On Wednesday, Germany’s two banking industry regulators said that as a way to deal with intense competition and low interest rates, which continue to “weigh heavily” on their business, smaller banks in the company are resorting to mergers.
The Bundesbank and BaFin announced that banks have been increasing fees for basic services and closing some branches, but as a way to solve the shrinking interest rates margins, mergers are being seen as the solution to this particular issue. This declaration was made after reporting on the results of their biennial survey of about 1,500 small and medium-sized banks that account for about 41% of all bank assets in Germany.
It was revealed by the survey that about 10% of the banks are presently in actual talks regarding mergers and that half believe that mergers in the medium-term are possible.
“Mergers and acquisitions are becoming more and more attractive and are now viewed less critically than in the past,” stated the Bundesbank board member responsible for banking supervision, Andreas Dombret.
According to a separate Bundesbank report in May, the largest economy of Europe was home to 1,888 financial institutions at the end of last year. That is half of what it was 20 years ago yet analysis regarded that the consolidation has not gone far enough.
Over the next five years, the banks expect pretax profit to decrease by 9%, Wednesday’s findings have revealed.
That resembles a decline of about 16% in the bank’s total return on capital. Although steep, that is less than the decrease of 25% in return on capital expected in the previous survey two years ago.
Dombret stated that he continued to be concerned about a worsening in the profitability of the banks even though it was deteriorating at a pace slower than in the last survey.
“The phase of stagnation caused by low interest rates is far from over,” he stated.
The fact that banks were looking for alternative sources of income, like fees and commissions, to counter low rates, was also welcomed by the regulators.
But if rates continued to remain ultra low for the foreseeable future, the profitability would likely get worse, with the return on capital estimated to shrink by 40% if interest rates were to be unchanged until 2021, they said.