Rating giant waddles off German banks

The rating agency S&P is downgrading the creditworthiness of many German credit institutions. The ruling has an unusual rationale that has to do with emerging digital competitors.

Gloomy prospects: View of the skyline of Frankfurt's banking district

Dhe rating agency Standard & Poor’s (S&P) has struck an unusually extensive blow against the German banks, dealing primarily with the savings banks and Volksbanks. The analysts see above all the persistently weak profitability, the high level of competition in the German banking market and the slow progress in digitization as dangers to the long-term creditworthiness of the institutions. All of these problems are exacerbated by the low interest rates that are likely to persist for a longer period of time because they make the most important source of income for small institutions – net interest income – increasingly less profitable.

“The corona pandemic has exacerbated the challenges for the German banking sector and made the institutes less competitive compared to global competitors,” commented S&P on his decision. The analysts also highlight the ruling by the Federal Court of Justice (BGH) on ineffective fee increases from April as a potential burden for the banks. Even if the consequences cannot yet be fully foreseen, the ruling should at least lead to high one-off repayments and presumably make future fee increases more difficult.

Meager return

The rating agency downgraded the long-term rating of a number of German institutes by one mark each. This can make their own refinancing more expensive for the banks. Affected are the cooperative banking sector including its central institution DZ-Bank and R + V-Versicherung, the fund company Dekabank, which belongs to the Sparkasse group, the Landesbank Hessen-Thüringen (Helaba) and the savings banks in Hesse and Thuringia. The analysts also downgraded the ratings of Deutsche Pfandbriefbank and Volkswagen Bank. At the same time, the experts confirmed their assessments from Commerzbank and Hypovereinsbank. The two still have a negative outlook and there is a threat of a downgrade.

The analysts see the high costs and negligence in digitization as open flanks when foreign competitors, including the large American technology groups, want to penetrate the German banking market. For many years, foreign institutions such as the Dutch ING or the French BNP Paribas have been able to gain significant market shares in the German market with inexpensive internet banks.

The return on equity in the German banking sector fell from a meager 4 percent to 2 percent last year. For the next two years, the analysts expect returns of between 3 and 4 percent, with which many institutes will not even be able to cover their cost of capital. In a European comparison, the German banks would work very inefficiently. The analysts rated the fact that the corona pandemic is likely to have only minor consequences for bank customers because of the German aid programs as positive. However, they do not expect a boost in business after the pandemic has subsided.

The banks concerned tried to downplay the importance of the downgrades. The new credit rating of “A-” continues to be a good rating in the German banking market, explained Helaba, for example. From Deka it was said that the savings bank fund company could not escape the overall downgrade of the sector. She rated it as positive that S&P had left its assessment of the fund house’s own financial strength unchanged. The Federal Association of Volks- und Raiffeisenbanken emphasized that the cooperative financial group was still the private banking group with the best rating in Germany, despite the downgrade.