Research by the European Central Bank (ECB) has revealed the profitability of the banking sector across the eurozone declined for the first time in three years. Analysis of 113 banks supervised by the ECB has found that slow growth and low interests rates for the 19 nations using the euro has caused returns on equity to decrease. In 2019, returns on equity – the difference between total assets and liabilities – slumped from 6.2 percent to just 5.2 percent.
Equity for banks in Germany fell more than five percent below the eurozone average and struggled to break-even.
Of the 21 German banks observed by the ECB, the average return on equity was a tiny 0.08 percent.
The damning figure was highlighted further after it emerged German banks were outperformed by Italy – which has been one of the worst-performing economies across Europe.
The ECB put Italian banks on 4.85 percent – just below the industry average.
Banks in the eurozone have struggled to see a return on investments due to the fragile European economy which saw growth rates of just 1.2 percent and interest rates slashed to 0.5 percent.
Katharina Utermöhl, senior economist at the Berlin-based financial services firm Allianz, said: “The already low profitability of eurozone banks and in particular in Germany is worrying as it could leave the industry struggling to rebuild capital buffers and to cope with rising non-performing exposures.
“If anything this could revive the debate about the long-overdue consolidation of the sector.”
The coronavirus crisis has put Europe on lockdown and economists have warned of an economic recession.
Europe has become the epicentre of COVID-19 with Italy, Spain, France and Germany among the world’s worst affected countries.
Florian Hense, economist at the Hamberg-based Berenberg Bank said: “On the negative side, the current fall in GDP will probably be worse than during the 2008/2009 crisis.”
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At a press conference on Monday, German Chancellor Angela Merkel warned the coronavirus crisis is the biggest challenge the EU has ever faced.
Ms Merkel said: “In my view the European Union is facing the biggest test since its foundation.
“We have a big health challenge that is impacting all member states, however differently. It is a symmetrical shock.”
Today the ECB attempted to stimulate the EU economy by making it easier for banks to cash at rock bottom rates during the COVID-19 pandemic.
In a statement, the ECB said: “The measures collectively support the provision of Bank lending especially by easing the conditions at which credit claims are accepted as collateral.
“The ECB is increasing its risk tolerance to support the provision of credit via its refinancing operations, particularly by lowering collateral valuation haircuts for all assets consistently.”
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