Moody's Skeptical of German Banks

In a new report issued today, Moody's Investors Service maintained its "negative" outlook on Germany's banking system. The ratings agency noted four reasons for the outlook:

Margin pressure on banks due to "intense competition, low interest rates and limited loan growth"Weakening operating environment as a result of European recessionary trendsRisking risk charges and deteriorating asset qualityLimited loss-absorption capacity at "many" banks

The pressure on Germany's banks will cut into revenues and profits over the next 12 to 18 months, and even as the banks focus more attention on domestic operations, that focus will "exacerbate structural pressure on earnings." Moody's says that savings banks and local cooperative banks will benefit from their retail operations, but that wholesale banking is set to remain "fiercely competitive."

Moody's expects German GDP growth of 1% to 2% in 2013, but sees:

significant downside risks from the ongoing euro area crisis will persist in view of the German economy's high dependence on other EU countries for its exports and the resulting economic interdependence with other European nations.

Germany's domestic asset quality is "gradually deteriorating and "legacy exposures" to dicey investments in "stressed" eurozone countries heightens many banks' exposure to a sovereign debt crisis that could get worse. Finally, Moody's cuts to the chase:

Moody's says that high balance-sheet leverage and low pre-provision profits will make it difficult for many German banks to cope with major (unforeseen) losses.

This last is what Germany's chancellor and finance minister have tried so hard to avoid, and it is the main reason Germany has done all in its power to deflect any course of action that may result in a review and almost-certain write-down of banking assets.

While Nicolas Sarkozy was president of France, the Germans had a staunch ally because Sarkozy did not want French banks to have to write-down assets either. President Hollande's position on this is not terribly clear, but he does not appear to be as frightened of the consequences as either Merkel or Sarkozy.

Paul Ausick