Cost and income structure

Net interest income accounts, on average, for over 70% of the banks’ total earnings. The relative importance of this item has declined since the beginning of the 1990s. In 1990 the figure was almost 82%. Net commission income meanwhile initially gained in importance. In 2003 it made up more than 20% of total earnings. After the end of the bull market in spring 2000, its share of total earnings fell. In recent years income from commission has become more important again, however, both because the financial markets have recovered and also in part because the banks have become more successful in selling products generating commission.

Net interest income as a percentage of the average balance sheet total has decreased considerably since the mid-1980s. Then the figure was more than 2%; today it is just under 1.2%. This reflects major changes in customer behaviour, the growing importance of the capital markets for both investment and funding purposes and the fierce competition in the banking industry, with a growing number of foreign banks entering the market.

% of balance sheet total   2000   2001   2002   2003   2004 Net interest income   1.14   1.12   1.20   1.16   1.18 Interest income   5.51   5.39   4.83   4.39   4.23 Interest expense   4.36   4.28   3.63   3.23   2.04 Net commission income   0.42   0.36   0.34   0.35   0.35 Staff costs   0.63   0.61   0.58   0.59   0.57 Other administrative spending   0.53   0.54   0.52   0.51   0.48 Other operating income   0.12   0.13   0.10   0.14   0.08 Operating results before provisions   0.53   0.46   0.54   0.55   0.56 Provisions   - 0.24   - 0.28   -0.44   - 0.31   - 0.24 Operating results   0.30   0.18   0.10   0.25   0.32 Extraordinary income and expense   - 0.01   0.02   0.06   - 0.22   - 0.17 Pre-tax profit   0.29   0.20   0.15   0.03   0.15

Around two thirds of total earnings go on administrative spending, with staff costs accounting for almost 55%. This percentage has fallen in the last few years as a result of staff cut-backs and heavy investment in modern electronic and communications technologies. In the early 1990s staff costs made up over 62% of administrative spending.

Though the banks have generally succeeded in reducing administrative spending as a proportion of their balance sheet total in recent years, the sharp decline in interest margins means that the cost/income ratio (costs in relation to operating results) has fallen only slightly. The banks will therefore continue to focus on cutting costs and improving business processes.

The banks have managed to improve their pre-tax operating results in recent years. Nevertheless, measured as a percentage of the balance sheet total, the figures are still a long way from those seen in the mid-1990s. Operating results after provisioning are also stronger since better risk management has enabled the banks to reduce write-offs on loans and securities.

The banks’ profits came under enormous pressure in the last two years as a result of one-off developments which gave rise to substantial extraordinary expenses. Overall profitability and pre-tax return on equity were therefore also extremely low. Up until the mid-1990s the average pre-tax return on equity for banks in Germany was over 14%. In 2004 the figure was only just over 4%. This was nevertheless a considerable improvement on 2003, and all available indicators show that profitability is continuing to improve.

in %         2000   2001   2002   2003   2004 Net interest income as % of gross earnings   67.8   69.9   73.4   70.3   73.4 Net commission income as % of gross earnings   24.8   22.2   20.9   20.9   21.9 Cost/income ratio   68.4   71.0   67.2   66.4   65.5 Return on equity before tax   9.3   6.4   4.4   0.7   4.2