Germany’s
banks suffering from chronic lack of profitability
Third-worst
return on equity in the EU, ahead of only Greece and Portugal
James Shotter in
Frankfurt
August 3, 2016 4:52
pm
For the past few
months, the clouds gathering over Italy’s banks have overshadowed
the pressures on Germany’s lenders. But the last week has given a
stark reminder that the outlook north of the Alps is also bleak.
In Europe’s latest
set of stress tests, released last Friday, German lenders posted four
of the 10 biggest falls in capital strength in the adverse scenario
modelled as part of the exercise.
And on Tuesday,
Commerzbank spelt out details of a weak second quarter, sending its
shares to an all-time low. Deutsche Bank’s shares followed, falling
to their lowest level since 1982.
Commerzbank’s
results cover just one quarter, which included the UK’s decision to
leave the EU. But, despite such caveats, the struggles of Germany’s
second-biggest lender encapsulate problems facing the banking sector
in Europe’s largest economy as negative interest rates start to
bite.
Unlike in Italy, the
big issue for German banks is not bad loans. Some, such as the
Landesbanken, HSH Nordbank and NordLB, are battling with exposure to
the shipping industry.
But for the sector
as a whole, the ratio of non-performing loans to total loans was just
3.1 per cent in March, below the EU average of 5.7 per cent, and a
far cry from Italy’s ratio of 16.6 per cent, according to the
European Banking Authority.
Instead, the problem
is a chronic lack of profitability. The German banking sector’s
return on equity was just 2.6 per cent in the first three months of
the year, according to the EBA. That made it the third-worst
performer in the EU, ahead of only Greece and Portugal.
“This is the root
of the trouble for German banks, and it was a problem long before the
financial crisis,” says Martin Hellmich, a professor at the
Frankfurt School of Finance and Management. “As long as their
profitability remains so low, they are going find it hard to
strengthen their capital buffers.”
The origins of the
low profitability of Germany’s banks lie in the sector’s
structure. The profusion of local savings and co-operative banks
means that Germany has the most fragmented banking system in the
eurozone. In 2014, the share of assets held by its five biggest banks
was just 32 per cent.
The upshot is a
toxic combination of a brutal battle for market share, which has
squeezed margins on retail and corporate lending; and high costs
stemming from duplication of banking capacity. In the eurozone, there
was one bank employee for every 166 people in 2014, according to the
ECB. In Germany there was one for every 127.
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Negative rates have
only made the situation worse for a banking system that is awash with
deposits, and in which most lenders traditionally derived a sizeable
chunk of their earnings from net interest income.
Commerzbank said on
Tuesday that the phenomenon had cut its net interest income in two
key divisions by €161m in the first half of the year. If rates stay
where they are, the bank expects an additional €100m hit each year
from 2017, as loans to customers run out and are replaced with ones
with lower interest rates, although the bank hopes to be able to
mitigate this effect.
For the German
banking sector as a whole, the ECB’s 0.4 per cent levy on excess
deposits will cost about €787m this year, according to analysts at
Deutsche Bank. “When rates are negative, it puts the German model
under a lot of pressure,” says Mr Hellmich.
Gunter Dunkel, head
of the Association of German Public Sector Banks, and chief executive
of NordLB, takes a similar line. “Almost every large German bank
has to reinvent its business model to reflect the new regulatory and
interest rate environment. These have changed dramatically and we
have to react to this with a fundamental review of what we do,” he
says.
Most lenders have
made a start. Several, including Commerzbank and Deutsche, have
passed on negative interest rates to institutional and big corporate
clients.
Commerzbank has
increased lending volumes in its retail bank, and some banks have
begun increasing the interest they charge on loans in an effort to
protect their margins. Others are introducing charges for previously
free services, such as paper account statements.
The problem is that
the cut-throat competition in Germany’s corporate and retail
banking markets means that there is limited scope to bolster
revenues. That means that banks will have to do much more to cut
costs.
Such schemes often
incur big upfront costs before the benefits begin to emerge. But
given the severity of the pressure on their income streams, banks
have little choice but to push on, says Rüdiger Filbry from Boston
Consulting Group.
“If banks can’t
afford to take these costs in one go, then they should do it in
steps,” he says. “Doing nothing is not an option.”
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