Germany is Europe’s biggest, strongest economy and the world’s largest exporter. Yet it is also home to one of the continent’s weakest banking sectors, at least in terms of shareholder returns. On Thursday Commerzbank, Germany’s second-largest bank by assets, underlined this paradox by revealing abysmal annual results. There are few reasons to believe things will improve soon.
Over half of all German banks are state-backed savings institutions or co-operatives with a correspondingly diminished profit motive. This is great for consumers and companies, who benefit from access to bountiful pools of credit supplied by thrifty savers.
It is not so good for equity holders. Commerzbank reported a paltry 1 per cent return on tangible equity in 2016. It had already axed the dividend just six months after it was reinstated for the first time since the financial crisis. Even excluding a goodwill loss of €627m, pre-tax profits declined by 30 per cent (to €643m).
Bad shipping loans are one reason.Costs are a more persistent culprit. An operating cost to income ratio of 75 per cent is average for Germany. It would be seen as steep elsewhere in the eurozone and wasteful in Scandinavia. Commerzbank wants to cut to 66 per cent by 2020, helped by €600m in cost savings.
The main bugbear, however, is negative interest rates. Commerzbank complained that European Central Bank levies on its deposits cost it €212m last year, costs it is loath to pass on to its own depositors. It says a 100 basis point rise in rates over the next four years would generate up to €1bn in additional income. The prospect of higher rates, nurtured by some better eurozone economic data, is one reason why its shares have risen by a third over the past six months.
Yet three-month euribor, which would account for around half of any projected revenue increase, has been falling. The shares, trading at 17 times forecast 2017 earnings, are not pricing in much scope for disappointment.
Email the Lex team at email@example.com
Get alerts on European banks when a new story is published