Interest-rate drop Small Banks, Big Worries

Germany's famed savings banks are often considered the backbone of the financial industry and have helped stabilize the country during the financial crisis. But if low interest rates continue, many will struggle to survive.
Through a glass, darkly.

Michael Ermrich is a man who chooses his words carefully.

“We have respect for future developments, but we are not afraid,” said the president of the East German Savings Banks Association with a view to the low interest rates in the euro zone. The association’s 45 member institutions are among Germany’s most profitable.

Mr. Ermrich feels “respect,” but others, unsurprisingly, feel afraid.

Savings banks, known as Sparkassen, are the backbone of Germany's financial sector, but are now buckling under the strain of operating under the European Central Bank’s low interest rate policy. Minimal or even negative interest rates for deposits at the central bank are hitting their financial results, and  calling the savings banks’ very business model into question. Collecting deposits to refinance loans is becoming less and less profitable.

As margins contract, concerns are growing. Handelsblatt sources say the situation is so bad that even a major taboo issue is being discussed internally: negative interest on deposit accounts for private customers. In other words, charging customers to put money into a savings account.

“If the ECB keeps the base rate this low, there will be no getting around it,” said the head of a savings bank, who wants to remain anonymous. Due to pressure to perform profitably, the savings banks simply will not be able to afford to pay out positive interest on deposits anytime soon, he said.

Another banking chief said it would be "negligent" not to at least consider negative interest rates.

But the move would spark fury among Germany's many careful and dedicated savers, and the banks know it.

At many institutions, interest earnings will fall below administrative expenses starting in 2017 or 2018. Marcus Riekeberg, chief executive, Sparkassen Consulting

Record low interest rates affect every bank, but Germany’s 417 savings banks are particularly vulnerable. They hold customer deposits of around €800 billion, or $904 million.

And the 2014 results show the first signs of slowdown. The operating profits as a percentage of the total assets is seen as a good indicator for the savings banks’ economic status. Broadly speaking, the interest earned on deposits and net commission charged by banks are added together and the administrative expenses are subtracted.

Handelsblatt has obtained a copy of the 2014 results from the savings bank associations. While the savings banks are still earning good profits, there is a downward trend in many regions.

The current business model is likely to hold for 2015 and 2016, but after that, many experts say interest earnings will in many cases no longer cover costs.

“At many institutions, interest earnings will fall below administrative expenses starting in 2017 or 2018. Then – other than commission earnings – these institutions will be living off their reserves,” said Marcus Riekeberg, professor at the Private University Schloss Seeburg and chief executive at the savings bank advisory firm Sparkassen Consulting.

A recent Bundesbank assessment estimates that nearly 80 percent of savings banks’ profits come from interest-related income. A fall in this income will hit then banks hard.

Economist Bernd Nolte has a similar view. “There is a kind of alarm going off at savings banks,” he said. "Business will become very challenging for many institutions from 2017 onwards.”

Mr. Nolte, who heads up the advisory firm 4P Consulting said weaker banks will struggle to turn a profit from that point.

The fact that savings banks – as well as cooperative banking institutions – are the ones coming under pressure seems almost unfair.

Their bread-and-butter business of collecting deposits at favorable conditions and handing out loans was a much lauded stabilizer during the financial crisis. But in times of extremely lax monetary policy, it is turning into a real burden.

As one savings bank manager summed it up: “If our deposits no longer generate returns, we have a problem.”


Less Profit-01


The mood at the German Savings Banks Finance Group, which represents the industry, is gloomy.

“We should brace ourselves for a period of low interest rates lasting five years or more,” the association said in a statment.

It has been clear for some time now that the low interest rates challenge savings banks and the situation has worsened since the end of last year, when it became increasingly likely that the European Central Bank would introduce quantitative easing. 

“The situation is more challenging for regional banks than we previously anticipated. It has gotten worse because we have to assume long-term low interest rates,” Mr. Nolte said.

What remains is the pressure to reduce costs. That is more difficult for savings banks than for private competitors, which can more easily close local branches. Savings banks need a highly visible local presence to survive.

Mr. Riekeberg expects that regional financial institutions will have to cut administrative expenses by an average of 30 percent. That is a mammoth task.

But it is more than just a matter of costs; it is a matter of savings banks’ very self-image. Their slogan has been the same since 1963: “When it comes to money - trust a savings bank.”

In the future, it is going to be more and more difficult for savings banks to justify this trust.


The authors are correspondents for Handelsblatt. Elisabeth Atzler focuses on the banking sector, Frank Drost reports from Berlin.  To contact the author: [email protected] and [email protected]