In view of the corona crisis, the banks are preparing for harder times and are massively increasing their risk provisioning. A study shows: The profitability of the corporate customer business sinks to a new low as a result.
Studies and research on trends and developments in the corporate banking sector, including corporate and investment banking.
–
Despite the corona crisis, the number of company bankruptcies in Germany has declined in recent months. But the banks are preparing for harder times. Just because of the currently suspended obligation to file for insolvency, it is not yet foreseeable when and in which sectors companies will increasingly be insolvent. However, experts already fear a high number of zombie companies.
Banks benefit from the increasing demand for credit
The banks and savings banks have benefited from the dynamically growing demand for credit from corporate customers. The extremely low interest rates for years mean that the volume of loans granted to corporate customers continues to grow. At just under 1.3 trillion euros, it again reached a high in the first half of 2020. After a long decline, the credit margin has recently also recovered.
However, not all groups of institutes are benefiting from these positive trends. While savings banks and private banks will be able to expand their market shares in the medium term, the Landesbanken are losing weight.
Banks also act differently, even if they belong to the same group of institutions. For example, financial institutions that have a wide range of products are increasing lending even during the Corona crisis. Others hold back in recessions or have to do so under pressure from their risk management.
Increased risk provisioning causes profits to shrink
However, the institutes run the risk that companies will not be able to service their loans on time due to the Corona crisis. That is why the financial institutions in Germany increased their loan loss provisions for corporate customers drastically in the first half of 2020 – similar to the 2008 and 2009 during the global financial crisis. According to an analysis by the management consultancy Bain & Company, profitability in corporate banking has reached a new low. In contrast, income has remained stable.
The corona pandemic has led to a collapse in profitability in corporate banking.
–
Cost structure and digitization
Well-positioned banks have usually already optimized their cost structure. Across the industry, however, there are still considerable deficits in some cases. Administrative expenses have even increased in recent years because the previous cost and efficiency programs have either not yet been fully effective or do not go far enough.
In addition, the costs for regulation and digitization will continue to rise. In addition, customers’ expectations of digitization are growing, no matter what industry they are in. The corona pandemic has accelerated this trend again. Numerous credit institutions have stepped up their efforts to digitize end-of-line routes in recent months, but there is still a lot of catching up to do.
Negative return on equity in corporate banking
The development of return on equity in corporate banking underscores how precarious the situation is in some places. This fell to minus 2 percent in the first half of 2020 – even in the global financial crisis it had not fallen below minus 1 percent. However, this decline is not solely due to the Corona crisis. The return on equity in corporate banking was already below the cost of equity in 2019. Now the existing weaknesses are showing in their full extent, which increases the pressure to act again.
Against this background, banks in Germany should primarily address two issues. We need to make further progress in terms of reducing costs and increasing capital efficiency. At the same time, the institutions must invest in selected customer relationships and thus reduce their dependence on the lending business. Despite the recent expansion of the commission business, net interest income in Germany still accounts for 70 percent of corporate banking income – a high figure by international standards. The more banks transform from pure lenders to corporate advisors, the higher their commission share – and the more stable their business model is.
–
