Over the past four years, German banks have improved their profitability more than banks in other important eurozone countries. This is the conclusion reached by Commerzbank on the basis of data on the large banks directly supervised by the ECB. However, the Frankfurt-based bank's analysis states that German banks still have modest profitability and weak earnings in relation to total assets.

The data from the supervisory authorities on the major banks in Germany, France, the Netherlands, Italy and Spain give reason for hope that the progress made by the EU banks in terms of costs and earnings could provide "some protection against the weaker economic environment", the analysts write.

In terms of the individual countries, the French banks reported the smallest improvements in earnings in the period under review from 2019 to 2023. The largest increase in costs characterised the Dutch banks.

The data comes from the ECB's Single Supervisory Mechanism (SSM) for the largest banks in the EU. The ECB is responsible for a total of 113 banks. Commerzbank analysts analysed the key figures for the third quarter of 2023. The report clearly shows the extent to which German banks have improved their earnings situation in recent years, Commerzbank concludes.

Since the third quarter of 2019, the income of banks in the eurozone has increased by 28% overall, while costs have risen by just under 8% in the same period. On the earnings side, Germany stands out with an increase of 151% in the period under review.

Based on the traditional cost-income ratio (CIR), the German banks are now more efficient than their French counterparts, according to the analysis. However, together with the French banks, they are still the weakest of the five euro member states analysed. In absolute terms, however, the increase is manageable. The cost ratios of the German banks lagged well behind those of the Italian and Spanish banks analysed.

From the analysts' point of view, the CIR is the most common measure of efficiency. However, the ratio says nothing about whether the bank generates high or low earnings in relation to its balance sheet. For example, a bank with a significant asset management or investment banking business will have structurally higher income and costs in relation to its balance sheet assets than a bank focussing on mortgages.

When analysing the EU banks and assessing their efficiency, Commerzbank analysts, therefore, also compare the level of costs and income in relation to total assets. On this basis, the German banks are the least profitable, although a low-cost base offsets this. Greater cost control is, therefore, worthwhile but will not bring competitive returns.

Rising interest rates have helped almost all banks. However, it is clear that German banks are less dependent on net interest income. At an average of 52% in the four quarters to the end of September 2023, the share of net interest income in total income was below the eurozone average of 58%.