German banks’ profitability deteriorated further in 2019. However, this is due primarily to strategic restructuring at one big bank, the Bundesbank’s economists note in the latest issue of the Monthly Report, with the resulting negative one-off effect overshadowing the growth in profit for the financial year observed for all other categories of banks. An analysis of the annual accounts of 1,440 German banks prepared in accordance with the German Commercial Code (Handelsgesetzbuch) shows that, overall, profit for the financial year before tax fell by more than two-thirds to €5.7 billion. While big banks recorded a loss of €17.5 billion, all other categories of banks managed to increase their profit for the financial year compared with 2018.

The Bundesbank’s experts report that the market environment for banks in 2019 was characterised by a continued cyclical slowdown and an expansionary monetary policy. Nevertheless, operating income declined only moderately overall, by €1.9 billion to €118.6 billion. According to the Monthly Report, this decline is due, in particular, to a €4.7 billion decrease in net interest income compared with 2018 and to around €1.1 billion being wiped off the result from the trading portfolio. Though net commission income and the other operating result increased, this was not enough to offset the overall decline in profitability.

Net interest income remains most important source of income

Accounting for 69.5% of operating income, net interest income remains the most important income component, though it decreased significantly from €87.2 billion to €82.5 billion. According to the Bundesbank’s experts, savings banks and credit cooperatives once again generated around half of this net interest income. By contrast, big banks generated only one-fifth of total net interest income but were responsible for three-quarters of the year-on-year decline across all categories of banks. The trading result was reduced by more than 30% to €2.4 billion, hitting its lowest level since the 2008 financial crisis.

The Bundesbank’s experts report that the net commission income earned by institutions through avenues such as fees for account management and the settlement of securities transactions as well as the brokerage of real estate, savings and loan contracts, and insurance, had a stabilising effect on income in the low interest rate environment of 2019. With year-on-year growth of €1.7 billion to €31.2 billion, it remains the second most important source of income for German credit institutions.

Lower cost efficiency

The Bundesbank determined that the return on equity, calculated as the ratio of profit for the financial year to balance sheet equity, declined by 2.66 percentage points to 1.07% in 2019. It thus fell far short of the long-term average of 5.36%, not least because of the one-off effect triggered by one of the big banks. The reduction reflects, first, the decline in profit for the financial year, the economists note, adding that, second, balance sheet equity rose by €21.7 billion to €527.2 billion in 2019.

Similarly, institutions’ cost efficiency continued to deteriorate. This is measured by the ratio of administrative spending to operating income. As administrative spending, which includes staff costs, went up slightly whilst operating income declined, in particular owing to the one-off effect at the big banks, the cost/income ratio increased by 2.9 percentage points to 76.0% according to the Bundesbank’s calculations.

Effects of the coronavirus pandemic uncertain

According to the Bundesbank’s experts, the coronavirus pandemic is likely to continue to have an adverse impact on banks’ profitability this year. In particular, they add, loan losses could lead to depreciation and value adjustments and reduce income in interest-related business. In addition to the pandemic, the persistence of the low interest rate phase is likely to keep weighing on banks’ traditional interest business. The economists note that there is considerable uncertainty surrounding the future course of the crisis and its implications for the economy.