financial sector

Shrinking Down to Size

Stormy times for banks. Source: imago/Reuters
Stormy times for banks.
  • Why it matters

    Why it matters

    The banking sector faces cost savings, job cuts and consolidation to meet the demands of regulators that they make their operations more stable.

  • Facts

    Facts

    • Report estimates cost reduction potential of German banks at 30 percent, or €25 billion.
    • Only six percent of banks are generating profits that exceed their capital costs.
    • Bonuses account for about one third of balance sheet totals of German banking sector.
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    Audio

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Germany’s banking sector, the most competitive in the developed world, faces an era of deep cutbacks and painful job cuts if the many thousands of individual banks based in Europe’s largest economy hope to survive and become profitable again.

That is the conclusion of a new study by Bain, a U.S. management consultancy that predicts as many as 125,000 jobs in the German banking sector may have to go in the coming years. Consolidation in the financial sector, which has more banks per inhabitant than any other developed country, looks likely in the next decade.

According to Bain, which is based in Boston, Massachusetts, German banks will remain fundamentally unprofitable unless they change their ways. That’s because, in the majority of cases, banks’ returns on capital are well below their equity costs, falling far short of the yield requirements of potential investors.

Record low interest rates, high labor costs, too many bank branches and new competition from financial technology companies have all contributed to make it a difficult time for the financial sector in Germany, where more some 3,000 banks compete for a limited amount of market share.

For 2014, Bain estimated banks’ balances to have had a 2.1 percent return on equity on average, compared to capital costs of 7.7 percent. The result is a shortfall of €25 billion, or $27 billion.

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