As part of the ECB’s Bank Lending Survey, German banks have for years repeatedly been reporting renewed pressure on margins in their corporate loans and private mortgage businesses. There is intense competition in both segments, causing the dissatisfactory trend for margins.
The drivers behind the intensification of banking-sector competition are technical progress in the form of digitisation and extremely low interest rates. The growing competition is making itself felt above all in the fields of corporate banking and account management/payment transactions, less in deposits business. Because in banking there is very limited scope for product differentiation, competition tends to take place as regards the terms and conditions offered, which squeezes margins further.
Service providers have the incentive to counter narrow margins by boosting business volume. Given the simultaneous restricted growth potential in the market as a whole, the battle for market share becomes all the fiercer as a consequence. While the respective shares of the deposits business have stabilised of late, the ratios in the loans business have continued to shift in favour of the credit cooperatives, regional banks and savings banks. Most recently, branches of foreign banks have succeeded in boosting their share of the corporate banking market.
Even if interest rates were to surge significantly, the situation cannot be expected to ease. On the contrary, rising interest rates swiftly lead to higher refinancing costs for what are predominantly short deposits. By contrast, interest income from the essentially longer-term loans business increases only very slowly. In other words, the pressure on margins in commercial banking looks for the time being set to increase. Moreover, higher interest rates will probably lead to renewed competition between the direct banks and the traditional branch-based retail banks – above all in the deposits business. Increasing interest rates can at best be expected to ease the pressure in the long term.