German banks falling behind

Germany's banking sector continues to lag behind international competition, especially in the areas of growth and return on equity (ROE). That's according to a study by US consultancy Bain & Company released Tuesday.

Between 2004 and 2015, German banks posted meager 1.3 percent growth (from 6.5 to 7.5 trillion euros; $6.97 to $8.05), putting German financial institutions at the bottom of the table. By comparison, the assets total of French banks almost doubled in the same time span, growing from 4.8 to 8.2 trillion euros.

The UK and Japan each saw more than 3 percent growth, overtaking Germany. And in the US, the country with the highest growth rate, top dog JPMorgan earned 6.3 billion euros in the third quarter this year, dwarfing Germany's leader Deutsche Bank, which booked a total below 300 million euros.

Germany's 2-percent ROE remained well below international figures. Indeed, no other banking sector generated a lower return from 2004 to 2015 than that of Europe's largest economy. Japan logged 4 percent, the UK's banking sector had a 6-percent ratio, and the US' 8 percent was four times that of Germany.

In other words, a 2004 investment of 100 euros in German banks would have yielded two euros a year, compared with four in Japan and eight in the US.

Considerable deficits

The high discrepancy between Germany and the table leaders was due to a multitude of shortcomings, German co-authors Walter Sinn and Dr. Wilhelm Schmundt argued.

Two major reasons are the inability of German banks to cover equity costs in the long run and the slow growth in lending to corporate clients. At the same time, no other banks have had such a hard time producing adequate returns. This seems to indicate that German financial institutions continue to grapple with the 2007-2008 financial crisis.

The woes of Germany's financial sector aren't limited to flagship institutes like Deutsche Bank. For small banks, the gap between Germany and the US as well as lenders in other countries is also widening.

Another major reason the authors of the study cite is the "strong dependency" of Germany's banks on interest surplus, whose share of gross profit averaged 73 percent in 2015. In France and Switzerland, that figure was 53 and 44 percent respectively. This also means German banks have been suffering more from the current low-interest-rate policy and the central bank money glut.

According to the study, a low diversification of earnings combined with poor "pricing discipline" and lack of "risk adequate" interest rates also help explain Germany's poor performance.

Radical cost reduction 'overdue'

Germany's bloated banking sector heavily contributes to its poor cost-income ratio of 67.6 percent. According to the study, banks need to cut 113,000 positions and 10,000 (of currently 30,000) branches.

This "radical structural cost reduction" of 30 percent within 10 years, the authors argue, is the only way to "cover the gap between profitability and equity costs."

Banks could use automation and digitalization, including artificial intelligence and robotics, to further cut costs. Investing in modern, user-oriented IT platforms as well working with so-called regtechs, a new generation of fintech startups offering regulatory solutions, could also help banks save money.

To keep the importance of the banking sector for Germany's economy from shrinking further, Sinn and Schmund recommend a speedy consolidation of the sector and a "realignment of business models." Furthermore, politics and regulators should refrain from straining domestic banks too much, the authors say, noting that a flourishing banking sector is indispensable for Germany's export-driven economy.

bb/hg (Reuters, Bain)