Performance indicators by category of banks

The savings banks have had a higher average return on equity over the last five years than the other categories of banks (though admittedly the credit co-operatives headed the table in 2004). This is essentially due to the comparatively favourable ratio of their gross earnings to administrative spending. Although the credit co-operatives had the highest gross earnings calculated as a percentage of their balance sheet total, their administrative spending is significantly higher than that of the other categories.

2004/2005 annual average   Comm. banks   Landes- banks   Savings banks   Credit coopera- tives   Mort- gage banks Net interest income (% balance sheet total)   1.22   0.61   2.35   2.47   0.43 Net commission income (% balance sheet total)   0.63   0.11   0.53   0.62   - 0.01 Gross earnings (% balance sheet total)   1.85   0.72   2.88   3.09   0.43 Staff costs (% balance sheet total)   0.77   0.22   1.18   1.37   0.08 Other administrative spending (% balance sheet total)   0.79   0.22   0.78   0.96   0.08 Other operating income (net, % balance sheet total)   0.22   0.08   0.04   0.12   0.02 Operating income before provisions (% balance sheet total)   0.51   0.35   0.95   0.88   0.30 Provisions (% balance sheet total)   - 0.28   - 0.21   - 0.56   - 0.55   - 0.16 Operating results (% balance sheet total)   0.23   0.14   0.39   0.33   0.14 Extraordinary income and expense (net, % balance sheet total)   - 0.18   - 0.09   0.05   0.12   - 0.02 Profit for financial year (% balance sheet total)   0.05   0.05   0.44   0.45   0.10 Return on equity   1.44   2.51   10.29   9.34   6.52 Cost/ income ratio   75.48   55.15   65.30   72.53   34.61 Net interest income as % of total earnings   58.80   76.31   80.64   76.98   97.12 Net commission income as % of total earnings   30.55   14.34   18.06   19.26   - 0.84

1)Figures slightly distorted by the transfer in 2004 of NRW.Bank from the Landesbanks to the banks with special functions.

Net interest income at the savings banks and credit co-operatives is normally higher than at the commercial banks. This is partly attributable to differences in the banks’ clientele: savings banks and credit co-operatives do most of their business with retail customers and small and medium-sized firms. Margins here are far wider than on transactions with big companies and institutional investors, which hold a strong market position in their dealings with the banks. These customers play a much more important role for commercial banks than for savings banks and credit co-operatives.

In addition, the savings banks and credit co-operatives are organised in such a way that competition in the lending market is largely excluded within the banks’ respective category. This allows these banks to operate with wider interest margins, particularly in rural areas.

The savings banks and credit co-operatives have to take significantly higher write-downs as a percentage of the balance sheet total, however. Though their client structure allows for much wider interest margins than at the commercial banks and Landesbanks, this advantage brings with it increased risk, which results in more write-offs.

Unlike at the savings banks and credit co-operatives, extraordinary expenses at the commercial banks and Landesbanks have been high over the last few years.

The cost/income ratio has worsened significantly in recent years in all the banking categories. It is especially high among banks with an extensive branch network, as maintaining branch offices is extremely cost intensive. This applies, above all, to the classic universal banks, i.e. the commercial banks, savings banks and credit co-operatives. At the Landesbanks and mortgage banks, which have far fewer branches, the cost/income ratio is noticeably lower.

Return on equity has fallen dramatically in all categories of banks. At the savings banks the rate has plummeted over the last ten years from almost 23% to around 10% (in 2004 even slightly less), while at the credit co-operatives it has fallen to just over 10%. The commercial banks even saw a negative return in 2003 and 2004. In 2003 the Landesbanks also had a negative ROE (- 4.3%).

This decline in profitability is evidently not dependent on membership of any particular banking category. It highlights the need for extensive restructuring of the entire German banking market so that the German banks can regain their earnings power in an environment of ongoing technological progress, a more advanced European banking market and increasing international competition.