German Banks

Fewer Is Better

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.

“There’s a lot of wishful thinking.”

Raimund Röseler, chief executive director, BaFin

Supervisory authorities are more skeptical. Andreas Dombret, a top executive at the German central bank, which conducted the survey, says the hope of the higher income is “a very sporting assumption.” The head of bank supervisory agency BaFin, Raimund Röseler, commented, “There’s a lot of wishful thinking.”

Credit is a huge component in the overall business model of these banks, accounting for some three-fourths of revenue. This is what makes them so vulnerable to the ECB’s low-rate policy. In the stress tests conducted by the German authorities, some of the more negative interest-rate scenarios forecast a 60 percent drop in overall return on assets – pretax earnings as a percentage of total assets.

Some 70 banks, or 4.5 percent of the total, would fall below the required minimum capital ratio in such an extreme scenario. In general, this stress scenario would reduce capital ratios by three points to 13.3 percent, but even that would be adequate. The German Banking Industry Committee, the umbrella organization for the different industry associations, said this indicates the banks are “forearmed” for stressful situations. Nonetheless, “the earnings situation concerns us,” said Mr. Dombret of the German central bank, the Bundesbank.

Just how big the impact is for the banks was clear from another survey finding: Nearly half the banks could see themselves merging over the next five years. In fact, 11 percent are already engaged in a merger or seriously contemplating it. Bank authorities acknowledged that even they were surprised at the extent of merger expectations.

Despite the growing pressure, the banks so far have resisted the temptation to take on excessive risk, for instance, in home finance. A third of the banks said they were willing in 2016 to grant credit for a higher percentage of the purchase price. But even if home prices plunged by 30 percent, the overall capital ratio would only decline 0.9 percentage points.


Yasmin Osman covers banking for Handelsblatt from Frankfurt. To contact the author: 

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