Big banks much less profitable

The large financial institutions in Europe are finding it even more difficult to generate profits in the pandemic. This is shown by new figures from the ECB. Bank customers are also feeling this.

The big banks in the euro zone are increasingly struggling with weak earnings. According to the European Central Bank (ECB), the institutions’ so-called return on equity fell to just 1.53 percent in the fourth quarter of 2020. A year earlier it was 5.16 percent. This key figure shows how high the share of profit is in the equity capital employed. The ECB attributes the fact that the profitability of the banks has fallen so sharply to increased value adjustments in the balance sheets and to provisions in the wake of the corona pandemic. In addition, it is increasingly difficult for institutions to generate profits – this is a longer-term trend in the banking industry in times of persistently low and penalty interest rates.

Share of bad loans decreased

According to experts, the longer the pandemic affects economic life, the greater the risk that credit defaults will put a strain on the balance sheets of the institutes. As the supreme supervisor of the big banks in the euro zone, the ECB has asked the industry to prepare for growing risks. In fact, according to the ECB banking statistics, the institutions have made progress in reducing loans at risk of default. The rate of “bad” loans fell to 2.63 percent in the fourth quarter of 2020 – from 3.22 percent in the same period of the previous year. However, according to the statistics, 444 billion euros of such problematic loans are still slumbering on the balance sheets. The ECB currently monitors 115 institutions – including Deutsche Bank and Commerzbank. The penalty interest that they have to pay on deposits at the central bank is a burden for the institutes and increasingly also for bank customers. This currently costs the commercial banks 0.5 percent. More and more financial institutions are passing this on to account holders. According to the comparison portal Verivox, more than 100 institutes introduced penalty interest rates for their customers in the first 100 days of the year alone. “More banks are currently being added almost every day,” said Oliver Maier, Managing Director of Verivox Finanzvergleich GmbH. Nice more than 300 banks and savings banks already charge a so-called custody fee – especially for overnight money.