Frankfurt am Main, November 21, 2019 —
- The outlook for Germany’s banking system has changed to negative from stable
- Moody’s expects the banks’ profitability and overall creditworthiness to weaken in a low interest rate environment
The outlook for Germany’s banking system has changed to negative from stable as the profitability and overall creditworthiness of the country’s banks is set to decline over the next 12 to 18 months, Moody’s Investors Service said in a report published today.
“Banks’ weak profitability will decline further as net interest income falls,” said Bernhard Held, VP-Senior Credit Officer at Moody’s “Traditional commercial banks and in particular deposit-funded institutions will struggle to out-earn their costs in the continuing low interest rate environment, even though loan-loss provisions are unsustainably low.”
Germany’s smaller, purely deposit-funded banks will be hardest hit. Their maturing loans and securities will continue to reprice at lower rates, while interest rates paid on retail deposits are in practice at or close to 0%. German banks have had very limited success in improving their high cost-to-income ratios which reached 80% in 2018. The track record of matching cost and revenue dynamics over the past years has been weak and is unlikely to improve in the short term in light of continued revenue headwinds.