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German credit institutions lack efficiency

 

The business of European money houses remains weak. According to a study, it looks particularly bleak for German banks. A lack of efficiency and a lack of focus cause costs to rise and earnings to melt. There is a need for action.

The market and competitive environment for European banks remains difficult. Increasing competitive pressure and diverse regulatory requirements are squeezing margins and putting costs on the institutes. The financial sector is facing fundamental structural change and has to face a variety of challenges.

In the past five years, the financial institutions have hardly been able to convert the good economy into their own growth. For most institutes, the costs are too high and the earnings too weak. It looks particularly bleak in Germany, as the management consultancy LivingPoint found in a study.

 

Lack of cost efficiency as a problem

credit loans

The profitability and efficiency situation of German banks is particularly challenging: The operating results have decreased by a total of 28 percent since 2013. One reason for the lack of cost efficiency is the lack of modernization and digitization measures within the institutes.

Many institutes would not use the technological possibilities to increase efficiency sufficiently. In addition, the necessary focus on a clearly defined core and product business is missing.

 

Risk provisioning as a possible problem

In 2018, the equity ratio of European banks had dropped again for the first time. Risk prevention is another threat. In recent years, banks have cut 63 percent of their loan loss provisions, thereby improving their earnings. It is uncertain whether the economic credit quality has improved to this extent. If loans could no longer be serviced due to the economic situation, the banks would have to build up risk provision again and suffer additional slumps in earnings.

 

Inadequate commission business

Outsourcing is stagnating

In response to the persistently difficult interest rate environment, many banks are increasingly expanding their commission business. Above all, the increase in the commission margin in Italy, Spain & Portugal and in the Nordic countries confirm the European trend to partially offset collapsing interest income through the commission business. In comparison to other European countries, however, with a stagnating commission margin of 0.4 percent, Germany is about to be left behind by its competitors.

Missing interest income can be partially offset, but efforts to increase the commission margin have so far not been sufficient. Only medium and small institutes have had real success. These seem to be easier to follow digital trends in commission business and to drive the holistic digitization of services.

 

Increasing competitive pressure requires strategic action

In general, competitive pressure in the financial sector, which was once characterized by barriers to entry, has increased significantly in recent years. FinTechs, BigTechs and digital banks are entering the market with a clear product focus and highly scaled processes and, in addition to increasing pressure to innovate, are also increasing the degree of transparency, according to the study.

To ensure competitiveness, banks should – in addition to further cost optimization – be on the lookout for new income fields. The necessary service and product innovations would have to be aimed at a clearly defined customer target group. The established institutes should learn from the simplicity and agility of the market appearance as well as in the B2C relationship of FinTechs, but at the same time avoid getting bogged down apart from the core business and tying up valuable resources.

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