Full text: Moody’s – Germany’s banking system outlook remains negative

The ratings agency Moody’s issued the following statement earlier today in connection with its ratings review of the German banking sector.

The outlook for Germany’s banking system remains negative, says Moody’s Investors Service in a new Banking System Outlook published today. The main drivers of the outlook are (1) margin pressure for banks, owing to intense competition, low interest rates and limited loan growth; (2) a weakening operating environment amid recessionary trends across Europe; (3) rising risk charges and deteriorating asset quality; and (4) many banks’ limited loss-absorption capacity.

The new report, entitled “Banking System Outlook: Germany”, is now available on www.moodys.com. Moody’s subscribers can access this report via the link provided at the end of this press release.

Moody’s says that intense competition and low interest rates are causing margin pressure that will likely further erode the banks’ already-weak revenues and profits over the 12-18 month outlook period. The banks are re-focusing on their domestic operations, which will reduce risk exposures but exacerbate structural pressure on earnings in the context of additional costs, weakening economies of scale and low loan-growth prospects. Uneven profitability across sub-sectors will likely persist, with savings banks and local cooperative banks benefiting from their strong retail franchises, while German wholesale banking will remain fiercely competitive.

Banks’ operating conditions will be challenging in the next 12-18 months, despite Germany’s so-far sound economic indicators (high employment, modest household leverage, and satisfactory overall corporate sector health). According to Moody’s central macro risk scenario for Germany (as commented in August), GDP will likely grow between 1%-2% in 2013. However, significant downside risks from the ongoing euro area crisis will persist in view of the German economy’s high dependence on other EU countries for its exports and the resulting economic interdependence with other European nations.

The rising risk charges in individual bank results in 2012 to date indicate that domestic asset quality is gradually deteriorating. Legacy exposures to stressed euro area countries and concentrations in highly cyclical sectors (such as commercial real estate and shipping) render many German banks vulnerable to a worsening of the sovereign debt crisis in Europe and to macroeconomic stress. Moody’s says that high balance-sheet leverage and low pre-provision profits will make it difficult for many German banks to cope with major (unforeseen) losses.

Subscribers can access this report via this link: https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_145492