German credit institutions’ performance improved significantly in 2023, according to the current issue of the Bundesbank’s Monthly Report. At €48.7 billion, aggregate profit for the financial year before tax increased considerably, up by nearly 80% on the year. All categories of banks posted higher profits for the 2023 financial year than they had done in 2022.

This development was driven in large part by the significant increase in net interest income. According to the authors of the report, net interest income rose by 16.7% compared with the previous year, in particular as a result of the Eurosystem’s key interest rate hikes, and reached its highest level in absolute terms (€106.9 billion) in 25 years. This widened the interest margin of German banks considerably. In addition, the trading result and other operating result showed strong increases. Net commission income was around the same level as the previous two years, and so did not contribute to the increase in profit for the financial year.

Write-downs on fixed-income securities lower in 2023

According to the report, net valuation charges sank by slightly over one-third in the reporting year, to €10.3 billion, compared to €16.2 billion in 2022. This development was mainly due to the lower write-downs on fixed income securities compared with the previous year. In addition, German credit institutions started to see reversals of impairment losses on securities which had been written down in the previous year due to the higher interest rate level.

Return on assets at a 25-year high

According to the Bundesbank’s experts, German banks’ profitability and cost efficiency were also significantly improved, as measured by their return on assets and cost/income ratio respectively. At 0.46%, the return on assets reached the highest figure seen over the past 25 years in the year under review. The sharp rise in operating income resulted in the lowest cost/income ratio in 25 years, at 59.2%, despite banks’ administrative spending having climbed slightly by 2.4%.

Macroeconomic challenges and geopolitical risks

According to the authors of the Monthly Report article, the continued macroeconomic uncertainties plus geopolitical risks mean that factors which act as a drag on earnings are likely to gain in significance this year. For instance, the still subdued state of new lending and the shifting of sight deposits into better-remunerated time deposits are set to have a detrimental impact on net interest income. In addition, further increases in counterparty credit risk makes higher write-downs for non-performing loans more likely, the Bundesbank experts point out.