Thanks to a much improved capital base, German credit institutions are currently still highly resilient to the burdens arising from the low-interest-rate environment. This is confirmed by the analysis of the performance of German credit institutions contained in the Bundesbank's latest Monthly Report, for which experts evaluated the financial statements, prepared in accordance with the German Commercial Code (Handelsgesetzbuch), of just under 1,700 German banks. In particular, the low need for provisioning in the banks' portfolios proved to be a mainstay of profitability in 2015, again allowing an improvement in profit for the financial year before tax.

Banks concerned about interest business

On the whole, German banks' operating income saw a positive development in 2015, growing by €4 billion on the year to €127.9 billion. This is, however, mainly attributable to special factors, which resulted in a clear increase in current income from shares and participating interests.

By contrast, net income from traditional interest business fell by €0.9 billion to €78.1 billion. According to the Monthly Report, this confirms expectations of a tendency towards diminishing prospects for earnings in the persistent low-interest-rate setting, although there is no indication yet of a slump. A survey conducted by the Federal Financial Supervisory Authority (BaFin) and the Bundesbank among some 1,500 German credit institutions revealed as long ago as last September that low interest rates are an increasing cause of concern for the institutions, with many of them perceiving their profitability to be at risk.

After interest business, earnings from commissions business are the second most important source of income for the institutions. This item gained further significance in 2015 and more than offset the losses in traditional interest business. This includes, for example, fees from giro transactions and payments as well as from brokerage of savings and loan contracts. Net income from commissions business saw significant growth of €1.2 billion to €30.5 billion in 2015. Savings banks, credit cooperatives, as well as the regional banks and other commercial banks played the largest part in this development.

Staff costs and other administrative spending weighing on expenditure side

The institutions' staff costs and other administrative spending went up by 5% to €90 billion last year. This led to a deterioration in banks' cost efficiency. The ratio of administrative spending to operating income rose by 1.2 percentage points to 70.4%. This meant that, to generate every €100, the banks had to spend €70.40 rather than €69.20 as in the previous year.

Accumulation of valuation reserves at an all-time low

Last year's favourable underlying macroeconomic conditions meant that the banks established valuation reserves of no more than €3.6 billion, which was significantly below the long-term average. Although this had a positive impact on institutions' earnings, it harbours the risk of a considerable need to top up reserves, which could weigh on future profitability.

In total, the profit for the financial year of the surveyed institutions increased by €1.5 billion to €26.5 billion. All things considered, the German banks thus proved robust in terms of profitability, as described in the Monthly Report. However, persistently low interest rates mean that institutions are subject to margin pressure, which is likely to increasingly squeeze their potential profit from interest business. The Bundesbank economists do not expect a reversal of trend in terms of diminishing net earnings from deposit business and lending in the current year either.