Germany’s Banking Problem Is Bigger Than Deutsche Bank
Posted by hkarner - 13. Oktober 2016
Source: The Wall Street Journal
Too many banks are fighting in the same space, while political and legislative hurdles make consolidation difficult
FRANKFURT—Germany may be Europe’s economic and political powerhouse, but you wouldn’t know it from its banks.
Deutsche Bank AG, Germany’s largest lender, is struggling with a litany of problems. It faces a multibillion-dollar settlement with the U.S. Justice Department over the bank’s selling of mortgage products before the financial crisis. It has a long list of regulatory troubles and its share price is at multidecade lows.
Its struggles have become a political issue, as Germany’s government ponders whether it can, or should, bail out the bank, if needed. Most analysts believe a rescue isn’t necessary at this time, and Deutsche Bank Chief Executive John Cryan assured employees on Sept. 30 that the bank fulfills “all current capital requirements and our restructuring is well on track.”
A recent TNS Emnid poll for news magazine Focus showed that 69% of respondents opposed any kind of state aid for Deutsche Bank, with only 24% in favor. Domestic financial issues are adding to Chancellor Angela Merkel’s worry list, as even bigger problems loom in Italy and Greece.
Deutsche Bank, Europe’s third largest bank, is hardly alone. Its smaller German rival Commerzbank AG has announced plans to slash up to 20% of its staff and downsize operations. Other big banks have been battered by the global rout in shipping. And the European Central Bank’s ultralow-interest-rate policies are gutting revenues at the country’s numerous community-owned savings and cooperative banks.
While banks in other countries, such as Italy, face the task of dealing with bad loans, in Germany, the problem is more structural: Too many banks fighting in the same space and not all with the same need to satisfy shareholders, while legislative and political hurdles make consolidation challenging.
In addition to Germany’s big publicly traded banks, the country’s retail banking landscape features publicly owned savings banks called Sparkassen and cooperative banks called Volksbanken or Raiffeisenbanken. The clearing banks for Sparkassen, known as the Landesbanken—literally “state banks”—are much larger. The clearing bank for the Volksbanken and Raiffeisenbanken is DZ Bank.
Such a fragmented system was much more common in Europe decades ago, but reforms in other countries allowed different types of banks to merge, which to this day remains politically difficult in Germany. Legal constraints prevent Sparkassen from being taken over by a larger private bank, such as Commerzbank or Deutsche Bank.
France, for instance, is “a very concentrated market that creates a stable, reasonably high income stream for French banks,” said Nicolas Veron, senior fellow at Bruegel, a Brussels think tank.
Data bear this out. Big French banks had a return on equity of 6.18%, while for German ones it was only 4.51%. French regional banks’ ROE was 8.88%, while it was only 2.65% for their German counterparts at the end of last year, according to FactSet.
Experts say that Germany simply has more banks than it needs. ECB data showed that in 2014, Germany had the lowest ratio of population per bank of large eurozone economies with 45,552 residents per credit institution. By comparison, Spain’s was 205,593.
“Germany is still ‘overbanked,’” said Beate Reszat, an economist and financial blogger. But consolidation is difficult also because many people are closely tied to their savings bank. “In the current mess, savings banks may be more trusted than the big private banks,” said Ms. Reszat.
The Sparkassen are a force both in terms of numbers and political power. Just over 400 Sparkassen employ about 234,000 and hold 44 million savings accounts, according to data published earlier this year by their umbrella group.
These banks are some of the loudest complainers about the ECB’s low-interest-rate policy, as they are heavily dependent on interest margins, or the difference between what banks earn on loans and pay on deposits. Data by Germany’s Bundesbank showed that savings banks’ interest earnings have dropped by about 37% between 2008 and 2015 (though when the fall in interest payments is considered, net interest income is actually up about 12% over the same period). Landesbanken have seen their net interest income decline by about 22% since 2011, the same data showed.
ECB Executive Board member Yves Mersch recently said that forecasts show that negative interest rates “will significantly reduce banks’ profitability over the next five years.” But “ECB staff estimates show that the overall impact on bank profitability of recent monetary-policy actions is net positive, compared with a scenario with no monetary-policy action.”
German regulators have urged banks to consider whether they can start earning money by charging fees for services previously provided for free. While customers like getting free services, “lacking alternative sources of income, this offer can’t stand for the long term,” said Felix Hufeld, head of German supervisor BaFin, at a conference in Frankfurt earlier this year.
German banks have also been hit hard by the shipping crisis in recent years. Hamburg-based HSH Nordbank AG was the world’s largest provider of shipping loans by volume in 2008, when charter rates fell sharply amid the global economic crisis and an oversupply of newly-built ships. Vessel earnings have remained low since then so that many ships don’t generate enough income to service the loans.
Two other northern German banks, Norddeutsche Landesbank Girozentrale and Bremer Landesbank, as well as Deutsche Bank and Commerzbank, had also provided sizable shipping loans, many of which turned sour.