* French banks want to tap in to Germany's faster-growingeconomy
* Small and medium-sized companies offer long-term potential
* French banks have to overcome suspicion and local loyalty
By Andreas Kröner and Lionel Laurent
FRANKFURT/PARIS March 19 (Reuters) - France's big banks areembracing an unlikely challenge - to prise away some ofGermany's mighty Mittelstand of small and medium-sizedenterprises (SMEs) from their local banking partners.
BNP Paribas, France's largest bank by assets,wants to boost its German business by over a quarter by 2016. Toachieve that, it will have to pick off select SMEs, which inGermany make up about 18 percent of the economy outsidefinancial services, compared with 6 percent in France and 7percent across the European Union.
If a bank can establish a relationship with such Mittelstandcompanies - often highly specialised manufacturers - it can meana partnership stretching for decades, making it a valuablesource of earnings despite low profit margins.
But Germany's SMEs already have long-standing partnershipswith local lenders that pass on their lower funding costs.
BNP does not aim, therefore, to usurp the Mittelstand'sso-called house banks, usually a local savings bank orco-operative bank, but instead take on large national playerssuch as Commerzbank, Deutsche Bank andUniCredit's HypoVereinsbank, which support firms' morecomplicated transactions.
Germany's savings banks have over 40 percent of theMittelstand market, followed by co-operatives with around 20percent. Private banks such as Deutsche Bank, Commerzbank andBNP have around 14 percent.
"The idea to expand business with middle-sized companiesisn't new ... (but) it makes a lot of sense for us to targetbigger 'Mittelstand' companies more intensively, because we canmeet their needs around the world," said Torsten Murke, thedeputy chairman of BNP's German operations.
That means courting people such as Christian Sedlatschek,the chief financial officer of Meggle, a Bavarian dairy withworldwide sales of 1 billon euros, who already does businesswith 10 banks and is loath to change.
"Banks have to know our company, they have to enjoy ourtrust, and they have to take care of us intensively," he said.
In 2013, BNP won more than 100 new corporate customers inGermany, attracted by its international network, Murke said.
"Turkey is a good example. It is a main trading partner ofthe German economy, and more than 5,000 German companies haveinvested in Turkey," he said. "We are working on a closercooperation between BNP branches in both countries."
BNP, active in Germany since 1947, is planning on hiring 500more staff in Germany by 2016 and is aiming for revenues to riseto 1.5 billion euros by then from 1.1 billion in 2012.
YEARS OF GROWTH
Germany's size, economic strength and financial conservatismmean it remains a potentially profitable market, provided bankscan break into the tight-knit Mittelstand world.
The German economy is around a third larger than France'sand expected to grow by 1.8 percent this year, according to theEuropean Commission, compared with 1 percent for France and 1.2percent for the euro zone.
There is also the scope to sell more products. Despite itslarge size, Germany's capital markets remain relatively small,with corporate bond issuance of $579 billion in the 10 years to2013, compared with $666 billion in France and $664 billion inthe UK, according to Thomson Reuters data.
French banks, after shedding risky assets and boosting theirloss reserves in the wake of the financial crisis, are keen toexpand beyond their sluggish home market.
In addition to BNP, Societe Generale is alsolooking to attract more German corporate clients after raising1.5 billion euros ($2.1 billion) in retail deposits from itsGerman brand Gefa in 2012.
Germany currently accounts for around 4 percent of SocieteGenerale's annual turnover.
"Societe Generale sees Germany as a growth market for yearsto come," said the bank's Germany chief, Guido Zoelle.
"Our main focus is companies that are active on capitalmarkets and that are active in countries where Societe Generalehas a big footprint, such as France, Eastern Europe, Russia orAfrica."
Credit Agricole is also considering expanding itslocal consumer operations in Germany, according to a bankingsource familiar with its strategy.
"The attraction would be to get more deposits from Germanyand to offer more universal banking products," the source said.
Credit Agricole declined to comment.
SUSPICION AND TRUST
While large German companies are usually comfortable workingwith foreign banks, small and medium-sized firms can be wary.
"There is suspicion that these banks will withdraw from theGerman market in case of a new crisis," said Bernd Supe-Dienes,who along with his brother Rudolf runs an industrial cuttingtools manufacturer in Overath, a city in the Rhine-Ruhr region,Germany's industrial heartland.
"We've been working together with most of our banks for 40or 50 years," said Supe-Dienes, the third generation to managethe family firm, which has annual revenues of around 45 millioneuros and relies on a local savings bank and Deutsche Bank forits banking needs.
Stefan Wolf, CEO of Elring Klinger, a publiclylisted car parts supplier with yearly turnover above 1 billioneuros, said he was "always open" to working with new banks, butif his usual banks can match the product, there is no contest.
Elring Klinger now pays less than 1 percent for financing ofup to a year and pays only up to 2 percent for loans of up tothree years, reflecting the thin margins on offer.
French banks face another hurdle in that their cost offunding is higher than German banks. French banks pay on average0.6 percent more than their German counterparts to sellshort-term debt to investors, further hitting profit margins.
There is also plenty of competition, with over 1,800 lendersin Germany, far higher than in any other eurozone country andmore than three times the number in France.
ACQUISITIONS?
BNP's strategy of using its international network to drivegrowth is a path well worn by HSBC Trinkaus, a unit of Europe'slargest bank, which, though bought by London-based HSBC in 1992,traces its history back to Duesseldorf in 1785.
HSBC Trinkaus is aiming to double its corporate client baseover the next four years, from about 1,500 now. To meet thatgoal it is emphasising its network in Asia and Latin America,and also widening its focus beyond large clients to includesmaller companies with annual sales of 35 million euros or more.
Commerzbank and Deutsche Bank are also upping their game,with Commerzbank targeting growth of 5 percent per year in theMittelstand market, and Deutsche expanding the number oflocations it deals with corporate clients to 250 from 70.
Stiff competition from local players has promptedspeculation that BNP might look at acquisitions to make its markin Germany, particularly as it has finished shedding riskyassets, unlike German rivals such as Commerzbank and Deutsche.
The French bank recently agreed to buy Polish bank BGZ for$1.4 billion, but sources close to BNP have played down theoften-cited prospect of it buying the German government's 17percent stake in Commerzbank.
Kepler Cheuvreux analyst Cyril Meilland said in a note toclients that a more likely alternative target could be IKB, oneof Germany's first banking casualties of the financial crisis,today owned by private-equity group Lone Star.
BNP declined to comment.
German banks are taking the competition in their stride.
"It's not surprising that corporate banking in Germanyattracts competitors," said Stephan Winkelmeier, finance chiefat BayernLB, one of Germany's largest state-backed banks. "(But)we live by word-of-mouth recommendation. Our business withexisting clients is growing, and we are winning new clients aswell." ($1 = 0.7214 Euros) (Writing by Carmel Crimmins; Editing by Will Waterman)
HSBC Holdings (HSBA)