It’s Not Just Deutsche Bank; German Banking Gloom in Chartsby
Europe’s most fragmented banking market squeezes earnings
Wealth of deposits a burden in negative-rate environment
Deutsche Bank AG Chief Executive Officer John Cryan’s troubles range from the company’s mounting legal costs to stricter regulation that’s eroding returns. And there’s at least one challenge he shares with his German rivals: Europe’s most competitive market.
“Deutsche Bank still has a lot to deal with, but the German market as a whole is pretty rotten,” said Martin Wilhelm, founder of IfK GmbH, which manages more than 600 million euros ($650 million) of fixed-income securities in Kiel, Germany. “It’s really hard for banks to make money here.”
The banking industry in Europe’s biggest economy is sitting on hordes of deposits that increase the pain of negative interest rates, while strict labor laws bloat costs and intense competition eats into earnings.
Cryan canceled an appearance Monday to discuss the future of banking with counterparts at Commerzbank AG and DZ Bank AG at the Euro Finance Week conference in Frankfurt, to be replaced by Marcus Schenck, Deutsche Bank’s chief financial officer. The following charts illustrate some of the challenges for Germany’s banks.
“The German market is just too fragmented,” said Lutz Roehmeyer, a money manager at Landesbank Berlin Investment who owns Deutsche Bank stock. The “high” market share of the country’s more than 1,400 savings and cooperative banks puts pressure on Commerzbank and Deutsche Bank’s profits, he says. That’s led bankers like Cryan to call for consolidation, and supervisors including Bundesbank board member Andreas Dombret to say mergers would make sense, providing they contribute to “sustainable, reasonable profitability.”
German lenders are among the biggest critics of the ECB’s measures to revive growth by driving down borrowing rates for companies and consumers because lending revenue makes up most of their income. Those policies aren’t working and may pose a risk to financial stability as banks find it tougher to build up capital, says Hans-Walter Peters, the president of the BdB Association of German Banks. Central bankers like ECB Vice President Vitor Constancio point to the benefits of growth, while supervisors including Bafin President Felix Hufeld say banks need to consider growing outside of lending.
The ECB’s 0.4 percent charge for parking deposits overnight hits German banks more than competitors in other markets because the country’s export surplus leaves them with a wealth of deposits, according to Commerzbank Chief Financial Officer Stephan Engels. His company saw negative rates erode revenue by 226 million euros in the first nine months of the year and is sharing the burden by passing deposit costs on to corporate clients and introducing new consumer fees, its filings show.
German banks have “a legacy of staff generating too little revenue at too high a cost,” says Wilhelm at IfK. Deutsche Bank is trying to increase efficiency by cutting 9,000 jobs, including 4,000 in Germany, while Commerzbank is eliminating a net 7,300 positions. Overall, jobs in Frankfurt’s banking industry will probably remain stable at about 62,000 at the end of 2018 as banks are set to move more than 2,000 jobs to Frankfurt after the U.K.’s decision to leave the European Union, Ulrike Bischoff, an economist at Landesbank Hessen-Thueringen, wrote in a study this month.