Frankfurt After the pandemic year 2020, the return on equity of German credit institutions should recover significantly this year. This is the conclusion of the management consultancy Bain in a study published on Tuesday. Last year, the return on equity after taxes fell to an average of 1.1 percent.
In particular, the higher provisions for loans at risk of default had masked the progress made by many banks in their operational business. The cost-income ratio, which shows how many cents a bank has to spend to earn one euro, was 72 percent in the 2020 pandemic. Banks had to spend an average of 72 cents to earn one euro. In the previous year it was 76 percent.
The closing of many branches and the ongoing downsizing in the industry have contributed to the falling costs. According to Bain, banks closed more than 2,000 branches for good last year and instead strengthened online banking.
The current year is likely to be significantly more favorable for the industry, as the half-year results of many financial institutions show. This is due to the fact that banks have to reserve much smaller sums than in the previous year for possibly bursting loans.
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Car banks hui, big banks ugh
However, the yield differences between the different types of banks are large:
Car banks lost practically nothing of their years of high profitability and were the most successful banking group with an average of 7.5 percent. Not only do they earn money from the high-interest loan business, they also earn an above-average amount through commissions, because they can often sell additional products such as insurance to the customers of the automobile manufacturers.
Direct banks, the most profitable in the previous year, had to admit defeat to the car banks. That was because they are more dependent on the lending business and so far have not been very successful in growing in commission-based services such as the securities business. “In addition, now, for example, the emergence of neo brokers limits the price scope in the securities business,” write the consultants from Bain. Thanks to the lean cost structure, the return is twice as high as that of the savings banks, for example.
Mortgage lendersthat finance commercial and residential buildings benefited from the unbroken real estate boom during the pandemic. Business growth offset the effects of low interest rates. The fact that the return fell despite the stable income and the comparatively low cost base was due to the higher risk provisioning due to the pandemic. It was still enough for a return of 5.7 percent.
The return on the Private bankswhich did not suffer from high risk provisioning, but from a chronically high cost base. Bain identifies two reasons for this: “On the one hand, the core business in asset management is associated with a high level of support and advice. On the other hand, even the comparatively small houses have to digitize their processes and shoulder the costs of increasing regulation, ”says the study.
But size is not everything: The bottom line in the Bain ranking is made up of the group of Major banks. This is because institutions like Commerzbank and Deutsche Bank are in a restructuring process that initially costs a lot of money.
Volksbanks are booting out savings banks
What is more surprising is the different track records of Credit unions and Savings banksthat actually follow a similar business model. Both institute groups rely on their regional roots and close customer relationships on site. The cooperative Volks- und Raiffeisenbanken were more successful. At 5.3 percent, their return was significantly higher than that of the savings banks, which came to 3.5 percent. Cooperative banks are on average even smaller than savings banks.
The negative factors of both groups of institutes are similar: the high dependency on the interest business depressed the income and also the returns of the cooperative banks and savings banks in 2020. Since the cooperative banks came from a higher level of returns and benefited more from other income, they stayed ahead – the savings banks had actually reduced their costs more significantly. The existing pressure on earnings is likely to lead to further mergers at the Volksbank and Raiffeisenbanken.
As great as the differences in profitability may be, no group of institutes has earned its cost of equity, which Bain estimates at eight to nine percent. The management consultants trust the industry to do just that in the medium term: over the next three to five years, Bain believes that average returns on equity of eight to ten percent are possible in the German banking sector.
More profit through more sustainability
On the one hand, this is due to external factors that the banks cannot influence themselves: Bain assumes that the interest rate environment for banks will improve somewhat in the medium term due to rising interest rates. In addition, the risk costs for bad loans are likely to level off again at a relatively low level.
The banks have the other two factors in their own hands: the institutes can work on increasing their commission income, i.e. fee income from advisory services or account services, for example. In addition, the financial institutions must further reduce their costs. Bain believes savings of ten to 15 percent are possible, which would lead to a cost-income ratio of 60 to 65 percent.
Tailwind from external factors and austerity measures should, however, only increase the return to five to seven percent. The ten percent promised by Bain is only possible if there are also mergers of financial institutions in the industry – which, according to Bain Germany boss Walter Sinn, does not look like it.
From his point of view, however, it is just as important that banks develop new business opportunities, for example in the area of sustainability, digital ecosystems, new payment methods such as “buy now, pay later” or digital assets.
The Bain experts see great business opportunities for banks in the climate-neutral restructuring of the economy – not only because of the associated investment and financing requirements. Consulting services related to the climate-related transformation of corporate customers make up half of the earnings potential, according to a study by Morgan Stanley.
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