Moody’s downgrades the outlook for the German banking system to negative
Moody’s downgrades outlook for German banks to negative from stable as profitability and overall creditworthiness weaken amid low interest rates.
«Traditional commercial banks, and deposit-financed institutions in particular, will struggle to outpace their spending in an environment of consistently low interest rates, even though loan loss reserves are unsustainably low.», – said Bernhard Held, vice president of Moody&# 39; s and senior loan officer.
Moody&# 39; s highlighted that the more German smaller banks financed by deposits will be hit hardest by the revaluation of loans and the revaluation of securities at lower rates, while the interest rates paid on retail deposits, «almost equal or close to 0%».
Banks in Europe’s largest economy have struggled to improve their high value-to-income ratios, which peaked at 80% in 2018, and the report predicts the situation is unlikely to improve in the short term amid persistent income fluctuations..
Since 2007, Deutsche Bank has lost 600 billion euros of its assets and is down more than 60 percent in terms of market capitalization. On the other hand, Commerzbank acquired around £ 100 billion in total assets but lost half of its market capitalization.
In terms of share price, Deutsche Bank shares fell more than 80 percent over a ten-year period, while Commerzbank shares lost almost all of their value over that period, having experienced a fall of almost 90 percent..
Speaking at the Handelsblatt Banking Summit in Frankfurt in September, Deutsche Bank CEO Christian Schueing and Commerzbank CEO Martin Silke warned of serious side effects of low interest rates from central banks.
The increase in rates is beneficial for banks, as it allows them to provide loans to investors at a favorable interest rate. Lower interest rates limit the bank‘s ability to generate profits, thus increasing pressure on margins.
Negative interest rates, such as in Europe, punish banks for keeping money deposits with central banks. The ECB‘s current deposit rate is -0.5%, the lowest ever.
In an effort to ease the pressure on bank balance sheets from its latest package of measures, the ECB introduced «two-tier» a system that exempts from payment part of the bank’s deposits, which are currently six times their required reserves.
Figures from Pictet Wealth management show that tax break will result in annual savings of € 3.1 billion ($ 3.4 billion) for the entire banking system of the eurozone.
A report released on Thursday said the increase in customer deposits is proving costly for German banks, while the lack of a fixed-income alternative and a general reluctance by investors to move to equity investments have contributed to the increase in bank deposits..
Faced with persistent low or negative rates, Moody&# 39; s suggested that German retail banks are increasingly considering charging negative rates on large retail depositors.
However, the agency suggested that borrowers’ solvency will remain strong amid low rates, a vibrant labor market and buoyant domestic demand.
Moody&# 39; s forecasts German GDP (gross domestic product) growth of 0.6% in 2019 and 1% in 2020 due to slowdown in global trade, which also contributed to negative outlooks for the automotive, chemical and manufacturing sectors.