By Christian van Beek, Director, Financial Institutions

The strong performance of Germany's retail banking groups, comprising 353 savings banks (Sparkassen) and 698 co-operative banks (Volksbanken and Raiffeisenbanken), is underlined by their sizeable 2023 aggregate profit before taxes and additions to the fund for banking risks of EUR 17.0bn and EUR 10.7bn, respectively. Robust revenue growth (Figure 1) was mainly driven by a strong increase in net interest income and positive fair-value results on investment portfolios. In 2022, the substantial investment portfolios of both groups suffered write-downs of EUR 8.0bn and EUR 5.8bn, due to rising interest rates.

A conservative deposit pricing strategy coupled with increased distribution of investment products were the main catalysts for the strong financial performance. The ability to limit deposit repricing highlights the importance of large retail deposit gathering franchises, which drove a notable increase in profits by both groups (Figure 2). Taken together, the GFG (Genossenschaftliche FinanzGruppe Volksbanken Raiffeisenbanken) and SFG (Sparkassen-Finanzgruppe) control 44% of total customer deposits in Germany.

Figure 1: Aggregate operating income

Source: German Savings Banks Association (DSGV), National Association of German Co-operative Banks (BVR), Scope Ratings

Figure 2: Aggregate profit before taxes and addition to fund for general banking risks

Source: German Savings Banks Association (DSGV), National Association of German Co-operative Banks (BVR), Scope Ratings

Efforts to streamline operations during the decade of low interest rates have led to more efficient cost structures while workforce and branch reductions and most notably the consolidation of local banking entities have kept general administrative expenses relatively stable. However, cost-income ratios continued to rise from already high levels as net interest margins continued to decline, peaking at almost 70% in 2020.

With the recent interest rate hikes, the cost-income ratios for both groups have significantly improved, to 54% for the savings banks and 61% for the co-operative banks, reflecting earlier strategic adjustments. We see the improvement as largely structural, although a pullback to slightly higher levels is likely as revenue growth levels off while continued, albeit slower, inflation and essential investments in IT infrastructure put pressure on costs.

Both banking groups recorded significant increases in loan loss provisions in 2023, reflecting economic uncertainty. But despite a steady rise in insolvency rates in Germany from historically low levels, there are no immediate indications of a default crisis. Additionally, while certain specialised real estate lenders and Landesbanken in Germany are reporting escalating non-performing loans in their commercial real estate portfolios, this trend remains contained within local savings banks and co-operative banks. Loan losses in the real estate sector will remain elevated but manageable for these banks in 2024.

See German banks: systemic crisis unlikely amid persistent concerns about real estate slump.

Looking ahead, we anticipate a continued increase in both administrative and risk costs for the SFG and GFG while revenues are expected to stabilise at a very healthy level, albeit slightly below the 2023 high watermark. German savings banks and co-operative banks are resilient, but 2024 poses challenges that will demand ongoing vigilance and strategic adaptation to sustain profitability in a dynamic market landscape.

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