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Low interest rate environment continues to take toll on German banks’ profits

German banks' profitability deteriorated further last year. Operating income, calculated as the sum of net interest income, net commission income, trading result and other operating result, was down by 3.8% on the year to €123.1 billion. In the current issue of the Monthly Report, the Bundesbank’s economists attribute this chiefly to the 6.2% decline in net interest income, by far the most important source of income for German banks, to €85.5 billion.

In order to stabilise profitability, institutions are attempting to boost the income that they generate from alternative sources. One of these is net commission income, which grew by 2.7% to €30.6 billion in 2017. However, the Bundesbank’s economists note that this increase was not enough to offset the decline in net interest income. Net commission income includes fees for giro transactions and payments as well as for securities and safe custody business, and remuneration for brokerage activities relating to loan contracts, savings agreements, savings and loan agreements, and insurance contracts.

Heterogeneous development across banking groups

According to the report, a comparison of the individual banking groups reveals that their results from operating activities developed differently. Big banks and Landesbanken, as well as mortgage banks, reported a marked decline in operating income last year. These institutions were unable to offset lower net interest income with profit contributions from other operating business. By contrast, the net interest income earned by savings banks and credit cooperatives decreased only slightly, while their net commission income rose significantly. As a result, operating income in these banking groups actually went up slightly.

Banks increasingly charging negative interest

To stabilise their interest margins, credit institutions have increasingly cut their deposit rates into negative territory. However, the credit institutions have stated that this has, for the most part, only affected large-volume sight deposits in corporate banking business. Retail banks, meanwhile, have continued to show restraint in passing on negative interest rates, according to the Bundesbank experts.

Cost cutting not yet successful

At €88.5 billion, banks’ staff and other administrative costs remained virtually unchanged in 2017 compared to 2016. The experts write that this means that the cost-cutting measures already taken managed only to offset the factors driving costs. At the same time, they said, cost efficiency in the banking sector had continued to decline last year. In order to generate operating income of €100, banks had to spend €2.60 more than in the previous year. Overall, pre-tax profit income for the year fell slightly by €0.3 billion to €27.4 billion, which was nevertheless still above the long-term average.

In terms of the current year, the Bundesbank assumes that the ongoing favourable economic situation will benefit German banks’ earnings situation, "while low interest rates and the flat yield curve will continue to present challenges for the banking sector", write the Bundesbank economists in the Monthly Report.