Germany’s public-sector banks are not meant to be profitable – they have a social function – but even though stresses will continue, savings banks have found ways to work with the Landesbanks.

Reichenau am Bodensee, which lies about 10 kilometres west of Konstanz in southern Germany, is a pretty little town. It has an eighth-century Benedictine monastery, picturesque half-timbered houses and a handful of welcoming Gaststätten. And like every German town and city, it has its obligatory savings bank, Bezirkssparkasse Reichenau. With assets of a little over €1 billion at the end of 2016, deposits of just over €600 million, loans of €950 million and a workforce of 132 employees, Reichenau’s savings bank is hardly a global systemically important bank. But it is remarkable in one respect. According to one recent study, it is the most efficient savings bank, or Sparkassen, in Germany among those with a balance sheet of more than €300 million. The survey of productivity among German and Austrian savings and cooperative banks was undertaken by Confidum, a Swiss financial management consultancy. Its managing director, Christof Grabher, says that in today’s interest rate environment, traditional measures of efficiency in the banking industry have lost their relevance.

The most popular of these yardsticks is the cost-to-income ratio, which collectively hovers at over 60%. “Firmly entrenched among the worst in Europe”, is how they were described in a recent speech by Andreas Dombret, member of the executive board of the Deutsche Bundesbank.

Confidum’s measures of productivity in the German banking sector are even less flattering. “Cost-to-income ratios are an imperfect efficiency indicator because the calculation is based on net interest margins, which are a reflection of accommodative ECB policy, rather than real productivity,” says Grabher. “Our survey compares cost efficiency ratios, which take into account total operating expenses relative to customer business volumes.” The Confidum ratios make uncomfortable reading for Germany’s savings banks. Grabher says that a ratio in excess of between 110 and 115 is unlikely to be sustainable in a low interest-rate environment. Under this methodology, Reichenau’s savings bank will have little to worry about, with a ratio of 86. Nor will larger Sparkassen in cities such as Hamburg and Munich. But with only 29 savings banks scoring 114 or lower in the Confidum rankings, the majority remain ill-equipped to navigate an extended period of low rates.

Policy

Of course, rates will not stay low for ever. But as Grabher says, it is not just today’s abnormal monetary policy environment that is creating headaches for Germany’s Sparkassen. Recent regulatory changes are making it easier for the small savers that are their lifeblood to switch accounts. That will give fresh impetus to internet banks like ING DiBa, which, with 8 million customers, is already the third-largest retail bank in Germany. ING DiBa says it has a strategy so simple it can be illustrated on a beer mat and its no-branch, no-frills business model clearly gives it a cost advantage that few other retail banks can match. It has a cost-to-income ratio of 40%, versus 64.3% among member banks in the Sparkassen-Finanzgruppe and 67.9% for the cooperative banks. Confidum gives ING DiBa a cost-efficiency ratio of 36, compared with 129 for the Sparkassen and 138 for Commerzbank. However, Georg Fahrenschon, the former Bavarian finance minister who is now president of the German Savings Banks Association (DSGV), argues that the Sparkassen are well-equipped to counter the competitive threat of the direct banks.

“Sparkassen are the biggest internet banking providers in Germany,” he tells Euromoney.

“The Sparkassen app has more than 13 million users, making it the most popular in Germany, and there are now about 500,000 people using our peer-to-peer payment service.” Besides, says Fahrenschon, it is not all about costs.

“Direct banks are fine for customers who want a very fast decision on a standard product from a big computer system,” he says. “But the reality is that if they want a personalized service and have individual questions that need to be answered, there is still no substitute for the Sparkassen.” This proximity to the customer, which has been at the heart of the savings banks’ ethos for well over 200 years, is regarded as a red line by the DSGV.

“We recognize that, on average, customers visit their branches only once a year, which is why Sparkassen are digitalizing the way they interact with clients,” says Fahrenschon. “But we will never abandon the principle of ensuring that Sparkassen serve every community in every region of the country.” This does not mean that savings banks are deaf to the findings of surveys such as Confidum’s, nor to external
analysts’ continuously repeated warnings that with almost 1,900 banks, Germany is overbanked and overburdened with costs. More than 900 Sparkassen branches closed in 2016 and a number of recently published surveys suggest that the universe of savings banks will continue to contract over the next five years. Frankfurt-based finance-market specialist Investors Marketing has forecast that by 2025, around 320 will remain active, compared with close to 400 today.