Profitability of Germany’s small and medium-sized banks and savings banks (less significant institutions, or LSIs) improved considerably in 2023. This, according to an extensive update from BaFin.
BaFin noted in a recent report that institutions in Germany have achieved stronger earnings during the period of “higher interest rates” and they have further expanded their “capital resources” and appear to be prepared even for serious adverse scenarios.
BaFin also mentioned in its comprehensive update that these were among the findings of the sixth LSI stress test and accompanying survey, which were conducted this year by the Federal Financial Supervisory Authority (BaFin) and the Deutsche Bundesbank.
Raimund Röseler, BaFin’s Chief Executive Director of Banking Supervision, while presenting the stress test results in Frankfurt shared that the banks are on more solid ground.
Röseler added that most institutions are “strongly capitalized” and are capable of handling the “very demanding” challenges posed in this year’s stress test.
Röseler also noted that the scenario assumed in this year’s stress test was far more “challenging” than in the last exercise two years ago.
In total, the shock caused the Common Equity Tier 1 (CET1) ratio to decrease by 3.7 percentage points to 14.5%.
The stress effect was mainly driven by credit and market risks.
In the adverse scenario of the stress test, the number of institutions that experience “difficulties” lies in the medium double digits.
These institutions would not meet the “supervisory capital requirements” in the event of a major economic downturn.
The BaFin update further noted that the number of impacted institutions is about twice as high as in the 2022 LSI stress test – “mainly due to the more severe scenario specifications.”
Röseler said that institutions should continue to focus on strengthening their capitalization and “not erode their solid capital base unless absolutely necessary.”
They added that the economic situation remains uncertain.
They also noted that they will now “closely monitor the outlier institutions.”
If necessary, they will aim to take the necessary “supervisory countermeasures at an early stage.”
Results of the survey on the current and future earnings and risk situation show that institutions are “anticipating an increase in value adjustments.”
The BaFin update also mentioned that banks and savings banks are still willing to take on “additional risks” on their books and increase their lending.
But their plans foresee a “greater increase” in CET1 capital than in risk-weighted assets, which leads to a moderate rise in the CET1 ratio and takes more than “sufficient account of the additional risks they plan to assume.”
Michael Theurer, the Deutsche Bundesbank Executive Board member responsible for banking supervision, said that their analysis shows that the majority of banks and savings banks are “less optimistic” with regard to commercial real estate.
Supervisors will continue to “closely monitor this segment,”
The outlook is generally said to be more positive for “residential properties,” but lower market values are expected for buildings in need of renovation to meet energy efficiency standards.
The banks and savings banks consider the “greatest challenges” to be recruitment, increased competition for “deposits and the slowdown in economic activity.”
1,200 small and medium-sized German credit institutions took part in the stress test conducted by the Deutsche Bundesbank and BaFin.
The participating institutions represent approximately 91% of all credit institutions in Germany and “approximately 40% of aggregate total assets.”
The results of the stress test are incorporated into the “supervisory activities” of the Deutsche Bundesbank and BaFin.