Some major US banks were able to multiply their profits at the beginning of the year. The German financial institutions, on the other hand, are still struggling with weak returns. What are the reasons?
Deutsche Bank boss Christian Sewing takes over the post of chief lobbyist of the private financial institutions in July. The board of directors of the banking association BdB today elected Sewing as the successor to the chairman of the board of directors of the private bank Berenberg, Hans-Walter Peters. Sewing is considered a “doer” who has managed to get Germany’s largest financial institution out of the red in the middle of the corona pandemic. Nevertheless, Deutsche Bank is also lagging behind its foreign competition, especially the large Wall Street houses. A look at the latest quarterly figures shows how big the gap is. According to this, the American industry leader JPMorgan alone earned in the first three months of this year with 14.3 billion dollars, almost five times the value of the previous year. Goldman Sachs increased profits sixfold to $ 6.7 billion. Deutsche Bank will not publish its new quarterly figures until next week, but a look at the fourth quarter of 2020 reveals how far behind the group is. The German industry leader earned just 189 million euros during this period, compared to 624 million euros for the year as a whole.
Only one percent return
Even beyond the absolute figures, the US banks outshine the domestic institutions by far. JPMorgan’s return on equity for the first quarter of this year is 23 percent. The Deutsche Bank managed eight percent last year, the entire German financial sector together, i.e. the private banks, the savings banks and the cooperative banks, came to just one percent. There are many reasons for such a huge difference. The fact that the US banks were able to increase their profits so strongly in the first quarter is mainly due to the good economic situation in the country. The financial institutions were able to cancel a large part of their risk provisioning for bad loans because they have to fear fewer loan defaults due to the recovery of the economy – US GDP is likely to rise by 6.5 percent this year. At JPMorgan alone, profits soared by $ 5.2 billion.
Big profits from the investment business.
At the same time, the large US companies benefited from their strong position on the capital markets and the companies’ high need for advice. JPMorgan took in investment banking, $ 2.9 billion, more than ever. Goldman Sachs even increased revenues in the division by three quarters. Deutsche Bank is likely to benefit from this boom too, as it is one of the largest foreign exchange and bond traders in the world. But the rest of the German banking industry is just sitting on the bench. Commerzbank has been saying goodbye to trading on the capital markets for years. Savings banks and Volksbanks were never really there. Of course, this is an extremely volatile business, but in times of zero interest rates it is an even more abundant source of income. Investment banking is also the greatest source of income at Deutsche Bank. Without the income from this division, the bank would not have managed to get out of the red.
Fragmented banking market
In other areas, too, German banks and savings banks are finding it difficult to increase their income from fees and commissions. Industry observers point to the still fragmented banking market in this country, which prevents adequate pricing of services. In fact, the division of the market into private banks, public savings banks and Landesbanken as well as cooperative houses remains a German peculiarity. This is an advantage for price-sensitive private customers. However, it was precisely this division that politicians wanted, that Germany, as the leading economic nation in Europe, has only one internationally positioned bank, experts have been complaining for years. However, the banks themselves are to blame for their misery. The German financial institutions are not able to reduce their dependence on the interest business and, in return, to increase their income from fees and commissions. Quite different in the US: JPMorgan increased noninterest income by 39 percent in the first quarter, but interest income by only eleven percent.
Comparatively high costs
According to management consultants at McKinsey, Germany’s banks are not offensive enough. In terms of their deposits, they lend significantly less than their European and US competitors. They are also lagging behind when it comes to selling systems. Overall, German providers are more dependent on recurring fees than their foreign competitors, according to a study published last summer. The sluggish income leads to a relatively high expense ratio for the institutes. The cost / income ratio has risen from 66 percent in 2007 to 83 percent. That is well above the international average of 70 percent. In order to achieve this standard, the banks have to further automate and digitize their business – with the result that Deutsche Bank and Commerzbank in particular have to cut many thousands of jobs.
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