German credit institutions’ performance tended to deteriorate in 2022, Bundesbank experts write in the current issue of the Monthly Report. Profit for the financial year before tax did manage to creep up on aggregate (+1.4%) and, at €27.4 billion, remained well above the long-term average. According to the Bundesbank’s Monthly Report, however, this was driven largely by a one-off effect at one institution belonging to the category of big banks. Excluding this effect, the collective profit of all German credit institutions before tax for the year would have fallen compared with 2021, the experts write. 

The Bundesbank reports that 2022 proved another challenging year for German credit institutions. While the coronavirus pandemic eased its hold on the macroeconomic environment as the year progressed, Russia’s war of aggression against Ukraine, supply bottlenecks, energy supply risks and high inflation took their toll on the German economy. With consumer prices soaring, the Eurosystem also ended the eight-year period of negative interest rates in the summer of 2022. Key interest rates were subsequently raised significantly by a total of 2.5 percentage points in several steps up to the close of the year.

Mixed impact of higher interest rate level

According to the experts, the rise in interest rates had a rather mixed impact on the individual categories of banks, with the majority recording lower profit for the 2022 financial year – in some cases by a significant margin – than in 2021. 

Overall, the report explains that the interest rate hikes in 2022 had both a positive and a negative impact on earnings. On the one hand, the higher interest rates were instrumental in improving the net interest income of German banks as a whole in the reporting year. The exceptionally steep increase of 11.4% chiefly came about on the back of lending rates rising faster and more strongly than deposit rates. Net interest income thus proved to be the main force behind the considerable rise in operating income (+11.8%), the experts write. By contrast, net commission income remained at the previous year’s level and, unlike in 2021, played no part in boosting operating income.

On the other hand, interest rate hikes in 2022 caused net valuation charges to shoot up to almost four and a half times the previous year’s figure; at €16.2 billion, they were also well above the long-term average. This was mainly due to high write-downs on fixed-income securities and increased risk provisioning in lending business, according to the experts. In addition, general administrative spending also went up by 3.3% compared with 2021. Together with higher net valuation charges, this more than offset the increase in operating income.

Sustained consolidation

The consolidation process in the German banking sector continued in 2022. Over the course of the year, the overall number of credit institutions fell by 61 to 1,395. The report states that the decline was thus somewhat higher than in the previous year and was mainly attributable to mergers, largely among credit cooperatives. 

Current challenges

In the current year, high inflation rates, the tightening of monetary policy and elevated uncertainty about economic developments continue to shape German credit institutions’ business environment, according to the experts. Against this background, it remains to be seen to what extent the continued rise in interest rates will bolster the performance of German banks in the medium term. Overall, risks that drag on earnings are pointing upwards: the increase in the interest margin in outstanding lending and deposit business, which played a major role in improving net interest income in 2022, is unlikely to be sustainable if the expected competitive pressure pushes up interest rates on customer deposits. A decline in new lending business and an increase in credit defaults is expected to weigh on performance in the next few years.