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German banks slow to answer low rate bell

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German banks slow to answer low rate bell

Germany'sbanks are far from alone in cutting jobs, closing branches and carrying outmergers as they look to cope with the pressure from low interest rates. Theirprogress is halting at best.

Recentlyreleased 2015 figures for Germany's savings banks, known as sparkassen, andcooperative banks, known as volksbanken and raiffeisenbanken, show decliningnet interest income, offset to some extent by increasing fee and commissionincome. Returns were under 5% for both sectors, although they outpaced theoverall German banking industry, where returns fell to 2.9% from 3.9% in 2014,according to S&P Global Market Intelligence data.

CarstenRogge-Strang, a spokesman for AGV Banken, an association of German privatebanks, said the savings and cooperative banks were now following the example ofthe private banks and that personnel cuts were affecting their branch networksand investment advisers. AGV Banken said July 19 that totalheadcount in German banking fell to 627,150 in 2015, the biggest decline inover a decade, yet this represented a decrease of just 2.0%.

BothUwe Fröhlich, head of the association of German cooperative banks, or BVR, andGeorg Fahrenschon, head of the DSGV savings bank association, have complainedlong and hard about negative rates, while their bank members have avoidedpassing them onto clients or cutting costs radically.Cost-to-income ratios grew year over year for both sectors in 2015, rising to63.6% from 60.7% for the cooperatives and 69.1% from 68.1% for the savingsbanks. Across German banking as a whole, the ratio was 76.2% in 2015, up from74.8% a year earlier.

Managementconsultancy AT Kearney said in a study released June 20 that German banks areperforming well in terms of asset quality, but remain weak in terms ofefficiency compared to European peers and are falling further behind given themove to digitization. Andreas Pratz, AT Kearney's head of financial services inGermany, said German banks needed to generate a 10-percentage-point improvementin cost-to-income ratios, both by increasing income and cutting costs.

"Freebanking is coming to an end," he said in the report, yet competition inGermany is fierce and customers are resistant to the idea of paying forservices.

"Thequestion is how long they can resist change," said Christoph Kaserer, afinance professor at the Technische Universität München. "The pressurefrom [interest rate] pain is now significant."

Rogge-Strangobserved that the private banks are undertaking far more radical cuts than thecooperative or savings banks, with Deutsche Bank AG set to close some 190 retail branches,leaving it with 535 in Germany. UniCreditSpA's Germanunit has already halved its branch count.

Cooperativebanks have more room for maneuver in reducing headcount than savings banks,whose employees have public sector contracts that do not allow involuntaryredundancies. They must therefore reduce staff through retirement or naturalfluctuation.

Yetneither sector is likely to see the sort of radical change taking place amongprivate banks, said one German bank credit analyst.

"Ithink things will continue as before unless the pain rises," the analystsaid in an interview, asking not to be named. "I do not know whether bothassociations expect the situation to change."

Mergersamong cooperative banks are rapidly increasing, something Fröhlich told the Börsen-Zeitung in June was adirect result of the "poison" of low interest rate policy. Fifty mergers are expected in2016, twice as many as in 2015, and the number of cooperative banks is expectedto fall below 1,000 in 2016 from 1,021 at the end of 2015.

Yetthe analyst noted that these are primarily "low-level mergers … involvingsmall banks, which I do not think result in big synergy savings."