Brief

Germany’s Banks 2017

By Walter Sinn and Wilhelm Schmundt

First published on dezembro 17, 2017
min read


An average of 36 bank branches close in Germany every week and at least one credit institution withdraws completely from the market. Structural transformation in the banking sector is evidently continuing – and with increasing speed. Yet this is not reflected in higher returns. In 2016, the average return on equity dropped again by 0.5 percentage points to 1.8 percent. Every tenth bank earns its cost of equity Nevertheless, the fourth balance sheet analysis of some 1,700 credit institutions operating in Germany shows a bottoming out. In many places, profitability has stabilised, albeit at a low level. At the same time, many institutions are building up increased reserves and increasing their equity. The equity ratio rose by 6.3 percent to the highest value since 1970. On the downside: an average return of at least 5 percent must now be earned for 474 billion euros in equity. By now 10 percent of banks manage this thanks to the cost of equity having plummeted – it was only half in the previous year. It is evident that achieving a comfortable return on equity also presents a big challenge for the future, particularly as returns are, at best, stable and administrative expenses have not reduced so far despite every effort. Big differences between and within institutional groups As in previous years, there are enormous differences between and within individual institutional groups. Focused institutions in particular, like direct banks and automotive captive finance companies, as well as the DZ banking group, which remains a central cooperative institution, achieve above-average returns. The two big institutional groups, savings banks and credit unions, continue to succeed in stabilising their returns. Savings and regular consolidation, in the credit union sector above all, offset declining interest surpluses. Nevertheless, the profound structural crisis in the German banking sector is nowhere near over yet, especially since it is imperative that banks prepare for the next round of digitisation and the concomitant competition with newcomers to the sector. Transformation and disruption While digital technologies continue to advance, Germany’s banks are facing a two-pronged challenge: transformation and disruption. The credit institutions must further develop their existing business model and at the same time create one or more future models. This requires a metamorphosis in going concerns. Greater progress is hampered in many places by a fatal combination of three factors: holding on to tried-and-tested practices, short-term controls and tight budgets. With an integrated strategy and concentration on the following eight success factors, this situation can be overcome. Attract and retain customers. For this to succeed, relevant offers, channel-independent interfaces and new technologies are needed. Create a homogeneous cross-channel offer. This reduces the number of branches, and call centers experience a renaissance. Digitize processes from A to Z and save billions. The potential of end-to-end automation has not yet been exhausted. See yourselves as technology providers. Banks become high-tech firms. Artificial intelligence, blockchains, cyber security and a new IT architecture come into focus. Data – dig up the gold of the 21st century. The more intelligently banks link information about their customers, the greater the chances of success in the market. Be agile. Small teams drive innovations – also with external help. Fintechs that were potential competitors become valued collaborative partners. Keep two engines running at the same time. While the old organisation further develops the existing business model, a new future model pushes ahead. Change – teach the elephant to dance. Clear and bold guidelines, a network of trailblazers and mobilisation of the entire workforce ensures the success of the metamorphosis. The success factors outline the plethora of tasks that Germany’s banks must deal with in the coming years. But they also show the opportunities that will open up if the transformation succeeds. Because with a successful metamorphosis the banks can establish themselves as an interface for the digital economy.

An average of 36 bank branches close in Germany every week and at least one credit institution withdraws completely from the market. Structural transformation in the banking sector is evidently continuing – and with increasing speed. Yet this is not reflected in higher returns. In 2016, the average return on equity dropped again by 0.5 percentage points to 1.8 percent.

Every tenth bank earns its cost of equity

Nevertheless, the fourth balance sheet analysis of some 1,700 credit institutions operating in Germany shows a bottoming out. In many places, profitability has stabilised, albeit at a low level. At the same time, many institutions are building up increased reserves and increasing their equity. The equity ratio rose by 6.3 percent to the highest value since 1970. On the downside: an average return of at least 5 percent must now be earned for 474 billion euros in equity. By now 10 percent of banks manage this thanks to the cost of equity having plummeted – it was only half in the previous year. It is evident that achieving a comfortable return on equity also presents a big challenge for the future, particularly as returns are, at best, stable and administrative expenses have not reduced so far despite every effort.

Big differences between and within institutional groups

As in previous years, there are enormous differences between and within individual institutional groups. Focused institutions in particular, like direct banks and automotive captive finance companies, as well as the DZ banking group, which remains a central cooperative institution, achieve above-average returns. The two big institutional groups, savings banks and credit unions, continue to succeed in stabilising their returns. Savings and regular consolidation, in the credit union sector above all, offset declining interest surpluses. Nevertheless, the profound structural crisis in the German banking sector is nowhere near over yet, especially since it is imperative that banks prepare for the next round of digitisation and the concomitant competition with newcomers to the sector.

Transformation and disruption

While digital technologies continue to advance, Germany’s banks are facing a two-pronged challenge: transformation and disruption. The credit institutions must further develop their existing business model and at the same time create one or more future models. This requires a metamorphosis in going concerns.

Greater progress is hampered in many places by a fatal combination of three factors: holding on to tried-and-tested practices, short-term controls and tight budgets. With an integrated strategy and concentration on the following eight success factors, this situation can be overcome.

Attract and retain customers. For this to succeed, relevant offers, channel-independent interfaces and new technologies are needed.
Create a homogeneous cross-channel offer. This reduces the number of branches, and call centers experience a renaissance.
Digitize processes from A to Z and save billions. The potential of end-to-end automation has not yet been exhausted.
See yourselves as technology providers. Banks become high-tech firms. Artificial intelligence, blockchains, cyber security and a new IT architecture come into focus.
Data – dig up the gold of the 21st century. The more intelligently banks link information about their customers, the greater the chances of success in the market.
Be agile. Small teams drive innovations – also with external help. Fintechs that were potential competitors become valued collaborative partners.
Keep two engines running at the same time. While the old organisation further develops the existing business model, a new future model pushes ahead.
Change – teach the elephant to dance. Clear and bold guidelines, a network of trailblazers and mobilisation of the entire workforce ensures the success of the metamorphosis.

The success factors outline the plethora of tasks that Germany’s banks must deal with in the coming years. But they also show the opportunities that will open up if the transformation succeeds. Because with a successful metamorphosis the banks can establish themselves as an interface for the digital economy.