Banks in Germany are
currently facing interest rate crisis and this is not a good outlook for citizens,
trade partners and vested interests across the globe.
Below is a detailed report;
Banks the world over are
groaning under the burden of low, even negative, interest rates. The gripes
from Germany are among the loudest. In March, when the European Central Bank
cut its main lending rate to zero and its deposit rate to -0.4%, the head of
the savings banks’ association called the policy “dangerous”. At the
co-operative banks’ annual conference this month, a Bundesbank official earned
loud applause just for not being from the ECB.
Germany’s banking system
comprises three “pillars”. In the private-sector column, Deutsche Bank, the country’s
biggest, expects no profit this year. That is mainly because of its
investment-banking woes, but low interest rates have also weighed it down: it
wants to sell Postbank, a retail operation it took over in 2010. Commerzbank,
ranked second, specialises in serving the Mittelstand, Germany’s battalion of
family-owned firms. It has felt the interest-rate squeeze even more. Analysts
at Morgan Stanley place it among the worst-hit of Europe’s listed lenders.
Most Germans, however,
entrust their savings to the other two pillars. One includes 409 savings banks
(Sparkassen), mostly municipally owned; the other, 1,021 co-operatives. These
conservative, mainly small, local banks are the most vocal complainers—even
though at first blush they have little to moan about. Savings banks’ combined
earnings declined only slightly last year, to €4.6 billion ($5.1 billion) from
€4.8 billion in 2014. Deposits and loans grew; mortgages soared by 23.3%.
Capital cushions are reassuringly plump: their tier-1 ratio rose from 14.5% in
2014 to 14.8%. Co-ops had a similar story to tell. But trouble is brewing.
The ECB has flattened
long-term rates as well as short ones, by buying public-sector bonds and,
starting this month, corporate debt. Ten-year German government-bond yields are
near zero—and recently dipped below, thanks in part to markets’ fears about
this week’s Brexit referendum. For banks, this means ever thinner margins from
taking in short-term deposits and making longer-term loans—from which, says
McKinsey, a consulting firm, German banks earn 70% of their revenue.
Lenders have been well
insulated so far, because most loans on their books were made when interest rates
were higher: 80% of loans last longer than five years. Rising bond prices (the
corollary of falling rates) have provided further padding as banks’ portfolios
gain in value: that effect alone has brought the savings banks €19.4 billion
over the past five years. But as old loans mature, they are being replaced by
new ones at today’s ultra-low rates. The mortgage boom is thus a mixed
blessing: rates are typically fixed for ten years or more.
With no increase in ECB
rates in sight, the screw is tightening. Half of the 1,500 banks surveyed by
the Bundesbank last year—before the latest rate cuts—expected net interest
income to fall by at least 20% by 2019. Although banks would prefer higher
rates, too sudden an increase would also be awkward, pressuring them to pay
more for deposits while locked into loans at rock-bottom rates.
Banks are seeking ways to
alleviate the pain. Commerzbank is charging big companies for deposits, above
thresholds negotiated case by case. (It is also reported to be pondering
stashing cash in vaults rather than be charged by the ECB.) Bankers warn of an
end to free personal current accounts. But with so many banks to choose from,
scope for raising fees is limited.
Selling investment products
and advice seems more promising; and commission income has risen, as some
savers seek out higher returns. Yet low rates have made many Germans, already a
cautious lot, even less adventurous. They are stuffing more, not less, into the
bank—but into instant-access accounts: with rates so low they may as well keep
cash on hand.
Low rates are not banks’
only worry. Both bankers and politicians vehemently oppose a proposed
deposit-insurance scheme for the euro zone: the savings banks and co-ops have
always looked out for each other, and don’t see why they should insure Greeks
and Italians, too. Smaller institutions complain about an increase in
regulation since the financial crisis—even though they weathered the storm far
better than many larger ones. The savings banks’ association claims that red
tape costs its members 10% of earnings—and some as much as 20%.
Another concern is the march
of technology. Germans have been slow to take up digital banking, but their
banks—reliant on simple deposits and loans, and still carrying the costs of
dense branch networks—are vulnerable to digital competition nonetheless.
Number26, a Berlin startup, has signed up over 200,000 customers across Europe
for its smartphone-based current account within months. The savings banks plan
to hit back this year with Yomo, a smartphone app aimed at young adults.
McKinsey reckons that low
rates, regulation and digitisation together could cut German banks’ return on
equity from an already wretched 4% in 2013 to -2% within a few years if they do
nothing in response. The pressure is starting to tell. This month the Sparkasse
Köln-Bonn, one of the biggest savings banks, said it would close 22 of its 106
branches. Some rural banks have replaced branches with buses.
All this is likely to thin
the crowded ranks of Germany’s lenders. Consolidation has been under way for
decades: since 1999 the number of co-ops has fallen by half; on August 1st
their two remaining “central” banks, DZ Bank and WGZ Bank, which provide co-ops
with wholesale and investment-banking services, are to join forces. The pace of
mergers has steadied in recent years. Negative rates may speed it up again.
Credit: The Economist
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