging their bets on Germany," said Alex Howard-Keyes, a partner at the London-based international head-hunting firm Alderbrooke.
"If they're going to have to have a foot on the ground in the euro zone, Frankfurt seems to be the best place," he said, adding: "Frankfurt is a Brexit hedge plus it's in the biggest economy in Europe."
The head of investment banking for Deutsche Bank (DE:DBKGn) in Europe, Middle East and Africa (EMEA) Alasdair Warren told Reuters last month that he planned to base more bankers to cover the industrial sector in Frankfurt from London.
Last month, BNP Paribas (PA:BNPP) appointed two senior bankers to run its EMEA teams focused on the chemicals and car sectors in Frankfurt, roles that had formerly been in Paris.
Several banks and head-hunters who Reuters spoke to in Frankfurt said while there is no major flight out of London to the city, they are placing increased emphasis on the region.
One senior German banker, who declined to be named, told Reuters that in the coming months his firm plans to relocate several EMEA sector coverage teams to Frankfurt, which are currently based in London.
"We believe in the region and we believe in the market," said the banker, speaking anonymously as the plans have not yet been officially announced. "This wasn't Brexit related, but I don't think it harms us in that context." He declined to give precise details of the plans.
CHINESE INVESTMENT BIG LURE
One clear draw for international bankers is that Chinese investors have concluded deals worth more than $10 billion in Germany so far this year versus $3.7 billion in Britain, about 40 times as much as in all of 2015, Thomson Reuters data shows.
Germany represents a much smaller market for investment banking than Britain, it takes about 10 percent of the EMEA fee pool compared with the UK's 23 percent, but this is expected by bankers to pick up.
"Finally, Germany's M&A market has woken up," said a senior Frankfurt-based banker, who spoke on condition of anonymity.
"Germany was lagging behind, but now some of its key industries like chemicals and pharmaceuticals are becoming more active. The environment is a good one right now."
Britain has said it will open formal talks to leave the European Union by the end of March, but some banks have said they are already starting to look at relocating staff and operations as early as next year in case of a so-called hard Brexit, or loss of single market access.
There are banks which have decided it makes good business sense to make Frankfurt their preferred EU outpost and will start moving more staff there, said Oliver Wagner at the Association of Foreign Banks in Germany, without giving specific examples.
"None of the big ones will wait until the end of negotiations. There won't be thousands in the short term and Frankfurt can't cope with that, but these contingency scenarios are now drafted," Wagner added.
FRANKFURT PASSPORTING OUTPOST
Frankfurt has been pitching itself for years as an alternative European financial capital. It is one of the only cities in Germany to allow the building of high-rise office blocks preferred by big banks.
London, however, is far bigger. For example, U.S. investment banks base 2.6 percent of their European employees in Germany compared with 88 percent in Britain, according to data from country-by-country reports analyzed by think-tank Bruegel in 2014.
Some U.S. investment bankers believe the big winner from Brexit will be New York because some business currently carried out in London would naturally revert to their home headquarters.
But most global banks have a Frankfurt base so that they could obtain licenses to allow them to operate across the EU under the bloc's passporting scheme.
Frankfurt is home to 159 foreign banks and about 62,300 staff, statistics from Germany's central bank show.
About 30 banks in Germany currently use London to passport through Europe, of which half already have a subsidiary in Frankfurt, the Association of Foreign Banks in Germany says.
Frankfurt is now quietly making its case behind closed doors to firms across the world.
"Our approach is partnering with those who think about moving business. There won't be massive marketing like in other countries," Wagner said. "We do not see politicians from Berlin traveling to London to do any marketing for Frankfurt."
Promotional activity is being carried out by Frankfurt officials. Tariq Al-Wazir, economics minister in Frankfurt's state of Hessen, recently made a trip to Japan and South Korea speaking to financial institutions and companies about the benefits of Frankfurt in a post-Brexit world.
But one of the biggest challenges for Frankfurt officials is convincing banks that their city can compete with London as a good place to live. Paris's newly launched campaign asks: "When did you last book a weekend in Frankfurt?"
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