Germany’s banking outlook has been slashed by credit ratings agency Moody’s amid concerns over the current low interest rate environment.
Moody’s has cut its forecast from stable to negative for the country’s lenders, adding that their profitability and overall creditworthiness will likely decline over the next 12 to 18 months.
Slowing global trade has also dented outlooks for Germany’s key industries, such as the automotive and manufacturing sectors.
According to the agency, Germany’s smaller, purely deposit-funded banks will be hardest hit.
German banks have had very limited success in improving their high cost-to-income ratios which reached 80 per cent in 2018, Moody’s said.
“Banks’ weak profitability will decline further as net interest income falls,” said Bernhard Held, VP-senior credit officer at Moody’s.
He added: “Traditional commercial banks and in particular deposit-funded institutions will struggle to out-earn their costs in the continuing low interest rate environment, even though loan-loss provisions are unsustainably low.”
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So-called low-for-long interest rates have driven concerns over the profitability of Europe’s banking giants in recent months.
Alongside new regulations and troubles in the global economy, low and negative rates have put pressure on banks’ net interest income.