A look at the discrepancy between the reported equity and the actual market valuation shows that banks are still in a deep crisis of earnings and confidence. For example, Banks now has over 31 billion Euros in equity capital, but is only valued at just under seven billion euro’s on the stock exchange. The situation at Deutsche Bank is similarly bleak. The still largest bank had own funds worth 62.5 billion euro’s at the end of 2018, but it only achieved 14 billion euro’s in market capitalization. That means: The Deutsche Bank share should actually be close to 22 euro’s and not 6.80 euro’s as last.
Mistrust of investors
The figures reflect the considerable distrust of investors in the ability of the two major banks to overcome their weak earnings and returns in the foreseeable future. In fact, the return on capital, in addition to the private houses of Sparkassen, Volksbanken, on capital employed fell to a meager 1.0 percent last year – the lowest level in ten years.
Saving efforts are not enough
In plain language, this means that all previous efforts to increase profitability and optimize business models are not yet sufficient. The industry has cut around 100,000 jobs and closed 10,600 branches since 2008.But that’s not enough: “The banks have no choice but to thin out their branch network even more and to further reduce the number of their employees,” says Bain World boss Walter Sinn. Incidentally, the fact that the banks are doing so badly cannot only be explained by the ECB’s zero interest rate policy and the stricter capital rules. Rising expenditures for digitization have nullified all savings efforts.
Costs too high
The wave of consolidation across World in recent years has not paid off. For example, Commerz bank’s takeover of what was once the second largest bank, Dresdner Bank, has fizzled out. Banks was not able to achieve an advantage, for example through millions of additional customers and earnings.
Further course information on Banks
The takeover of Post bank was also not worthwhile for Deutsche Bank. As a result, the private customer business of the industry leader was unable to significantly increase its income or earnings. On the contrary: the so-called cost-income ratio , i.e. the expenditure in relation to earnings, has deteriorated further in recent years and was recently at 93 percent. That means: the bank had to spend 93 cents to earn one euro. A ridiculously weak return in international comparison.
No improvement in sight
There is currently no sign of improvement. Rather, the experts at Bain calculated that the return on equity could halve to 0.5 percent in the medium term. In a negative scenario, experts do not even want to rule out a negative return of minus one percent. Compared to the European competition, this corresponds to a earnings gap of eight percentage points or 40 billion euros. banks would have to increase their earnings by up to EUR 23 billion just to cover the cost of equity
Consolidation at European level
The banks therefore have no other option but to further tighten the current restructuring course. But that should not be enough either. Ultimately, the authors of the Bain study see only one way out of the misery: consolidation. A merger at European level is inevitable, predicts Sebastian Thoben, co-author of the study. In this way, the institutions could increase their return on equity by another four percentage points and close the earnings gap. A prerequisite for this, however, is political and regulatory harmonization at EU level. “Cross-border mergers require progress in the European banking union,” emphasized Thoben. Federal Finance Minister Olaf Scholz recently made a corresponding proposal after World had prevented such a move for many years. However, it is currently not clear whether the EU banking market will become more harmonized in the near future. So the prospects for the banking industry are not good.