German Banks

Fewer Is Better

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The ECB's low interest rates have been a thorn in the side of small banks. Source: Reuters

The lending business of small German banks will continue to languish as the low-interest-rate policy of the European Central Bank squeezes credit margins. While increased income from fees and commissions may offset part of the decline in earnings, consolidation of the industry seems to be on the cards.

The latest survey of 1,500 small and medium-sized banks supervised by German authorities shows that they expect pretax earnings to decline 9 percent over the coming five years. The biggest banks in the European Union are supervised directly by the ECB.

But even that decline may be optimistic, because the banks are counting on offsetting the decrease in interest earnings with more fees and commissions as they expand their business beyond just deposits and loans. Taking out the effect of these potential gains, profitability is expected to decline by 16 percent, though even that is an improvement on the 25-percent decline forecast in the survey two years ago.

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