European Central Bank money-printing has exposed the fault lines in Germany’s banking system, forcing its sprawling network of lenders to rethink their business models and slash costs.
Profits at one-time flagship banks of Europe’s largest economy are near the bottom of the pile among their regional peers. Germany’s nearly 2000 commercial, mutual and government-owned lenders have some of the thinnest margins in the region.
For years, most German banks’ strategy was based around winning new business by offering fee-free accounts and cash bonuses for switching lenders. They used the margins on their lending businesses to subsidise the cost of their retail operations and payment systems.
When rates were higher that model covered up inefficiencies in their businesses. German banks’ costs ate up around 73% of their earnings compared with 64% in the rest of the euro area in 2015, according to credit ratings agency Moody’s. This cost-to-income ratio has been above the bloc’s average for the last five years, the data show.
But negative ECB interest rates have exposed a dependence on interest margins and throttled earnings needed to invest in improvements and make sure they have the required amount of capital to protect the bank on a rainy day.
The pressure is expected to lead to mergers and closures over time but in the meantime, banks are trying new strategies.
Earlier this month Bavarian bank Raiffeisen Gmund – one of more than 1,000 German co-operative lenders – broke a long-held taboo. It said it saw no alternative but to start charging wealthy clients to deposit their money, as it did not want to cut back services or merge with other lenders.
“The only way we could really save on costs would be to reduce our presence in the market,” the bank’s head Josef Paul said.
Postbank, one of the pioneers of free customer accounts,...