The monetary measures of the European Central Bank (ECB) are increasingly burdening the profits of banks in Germany and Europe. This is revealed in the ECB’s Bank Lending Survey for April on the lending business of banks. While the extended asset purchasing programme of the Eurosystem has directly or indirectly improved the liquidity position and financing conditions of banks in the last six months, the improvements in Germany resulted primarily from clients‘ cash asset reallocations into bank deposits and to a lesser extent from the sale of banks‘ own securities. However, a significant majority of the institutions surveyed in Europe also reported contracting net interest margins and a deterioration in the overall earnings situation of banks.
The reduction in lending rates, boosted by the asset purchasing programme, has particularly contributed to this development. The average European effective interest rate on new business with corporate clients fell in February to a new record level of 1.56 percent. In Germany, the corresponding interest rate already marked a new low in January of only 1.32 percent. In addition, banks’ profits are burdened by the negative interest rate of the ECB’s deposit facility. Credit institutions in Germany and the entire Eurozone have in this connection reported margin contraction in the past six months and additional pressure on lending rates.
Banks are also pessimistic about the next six months. Despite the ECB’s tapering of its purchasing volume of bonds, the banks surveyed in Germany and in the entire Eurozone expect a further monetary-induced burden on interest margins and earnings deteriorations. No matter how encouraging the development might be for credit customers: In a highly competitive environment, the pressure on banks to make cost savings and raise fees further is increasing. Most important, however, is the contraproductive impact of declining profitability when it comes to improving the capitalisation of credit institutions.