Situation in the financial sector: headwind for the banks

If there is a recession in Germany, the financial institutions are threatened with loan defaults. On the other hand, a turnaround in interest rates is imminent. How stable are the major German banks?

Before the start of the Russian attack on Ukraine, there was great hope that the banks would now take off. But the outbreak of war has crushed hope immensely. Deutsche Bank in particular has done its homework, says Klaus Nieding from the German Association for the Protection of Securities: “The restructuring of the bank is taking effect, the bank is on the right track and, with its business areas that are doing well, it is again in the top group worldwide banks represented.“

In particular, the business from investment banking would have helped the bank – especially the division for mergers and acquisitions of companies. This division flushed a lot of money into the coffers of Deutsche Bank last year. This year – as the US banks show – the war is dampening takeover activities.

Does Commerzbank need a partner?

But the problem child remains Commerzbank, according to Nieding. “Commerzbank has to show us how it wants to make money in the future. It’s certainly not the private customer business. Commerzbank might also be well advised to look for a European partner.“

The planned merger with Deutsche Bank fell through. However, it is said that two large US investors had speculated on them. The American asset manager Capital Group recently sold a large block of shares held by the banks. Only at the beginning of the year had the hedge fund Cerberus sold large parts of its blocks of shares – even at a loss. He now holds less than three percent of both banks.

“There are also institutional investors who are betting that something like this will happen and then of course accept the consequences,” said Nieding. “It is important that the capital market as a whole has confidence in these shares.”

But there are many uncertainties that put trust to the test. The topic of Russia in particular plays a major role here. Primarily the direct business with Russia. However, that is “manageably large,” says Andreas Hacketahl, finance professor at the Leibniz Institute SAFE. “It was even reduced in part, which means that the direct effect of the Ukraine war is actually small.”

“Situation still too uncertain”

However, it is not only the direct business that is a test for the banks, but also the concern about an impending recession due to an oil and gas embargo. This could cause many companies to stagger, resulting in loan defaults, and this is likely to affect medium-sized companies in particular. A danger for the Mittelstandsbank – the Commerzbank? “At the moment there is still the unanimous opinion, even from supervisors, that the banks are well prepared. That means they can cope with it,” like Hackethal.

The change in interest rate policy gives the banks hope. The US Federal Reserve has already raised interest rates – the European Central Bank (ECB) could soon follow. But champagne corks shouldn’t be popping in the bank towers just yet. “The banks will certainly not celebrate yet, the situation is still too uncertain for that,” says finance professor Hackethal. “But if you look at the interest rate development, then it’s also a step back to normality.”

But nothing really seems normal in times of an unpredictable war.