Germany’s smaller banks are increasingly resorting to mergers as a way to deal with intense competition and ultra-low interest rates, which continue to ‘weigh heavily’ on their business, the nation’s two banking industry regulators commented in a recent statement.
Reporting on the results of their biennial survey of about 1,500 small and medium-sized banks that account for some 41% of all bank assets in Germany, the Bundesbank and BaFin said the banks have been raising fees for basic services and closing branches but mergers are increasingly seen as the solution to shrinking interest rate margins.
The survey revealed that about 10% of the banks are currently in actual merger talks and that half think mergers in the medium-term are likely.
“Mergers and acquisitions are becoming more and more attractive and are now viewed less critically than in the past,” said Andreas Dombret, a Bundesbank board member responsible for banking supervision.
Europe’s largest economy was home to 1,888 financial institutions at the end of 2016, according to a separate Bundesbank report in May. That’s half what it was 20 years ago, but analysts reckon the consolidation hasn’t gone far enough. The findings showed that banks expect pretax profit to fall by an overall 9% over the next five years.
That corresponds to a 16% decline in the banks’ total return on capital. While steep, that is less than the 25% decline in return on capital anticipated in the previous survey two years ago.
Dombret said he remained concerned about a worsening in the profitability of the banks although it was deteriorating at a slower pace than in the last survey.
“The phase of stagnation caused by low interest rates is far from over,” he said.
The regulators also welcomed the fact that banks were finding alternative sources of income, like fees and commissions, to counter low rates. But profitability would get worse if rates remained ultra-low for the foreseeable future, with return on capital set to shrink by 40% if interest rates were to remain unchanged until 2021, they said.
