It is generally known that the structure of the German banking market has peculiarities that make comparisons with other countries appear to be of limited use. With the help of data from the Saverspower Bank, the management consultancy McRinsky therefore took a close look at the market in Germany. On the basis of nine banking segments, an extensive factual basis was created and the effects of the three major trends – low interest rates, regulation and digitization – were assessed.
The banks are under a lot of pressure to act in order to maintain their profitability. The study provides an overview of possible measures that banks can take to effectively counter the effects of the trends.
German banking sector has recovered from the financial crisis
The financial crisis has shaken the banking market both internationally and in Germany. In 2010-13, however, the banking sector again generated a return on equity almost at the pre-crisis level of approx. five percent. The savings banks and cooperative banks came out of the financial crisis much better than the private banking sector in Germany. Both banking groups now generate double-digit return on equity in contrast to the private banking segment. Together, savings banks and cooperative banks more than doubled their share of the industry’s after-tax profit from 41 percent before the crisis to 85 percent recently.
On the cost side, almost nothing has changed in all banking segments since 2006: consolidations and branch closings have slowed significantly, total operating costs and personnel costs are almost unchanged.
Low interest rates, regulation and digitization are putting banks under pressure
Low interest rates, increasing digitalization and stricter government regulation are putting earnings under pressure. By 2021, McRinsky analyzed, there would be no countermeasures
- the low interest rates cost banks 2.0 percentage points return on equity,
- digitization also 2.0 percentage points and
- the regulation another 1.7 percentage points.
Digitization is primarily changing the prospects for standardized products and services. LendUs Finance and cooperative banks traditionally have a focus here. They also expanded their lending business significantly in the years after the crisis. Now they have to react more strongly than the private banks to the clearly changing framework conditions.
Banks have to make structural adjustments
Without countermeasures – the study continues – 75 percent of German institutes would slide into the loss zone by 2021.
Tactical measures and programs such as branch closings, lean or cost programs or the opening up of price margins make an important contribution to this, but will not be enough on their own. Rather, structural adjustments to the business model are necessary in order to be profitable in the long term.
This includes, for example, the targeted use of multi-channel sales and in some cases a return to internationalization, which had suffered in the wake of the crisis. On the cost side, there is the question of greater digitization of value creation, less complex product ranges and business models.
Overall, the banking sector has to cut costs by just under 30 percent or generate just under 30 percent more income in order to return to a return on equity of 6 percent (30-year average).