Fitch Ratings-Frankfurt/London-05 August 2015: Recent warnings of lower 2015 profitability from three German Sparkassen Verbande, regional savings bank groups, suggest this year might be a turning point for the sector, when low interest rates finally force downward repricing of assets, says Fitch Ratings. The Sparkassen, which represent around a third of Germany's retail banking market, have reported an operating return on assets of around 0.8% for many years, in line with their low risk, retail focus.
But performance ratios at the Sparkassen are likely to fall in 2015 as their ability to sustain net interest margins, which drive overall profitability, is becoming increasingly strained. This is because competitors are encroaching on their traditional retail mortgage and deposit businesses. In addition, higher-margin loans and higher-yielding securities are maturing and being replaced by ultra-low-yielding German and foreign public sector bonds and newer, less profitable, lending in a highly competitive environment.
Sparkassen Finanzgruppe Hessen Thueringen (SFHT) and Sparkassen in Baden-Wuerttemberg and Lower Saxony all expect 2015 profits to fall short of those reported in 2014. We believe the groups will find it difficult to reverse dwindling net interest income. Greater lending volumes are failing to fully offset a squeeze in net interest margins, which SFHT believes could fall by as much as 5% in 2015. We do not expect this situation to improve in the near term as we see no immediate relaxation of the ECB's quantitative easing programme or any let-up in competitive pressures.
Cost-cutting may help offset the anticipated fall in profits. A few Sparkassen have announced plans to close branches, which should help to cut overheads. But the savings banks' historical roots and public ownership structures mean that they prioritise support for local economies and communities over profit maximisation. We believe that any progress on cost efficiency will be slow. Still, discussions among savings banks about streamlining back-office functions and reducing duplication, partly due to increasing regulatory and reporting requirements, have intensified in recent years.
Deutsche Bundesbank has long recognised that the low interest rates are a growing burden on the profitability of German banks because they tend to compress net interest margins. The longer low rates persist, the more new lending is undertaken at lower rates, while banks are unable to offset falling lending rates by further reducing deposit rates as these are already extremely low.
Retail-focused banks still generate around 75% of total banking sector profits in Germany and the savings and cooperative banks have long achieved the highest performance ratios. In the medium to longer term, we envisage a gradual shift in profitability away from these groups and towards the universal banks, which should be able to develop a deeper franchise by offering a broader business mix.
Further details about the performance of Germany's retail banks are contained in our Special Report, available on
www.fitchratings.com or by clicking on the link below.
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The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at
www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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