Despite the steadiness of these parameters and the currently very favourable macro-economic
conditions, the German banking sector of today is not very profitable by international standards.
This may to some extent be owed to the three-pillar structure of the German banking
market and related ownership structures of banks: In addition to economic objectives, in particular
the public and cooperative banking pillars pursue overarching goals related to local economic
development, country-wide offering of banking services and mutual support. This affects return
expectations of banks within these two pillars but also the market return expectations as a whole.
Resulting from the implementation of new regulatory requirements
1, and the associated build-up
of capital buffers (starting from a low starting point) of approx. €163 billion, the profitability of
German banks has actually declined by about one-third over the past ten years.
2, An even further
erosion of profits could so far be avoided, specifically by converting hidden reserves. It is
uncertain, however, for how much longer these buffers will be available.
The low profitability of German banks is regarded as an indicator of overcapacity by market
observers, including regulators – casting doubt on the sustainability of their business models.
If the macro-economic environment worsens, risk costs are expected to increase, which would
further negatively affect the profitability of German banks.
An additional role is played by the specific German way of consolidation within the
Figure 1: Post-tax return on equity of banks by country, 2016 (in %)