The increase in the return on equity of German banks to 3.8% (previous year: 3.2%) in 2022 lagged significantly behind the growth in interest income. Moreover, it is based on the progress of a few credit institutes, especially major banks. Based on data from the consulting firm Bain, 53% of the nearly 1,380 credit institutions operating in Germany had to settle for a return of less than 2% in the year of the interest rate turnaround.

"The interest rate turnaround alone is obviously not enough for German banks to overcome their weak profitability," said Walter Sinn, Head of Bain Germany. He emphasized the need for a profound transformation and investments in new business areas and technologies. The annual analysis is based on data from the German Bundesbank, the European Central Bank, as well as research companies Dun & Bradstreet and S&P Global.

Large banks positively stand out as they reduce administrative expenses and increase profitability. "A division of the market is emerging. Proactive banks are pulling ahead of the competition," stated Sinn. According to the study, the gap between the strongest and weakest institutions almost doubled within a year.

The cumulative interest surplus increased by 12% to 89 billion euros in 2022. However, many banks could not benefit from it. Although the cost-income ratio decreased to 67%, the lowest level since 2012, it did so only on average. The result was clouded by a strongly negative valuation result of 16 billion euros or 2.8% of equity. "This is the flip side of the positive interest surplus effect", noted Jens Oesterle, Associate Partner at Bain. It is mainly driven by write-downs on fixed-income securities.

Some banks were more affected, including credit cooperatives and savings banks. Therefore, in the year of the interest rate turnaround, they had to accept declining profitability, like most other banking groups. In addition to major banks (6.5%, previous year: 2.1%), state banks (5.5%, previous year: 3.4%) were able to increase their return on equity. These two groups achieved a return of over 5%. The new leader is the private banks, which were able to further expand their results and earned an average of 8.8% (previous year: 7.7%) on equity. This group was the only one able to increase commission income and benefited from its business model, which remained stable even in times of uncertainty.

As per Bain's forecasts, the industry faces a stagnation of return on equity between 3% and 4% in the coming years. Nonetheless, Oesterle believes that there is no reason for resignation: "No bank has to settle for a return below the cost of equity or below the risk-free interest rate."

Rather, banks could increase their return on equity to 7% to 9% in the coming years, bringing it to the level of the cost of capital. To get there, it would be important to further reduce complexity, actively manage the balance sheet and portfolio, and advance consolidation. In addition, further sources in the areas of sustainability, additional services, and technologies, including digital assets and artificial intelligence (AI), need to be explored.

Bain estimated the potential for additional business in the ESG segment at 0.5 to 0.7 percentage points. Simply by using AI, a return increase of 1.3 to 1.5 percentage points is possible. In international comparison, it has been shown that institutions with a strong focus on technology, such as BBVA, J.P. Morgan, and DBS, are among the most profitable banks. According to Bain, pioneers among German banks could achieve double-digit return on equity in the medium term, similar to large U.S. institutions.