|
|
The corporate sector in Germany and particularly SMEs have become more resilient in terms of funding which should help them weather the corona shock. Current financing conditions also remain favourable: banks have hardly tightened lending standards, the government has issued unprecedented credit guarantees and the ECB is eagerly buying corporate bonds. Nonetheless, corporate insolvencies will rise as a result of the deep recession. Because the government has temporarily waived the obligation to file for bankruptcy, insolvency numbers have continued to fall until now but this may change soon. Rising loan losses will have a significant impact on German banks which are already exhausted by years of zero interest rates and low structural growth. With loan loss provisions possibly tripling, the banking industry will probably record a net loss this year.
The corporate sector in Germany has become less vulnerable in terms of funding over the past two decades.
The equity capital ratio has risen a lot and the share of bank loans in
total liabilities has declined materially. This is particularly true
for small and medium-sized enterprises whose funding structure has
become more similar to that of large firms.
This improved resilience should help the sector to weather the corona shock. In addition, financing conditions remain clearly favourable: banks have hardly tightened lending standards, the government has issued unprecedented credit guarantees, lending rates are still close to record lows, and the ECB is eagerly buying corporate bonds which many companies are currently issuing.
Nonetheless, corporate insolvencies inevitably will rise as a result of the deep recession, with the economy expected to shrink this year by about as much as during the Great Recession. The German government has waived until September/December the obligation to file for bankruptcy if insolvency is caused by the corona crisis. As a consequence, until now, insolvency numbers have continued to fall instead of rising but this may change soon. Bundesbank expects a maximum increase of 36% until Q2 2021, to a level last seen in 2013, but it leaves out the waiver effect. Including this, the surge may be delayed somewhat, and the number of zombie firms may increase.
Rising loan losses will have a significant impact on the German banking sector.
It is already among the weakest in Europe and exhausted by many years
of zero interest rates and low structural growth. Banks were moderately
profitable post-financial crisis only thanks to loan loss provisions far
below the historical norm. With those climbing considerably – and
possibly tripling, the industry will probably dip deeper into
loss-making territory in 2020.
The corona pandemic has hit the German
economy hard and triggered a massive recession, as in many other
countries. Output is expected to drop by 5.2% yoy and thus by a similar
magnitude as in the aftermath of the financial crisis. The corporate
sector is suffering considerably and many firms will not survive a
collapse in demand. How big is the impact going to be, and what will it
mean for German banks? ...more