The Deutsche Bundesbank (BBk) and the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht - BaFin) published the results of the stress test for less significant institutions (LSIs), based on data from around 1,400 small and medium-sized German, which are under direct national supervision. The stress scenario led to the common-equity Tier-1 capital (CET1) worsening by 3.5 percentage points; however, on average, the German institutions demonstrated sound capital backing even under stress.
Based on the credit institutions’ own planning and forecast data, the institutions anticipated a 23% increase in pre-tax net profit for the year in five years. This corresponds to a 10% increase in the return on assets (2017: -16%). The reason for this very positive forecast is that around half of the institutions performed their calculations based on rising interest rates. The banks and savings banks that planned for a constant interest rate, meanwhile, anticipate a 2% fall in the return on assets. This negative trend may worsen considering the further fall in interest rates that has occurred since the survey was carried out.
The simulations of the five predefined interest-rate scenarios show that the earnings power of banks and savings banks in Germany would worsen considerably if the low interest-rate environment continued in the long term or became more acute. The primary reason for the fall in the return on assets was that the institutions would transfer the falling market interest rates to interest on deposits only to a limited extent. A rise in interest rates would initially be likely to result in a fall in profit, in particular because of a drop in the prices of securities. In the medium to long term, however, profits would recover as a result of increased margins.