Struck by slowing economic growth and falling interest rates, the return on equity for the 113 banks supervised by the ECB fell from 6.2% to 5.2% last year.
The least profitable banks by country were in Germany, where the 21 banks monitored by the ECB had an average return on equity of only 0.08%. This is well below the profitability of Italian banks, which are generally considered to be the weakest link in the sector, but which recorded an average return on equity of 4.85% last year.
“The already low profitability of banks in the euro area – and in particular in Germany – is worrying because it could leave the industry struggling to replenish capital buffers and cope with the increase in non-performing exposures,” said Katharina Utermöhl, senior economist at Allianz. “If anything, it could reignite the debate on the long-awaited consolidation of the sector. “
Falling profitability of eurozone banks is further dragging the sector behind its American rivals who, on average, reported twice as high returns on equity last year.
It also highlights the increased vulnerability of the European banking sector to economic and financial turmoil caused by the measures taken to contain the coronavirus pandemic, which are forcing a large number of companies and workers to seek government assistance.
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Bank profits were hurt last year by the slowdown in euro area growth to 1.2%. Credit lines in the sector were also reduced by lower ECB interest rates to a record low of 0.5% in September.
Economists predict that the eurozone economy could contract by around 10% in the second quarter of this year as the world faces its deepest recession since the Great Depression of the 1930s.
“On the negative side, the current decline in GDP will likely be worse than during the 2008/2009 crisis,” said Florian Hense, economist at Berenberg.
But Hense said eurozone banks were “in better shape now, with more capital and liquidity” than during the 2008 financial crisis. He added that “the aggressive political response is limiting the damage” after central banks promised to inject billions of euros into the financial system and governments promised similar amounts of support to struggling businesses and households.
Regulators across Europe lowered capital requirements for banks and urged them to freeze dividends and curb premiums to give them more room to absorb the brunt of the crisis, as part of an initiative to free up nearly $ 500 billion in capital from bank balance sheets.
The ECB said that in other respects, the euro area banking system had become healthier over the past year, as its capital levels had increased relative to both total assets and those weighted by function of their risk, while non-performing loans fell to their lowest level since the 2008 crisis.