European Banks Leave Germany in the Dust | Business| Economy and finance news from a German perspective | DW | 09.04.2005
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European Banks Leave Germany in the Dust

German banks are limping behind their counterparts in other European countries. German financial institutions survived the crisis of two years ago, but their profits are still low. There are several reasons for that.

German banks' headquarters are sky high, but profits aren't

German banks' headquarters are sky high, but profits aren't

According to German financial daily Handelsblatt, last year 22 out of 25 large European banks reported after-tax rates of return of 15 percent. Most German banks, on the other hand, can only expect to attain around 8 or 9 percent this year. Only Deutsche Bank is realistically hoping for a yield of 15 percent.

Although the Germans are far behind their competitors, whether that is in itself cause for great concern depends on your perspective, according to Dorothea Schäfer, a banking expert at the German Institute for Economic Research (DIW). On the one hand, analyses have confirmed that German banks are not very profitable in international comparisons, she said. According to a study by Deutsche Bank Research, the return on equity among German banks from 1992 to 2001 averaged just below six percent. In the UK, the average was 16 percent.

But according to Schäfer, the main reason for the poor yields is the competitive banking landscape in Germany, which while bad for banks' profits, has definite advantages for customers. "A lot of competition lowers the profit margins," Schäfer said. "For customers, that means credit terms are better."

High personnel costs

Besides the intense competition in Germany, the sluggish German economy and high personnel costs are also reasons for lower profits, according to Schäfer, who said cutting down on personnel could be a way to bring banks in dire economic straits back into the black. However, she warns against layoffs when a bank is making a profit.

Stellenabbau bei der Deutschen Bank

Deutsche Bank logo at Frankfurt headquarters

"If areas like customer service are cut back, that could negatively impact profits," she said.

She doesn't see Germany's poor performance in European banking comparisons as a reason for undue alarm, pointing out that the serious slump two years ago in the sector is now over and most banks succeeded in getting over the worst. Developments over the past two years are anything but unhealthy, she said.

Too little open competition?

But stock analyst Dieter Hein of "fairesearch" doesn't see the situation in such rosy terms. According to him, the reasons for German banks' poor yields can be traced back to a lack of open competition in the sector.

Stopschild vor Sparkasse in Berlin

Government subsidies for banking institutes such as the Sparkassen savings banks and the Landesbanken are hindrances to a level playing field. He and other experts have said that only a consolidation in the sector could lead to higher profits -- for fewer banks.

As opposed to the DIW's Schäfer, Hein said the health of German banks has "dramatically worsened," pointing to the fact that today, as opposed to 15 years ago, there are no German banks among the world's top 20. He accepts the fact that job losses might occur before banks can start growing again.

"First of all, we need to see a shrinking of the sector," he said. "Only when that happens can banks start hiring again."

Calls for a "speculation tax"

But that kind of thinking is foreign to globalization critics like the organization attac. The group's finance expert, Peter Wahl, considers it illusory of banks to think they can chase after rates of return which are higher than economic growth. He calls it a "parasitic phenomenon." Besides, he added, banks in Germany are doing just fine. "If some banks are doing badly, it's due to their very risky speculative businesses," he said, adding that his organization is in favor of introducing a "speculation tax" to prevent such behaviour in the future. That way, he said, employees would not be forced to pay for slumps brought about by banks' own risky choices.

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