Frankfurt The German savings banks have to make historically high value adjustments on their own investments due to the rapid rise in interest rates. At the end of last year, the 359 savings banks had to write off 7.9 billion euros on bonds, shares and other securities, as the German Savings Banks and Giro Association (DSGV) announced on Tuesday.
In 2022, driven by the European Central Bank (ECB) rate hikes, interest rates have risen significantly. At the same time, share and bond prices fell. The savings banks usually report their securities at market value.
However, DSGV President Helmut Schleweis was confident that the savings banks would be able to cope with the enormous value adjustments. “The current turnaround in interest rates is economically challenging in the short term, but the savings banks have enough substance to deal with it quickly,” he said.
Because the savings banks – unlike the Silicon Valley Bank (SVB) in the USA – have not yet realized the losses, they are only on paper. And there is hope that the financial institutions will make up for the value adjustments. “If the papers are held to maturity, they will be repaid 100 percent and make up for the value adjustments that have occurred in the meantime,” said Schleweis. “We expect that this will be the norm at savings banks.”
The bankruptcy of the SVB, number 16 in the US industry, has been causing unrest on the financial market for days. Many of the bank’s customers – especially technology companies and their investors – had withdrawn or used up their deposits.
In order to pay customers, the SVB had to raise cash and sell bonds at low prices on a large scale. It posted losses of $1.8 billion. When she tried to fill this gap with a capital increase, more customers withdrew their deposits and the bank collapsed.
The collapse of the Silicon Valley Bank causes unrest
The development at the SVB highlights the pitfalls that the interest rate turnaround by the central banks has in store for the banking sector. In the long run, the financial sector should benefit from higher interest rates because it then earns more in the lending and deposit business. But there are huge risks in the short term.
The collapse of the SVB shows “how great the vulnerability of the banks to the turnaround in interest rates can be,” says finance professor Hans-Peter Burghof from the University of Hohenheim. “Both long-term bonds and long-term loans with fixed interest rates, as are common in Germany, have lost significantly in value.” Burghof criticizes that the fact that the ECB reacted so late to the high inflation made the problem even bigger had become.
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According to Schleweis, the savings banks had to use a “very small part” of their contingency reserves formed in previous years to absorb value adjustments. This is likely to have been the case above all if savings banks had slipped into the red without releasing reserves.
The Savings Banks did not form any new contingency reserves in 2022. In the previous year, they had set aside 3.4 billion euros. The profit before taxes therefore fell only slightly to 4.2 billion euros. The savings banks are market leaders in business with private customers and medium-sized companies.
The cooperative banks, the second largest financial group in Germany, fared slightly better. They earned 4.4 billion euros before taxes last year. However, the Volks- und Raiffeisenbanken had to write off almost six billion euros on securities, and they released contingency reserves, which makes it difficult to compare the results. In 2021, savings banks and cooperative banks had each achieved a pre-tax profit of around 7.7 billion euros.
Like the Volksbanks, the savings banks also increased net interest income, the dominant item in the income statement. It increased by nine percent to 21 billion euros. This is already a sign that the turnaround in interest rates is supporting the banks’ core business.
The mortgage lending business collapses
However, the Savings Banks clearly felt that many people could no longer afford to build or buy real estate due to higher interest rates on loans and the cost of materials. In the second half of the year, loan commitments for private housing loans collapsed by a third. In 2022 as a whole, new business fell by twelve percent.
“The first figures from this year show that the bottom has not yet been passed,” said Schleweis. The savings banks in Hesse and Thuringia recently reported that new business with mortgage lending had fallen by 70 percent at the start of the year.
However, the DSGV does not assume that the construction slack will last long. Since there are hundreds of thousands of homes missing in Germany, there is “a compulsion to build homes,” he said. The desire of people to own their own home is also unbroken. In addition, many properties would have to be energetically renovated in order to achieve the climate goals and create the energy transition.
Net 700,000 new checking accounts
Schleweis is therefore demanding – like his designated successor Ulrich Reuter – further political support measures. What is needed are “noticeable equity grants” and an abolition of real estate transfer tax for owner-occupied residential property. “It must not be that today a young family with two normal earners sees practically no possibility of being able to afford home ownership,” said the DSGV boss.
All in all, savings bank customers got through the crisis year better than they had feared. “A year ago we expressed the fear that by 2022 large parts of the population would no longer be able to save. Fortunately, that could be averted,” said Schleweis.
Above all, the federal government’s stabilization measures and the consistently high employment rate would have prevented this. Deposits at the savings banks rose last year by almost three percent to 1.15 trillion euros.
The savings banks also won new customers in 2022. According to the DSGV, the number of current accounts grew by almost 700,000 net, so that the savings banks now have more than 40 million accounts. Private customers accounted for 650,000 account openings. Among them are many accounts of refugees from Ukraine. Around 300,000 corresponding accounts were opened at the savings banks last summer.
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