German banks at risk of ‘alarming’ profit fall

German banks are at risk of suffering an “alarming” fall in profits in the next four years because Europe’s persistently low interest rates are wiping out their income, the country’s financial watchdogs warned on Friday.

Profits at banks across the eurozone have been squeezed since the financial crisis, as the European Central Bank has held rates unusually low in an attempt to revive the bloc’s battered economy.

But German lenders have been hit particularly hard, because of the highly competitive nature of the local banking sector.

A review of 1,500 small and midsized banks carried out by BaFin and the Bundesbank — Germany’s financial regulator and its central bank — found that domestic lenders expect their pre-tax profits to fall roughly 25 per cent by 2019, mainly as a result of a decline in net interest income.

Five possible scenarios were tested in the review — encompassing falling, stable and rising interest rates. In the best case, the regulators found that only 40 banks would make losses by 2019. In the worst case, however — where banks fail to react to a sharp decline in interest rates — profits would plunge by 75 per cent, and as many as 300 german banks would make losses by 2019.

Andreas Dombret, the Bundesbank board member responsible for banking supervision, said the worst case scenario was unlikely to occur, but warned that the others were not much better. “In all the scenarios reviewed, we absolutely consider the findings to be alarming,” he said.

Germany’s banking lobby, the Deutsche Kreditwirtschaft, played down the regulators’ concerns, arguing that banks were already taking “active measures” to combat the low interest environment. Even so, it called on the ECB to reverse its low rate policy as soon as possible.

“The DK believes that once there has been a sufficient stabilisation of Europe’s economy and financial system, this policy must immediately, step by step, be reversed,” it said.

BaFin and the Bundesbank concluded that most lenders would be able to survive a period of low interest rates. But they said it was still important that banks cut costs and boosted their sources of income, and warned that they were prepared to intervene.

“We will make sure that sufficient reserves are available in the case of a crisis,” Raimund Röseler, head of banking supervision at BaFin said.

“In individual cases, we will take the necessary action,” he added, citing bans on dividend or bonus payments and capital surcharges as possible steps that regulators impose upon struggling banks.

BaFin and the Bundesbank did not review the 21 biggest banks in Germany, including the likes of Deutsche Bank and Commerzbank, which are supervised directly by the ECB. However, the lenders that they did cover play a significant role in the German economy, as they are important lenders to the Mittelstand — the bevy of small and medium-sized companies central to Germany’s economic strength.