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FRANKFURT/PARIS (Reuters) - France's big banks are embracing an unlikely challenge - to prise away some of Germany's mighty Mittelstand of small and medium-sized enterprises (SMEs) from their local banking partners.
BNP Paribas (BNPP.PA), France's largest bank by assets, wants to boost its German business by over a quarter by 2016. To achieve that, it will have to pick off select SMEs, which in Germany make up about 18 percent of the economy outside financial services, compared with 6 percent in France and 7 percent across the European Union.
If a bank can establish a relationship with such Mittelstand companies - often highly specialized manufacturers - it can mean a partnership stretching for decades, making it a valuable source of earnings despite low profit margins.
But Germany's SMEs already have long-standing partnerships with local lenders that pass on their lower funding costs.
BNP does not aim, therefore, to usurp the Mittelstand's so-called house banks, usually a local savings bank or co-operative bank, but instead take on large national players such as Commerzbank (CBKG.DE), Deutsche Bank (DBKGn.DE) and UniCredit's HypoVereinsbank (CRDI.MI), which support firms' more complicated transactions.
Germany's savings banks have over 40 percent of the Mittelstand market, followed by co-operatives with around 20 percent. Private banks such as Deutsche Bank, Commerzbank and BNP have around 14 percent.
"The idea to expand business with middle-sized companies isn't new ... (but) it makes a lot of sense for us to target bigger 'Mittelstand' companies more intensively, because we can meet their needs around the world," said Torsten Murke, the deputy chairman of BNP's German operations.
That means courting people such as Christian Sedlatschek, the chief financial officer of Meggle, a Bavarian dairy with worldwide sales of 1 billion euros, who already does business with 10 banks and is loath to change.
"Banks have to know our company, they have to enjoy our trust, and they have to take care of us intensively," he said.
In 2013, BNP won more than 100 new corporate customers in Germany, attracted by its international network, Murke said.
"Turkey is a good example. It is a main trading partner of the German economy, and more than 5,000 German companies have invested in Turkey," he said. "We are working on a closer cooperation between BNP branches in both countries."
BNP, active in Germany since 1947, is planning on hiring 500 more staff in Germany by 2016 and is aiming for revenues to rise to 1.5 billion euros by then from 1.1 billion in 2012.
Germany's size, economic strength and financial conservatism mean it remains a potentially profitable market, provided banks can break into the tight-knit Mittelstand world.
The German economy is around a third larger than France's and expected to grow by 1.8 percent this year, according to the European Commission, compared with 1 percent for France and 1.2 percent for the euro zone.
There is also the scope to sell more products. Despite its large size, Germany's capital markets remain relatively small, with corporate bond issuance of $579 billion in the 10 years to 2013, compared with $666 billion in France and $664 billion in the UK, according to Thomson Reuters data.
French banks, after shedding risky assets and boosting their loss reserves in the wake of the financial crisis, are keen to expand beyond their sluggish home market.
In addition to BNP, Societe Generale (SOGN.PA) is also looking to attract more German corporate clients after raising 1.5 billion euros ($2.1 billion) in retail deposits from its German brand Gefa in 2012.
Germany currently accounts for around 4 percent of Societe Generale's annual turnover.
"Societe Generale sees Germany as a growth market for years to come," said the bank's Germany chief, Guido Zoelle.
"Our main focus is companies that are active on capital markets and that are active in countries where Societe Generale has a big footprint, such as France, Eastern Europe, Russia or Africa."
Credit Agricole (CAGR.PA) is also considering expanding its local consumer operations in Germany, according to a banking source familiar with its strategy.
"The attraction would be to get more deposits from Germany and to offer more universal banking products," the source said.
Credit Agricole declined to comment.
While large German companies are usually comfortable working with foreign banks, small and medium-sized firms can be wary.
"There is suspicion that these banks will withdraw from the German market in case of a new crisis," said Bernd Supe-Dienes, who along with his brother Rudolf runs an industrial cutting tools 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 40 or 50 years," said Supe-Dienes, the third generation to manage the family firm, which has annual revenues of around 45 million euros and relies on a local savings bank and Deutsche Bank for its banking needs.
Stefan Wolf, CEO of Elring Klinger (ZILGn.DE), a publicly listed car parts supplier with yearly turnover above 1 billion euros, said he was "always open" to working with new banks, but if his usual banks can match the product, there is no contest.
Elring Klinger now pays less than 1 percent for financing of up to a year and pays only up to 2 percent for loans of up to three years, reflecting the thin margins on offer.
French banks face another hurdle in that their cost of funding is higher than German banks. French banks pay on average 0.6 percent more than their German counterparts to sell short-term debt to investors, further hitting profit margins.
There is also plenty of competition, with over 1,800 lenders in Germany, far higher than in any other eurozone country and more than three times the number in France.
BNP's strategy of using its international network to drive growth is a path well worn by HSBC Trinkaus, a unit of Europe's largest 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 base over the next four years, from about 1,500 now. To meet that goal it is emphasizing its network in Asia and Latin America, and also widening its focus beyond large clients to include smaller 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 the Mittelstand market, and Deutsche expanding the number of locations it deals with corporate clients to 250 from 70.
Stiff competition from local players has prompted speculation that BNP might look at acquisitions to make its mark in Germany, particularly as it has finished shedding risky assets, 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 the often-cited prospect of it buying the German government's 17 percent stake in Commerzbank.
Kepler Cheuvreux analyst Cyril Meilland said in a note to clients that a more likely alternative target could be IKB, one of 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 Germany attracts competitors," said Stephan Winkelmeier, finance chief at BayernLB, one of Germany's largest state-backed banks. "(But) we live by word-of-mouth recommendation. Our business with existing clients is growing, and we are winning new clients as well."
($1 = 0.7214 Euros)
Writing by Carmel Crimmins; Editing by Will Waterman