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Western EuropeAugust 3 2009

Does more mean less for Germany's banks?

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The fragmentation of Germany's banking sector remains its dominant characteristic: the $10,360bn in assets recorded in this year's Top 1000 for the country are held across 82 separate banks. This is in striking contrast to the UK, where $11,267bn assets are held by 15 banks, or France, with $8745bn among just nine banks.

This year's Top 1000 reinforces the long-asked questions about whether the German banking model serves the country well, as the German banks listed made an aggregate loss of nearly $35bn. The average return on assets (ROA) was only 0.14%, and the return on Tier 1 capital was a loss of 1.1%. Among the major European economies, only the UK banking sector lost more money ($51bn), and this was on a larger base of assets and capital (aggregate capital of $335bn to Germany's $241bn). Only Belgium suffered a worse ROA and return on equity.

In the case of both the UK and Belgium, a handful of banks accounted for most of the damage. In Belgium, there were just two very large loss-makers - Fortis and KBC - while in the UK, Royal Bank of Scotland, HBOS and Alliance & Leicester were the prime (or perhaps the subprime) culprits.

By contrast, 15 German banks in the rankings suffered losses in 2008, with 12 losing more than $100m and eight losing more than $1bn. Even when excluding the loss-makers from the average, the return on capital of Germany's banking sector as a whole is weak, at 6.25%.

This compares poorly with France and Italy, even when the loss-makers in those countries are included, giving them an average return in 2008 of 7.6% and 14.6%, respectively. Low German returns could be interpreted as a sign of limited risk-taking, but the scale and spread of losses suggests this is not the case. Instead, the poor profitability simply leaves the sector with a smaller cushion during an economic downturn.

However, the lacklustre performance has not translated into genuine consolidation, beyond the Commerzbank takeover of Dresdner Bank. The majority of the German banks in the Top 1000 are the sparkassen (local savings banks), owned by the municipal authorities, which regard them as useful tools for maintaining credit to local businesses. Nor does the increased pressure for transparency in global finance seem to have touched this sector yet. The provision of 2008 results by the sparkassen was among the worst for any country in the Top 1000. In total, 34 sparkassen only submitted their 2007 results, and four only provided 2006 data. For the years they have reported, these banks have a substantial combined capital of $21bn. Their reluctance to provide fresher data is striking given that the level of a bank's Tier 1 capital - the basis of the rankings - is publicly regulated.

Selected European Banking Indicators, 2008

Selected European Banking Indicators, 2008

Top German Bank\'s Losses on Capital, 2008 ($M)

Top German Bank's Losses on Capital, 2008 ($M)

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