MOODY’S REPORTS: NEGATIVE OUTLOOK FOR GERMAN BANKING SYSTEM, BUT NO SYSTEMIC CRISIS EXPECTED
The negative ratings outlook on German banks is being maintained, reports Moody’s Investors Service in a new Banking System Outlook on Germany. However, the renewed focus on profitability and strategic refocusing among German banks leads Moody’s to believe that the country’s banks will not undergo a systemic crisis.
“The main challenge facing the German banking system at the moment is its very low profitability, which is the result of a combination of structural, management-related and cyclical problems,” said the authors of this report at Moody’s. The rating agency notes that German banks’ poor profitability can no longer be underpinned by hidden reserves, as these are now depleted. This reduction of economic capitalisation among German banks has deprived them of an important additional cushion. Moreover, the banks’ asset quality has also significantly deteriorated, and the outlook for 2003 offers little hope for improvement.
Nevertheless, despite these concerns, Moody’s does not believe that a systemic banking crisis is imminent in Germany. “This is because all banks – even those in the public sector as well as smaller banks – are taking measures to improve their profitability by cutting costs, enhance their risk management practices (linked to their efforts to comply with Basel II guidelines) and rethink their business models,” Moody’s continues. Moreover, as indicated by the Prime-1 ratings for most rated German banks, Moody’s believes that liquidity is assured under stress scenarios.
The new report also examines the key trends among Germany’s four main types of banks and concludes that private banks are under growing pressure as poor earnings have led the global investor community to question their business models. On the positive side, Moody’s expects German private banks to be the main beneficiaries of the planned removal of the support mechanisms for public sector banks.
Moody’s believes that change is on the cards for Germany’s other types of banks: mortgage banks are likely to undergo further consolidation, Landesbanken will lose their guarantee mechanisms but will continue to enjoy current rating levels for its “grandfathered” guaranteed ratings, while savings banks (or Sparkassen) are considering reforms, as pinpointed by a new strategic paper issued on their behalf.
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