12 December 2013

Fitch: Low interest rates limit upside for German banks in 2014

Positive momentum for the German banking industry from better economic growth will be limited by ultra-low interest rates, Fitch Ratings says. German banks are particularly restricted in their ability to earn money when rates are so low because they have healthy deposit bases.

Fitch's outlook for the sector is stable, despite expecting a 1.5 per cent rise in German GDP and improved economic prospects in the eurozone. Low interest rates limit potential to improve margins. Loan growth will also remain cautious in 2014 as banks undergo the ECB's comprehensive assessment, particularly weaker Landesbanken and commercial real estate banks, which are likely to come out in the bottom quartile.

These banks have loan concentrations in riskier areas, on which the asset-quality review is likely to concentrate, and thinner capital. Some Landesbanken have large real estate, renewable energy and shipping loans, while commercial real estate banks' exposures to peripheral Europe could leave them at risk.

Most of the savings and cooperative banks are excluded from the ECB's assessment, leaving them better placed to benefit from economic growth, especially as they have large domestic retail and SME franchises. As they account for around two-thirds of Germany's retail deposits, net interest income is likely to be squeezed again in 2014, but Fitch expects overall earnings to be only slightly weaker as both groups keep their pricing discipline.

In the medium term, elements of Basel III, and progress towards Banking Union and bank resolution in the EU also pose challenges for some German banks. Those with weak business models and dependence on the country's safe-haven status for wholesale funding will face pressure if they fail to adapt. However, Fitch believes regulatory changes are unlikely to alter significantly the business and risk profiles of savings bank and cooperative banking groups.

Full press release

Fitch Ratings' Report: 2014 Outlook: German Banks (registration required)

© Fitch, Inc.