• Competition, interest rates put pressure on profitability
  • Industry association head Fahrenschon speaks to executives

Germany’s savings banks, the country’s largest source of credit, may see earnings fall by 20 percent over five years, pressured by rising competition and low interest rates, according to the head of the industry association.

Operating profit across the industry will be 2.3 billion euros ($2.6 billion) lower in 2019 than in 2014, Georg Fahrenschon, president of the German Savings Banks Association, told banking executives in a speech on Wednesday. Profitability is also threatened by a decline in working-age individuals, he said.

"Looking at averages makes the situation look better than it actually is,” he said. “If a significant number of institutions fall into serious financial difficulties, it won’t help us that the majority can handle the situation.”

German banks have seen the amount they earn from loans decline as the European Central Bank cuts interest rates to record lows to stoke growth in weaker parts of the euro area. At the same time, competition is increasing in the country as other European banks seek to do more business with the small and medium-sized companies that make up the backbone of the country’s economy.

While most smaller German banks have sufficient reserves to weather lower interest rates, they need to cut costs and build up capital to increase their financial strength, executives at banking regulator BaFin and the Bundesbank said last month. To avoid losses, banks must close branches, trim the number of products on offer and standardize their processes, according to Fahrenschon.

"The situation is serious and requires entrepreneurial action," he said.

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