German banks need to cut costs

21.10.2020 – 08:18 | Those: Dow Jones Newsw… | Reading time about 2 minutes.

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By Hans Bentzien

FRANKFURT (Dow Jones) From the point of view of the rating agency Moody’s, German banks must cut their costs. According to a Moody’s publication, the reason is the long-term low interest rate environment that has been assumed to have persisted for a long time due to the corona, the consequences of which for the margins can no longer be compensated for with fee and commission income. An excess of deposits from private customers makes it difficult to further reduce financing costs.

The resilience of German banks to low interest rates is coming under increasing pressure as interest rates will remain low for longer than previously assumed in view of the fragile macroeconomic situation, “Moody’s writes.

According to the rating agency, banks have been able to protect their net interest margins in recent years by reducing low-risk and low-margin activities and increasing fee and commission income. In the future, efforts to diversify revenue streams would no longer be enough to offset the pressure on margins. The ability of German banks to cut costs will therefore be a decisive factor.

The German banks have already withstood a long period of extremely low interest rates, but the prospect of a much longer persistence of the situation will be more difficult to absorb, “said analyst Andrea Wehmeier.” The corona pandemic could be the catalyst for more aggressive cost management in Germany Be banks, even if they haven’t had such a good track record in this area. “

The corona crisis has significantly clouded the business environment for German banks. Moody’s expects real gross domestic product (GDP) to decline by 6.7 percent in 2020, followed by a slow recovery next year, which, however, will not be able to fully offset the loss of economic output.

Weaker credit demand, especially from corporate customers, will weigh on the earnings potential, even if the risk premiums in traditional lending have temporarily increased. It is true that the federal government’s measures to support the economy would mitigate the consequences, but the weak economy and rising unemployment should ultimately severely test the ability of borrowers to repay their loans.

Contact the author: hans.bentzien@dowjones.com

DJG / hab / apo

END) Dow Jones Newswires

October 21, 2020 02:18 AND ( 06:18 GMT)

Copyright (c) 2020 Dow Jones & Company, Inc.

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