16 September 2003

EZA 555 - Germany-Economy

German banking turns the corner but further restructuring to hinder sector's development
The German banking system has moved back from the brink of a systemic crisis. Bank lending to the private sector — a coincident indicator of economic performance — edged higher in the last few months to growth in Jul03 accelerating to 1.3%y/y. This coincides with a deceleration in credit tightening during 2Q03, which the Jul03 bank lending survey of the European Central Bank characterises as even more noticeable than for the euro area aggregate. The main reasons for this improvement from the crisis earlier this year are the recovery of the stock market and a less gloomy outlook for the cycle. Bank stocks have outperformed the market — we think, temporarily. Although the German banking system is experiencing accelerating restructuring, which will boost its long-term capacity to support economic performance, short-term prospects are more muted. We hold to our view (EZA rpt 521/03Apr17) that restructuring efforts will take their toll on the macro-cycle in coming years as German banks concentrate on cost control and limit lending growth.

SummaryAsset Conclusions: Slow recovery to make German bank stocks underperform; strong advances are intermittent catch-up, not a lasting improvement

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© Graham Bishop