Non-final working translation

German credit institutions’ performance improved significantly in 2023. At €48.7 billion, aggregate profit for the financial year before tax was almost 80% higher than the previous year’s figure. All of the categories of banks considered posted higher profits for the 2023 financial year than they had done in 2022. In a long-term comparison, the aggregate profit for the financial year before tax reached its highest level since the start of the reporting period for the profit and loss statistics in 1999. 

This development was driven by a significant increase in net interest income, which rose by 16.7% compared with the previous year, in particular as a result of the Eurosystem’s key interest rate hikes, and reached its highest level in absolute terms (€106.9 billion) in 25 years. This widened the interest margin of German banks considerably, although – at 1.00% in 2023 – it remained below its long-term average of 1.09%. In addition, the trading result (+18.4%) and other operating result (+359.7%) showed strong increases. In absolute terms they remain of minor significance, though. Net commission income for 2023 was around the same level as the two previous years and so did not contribute to the increase in profit for the financial year.

Net valuation charges sank by slightly over one-third in the reporting year, to €10.3 billion. Unlike in the previous year, they thus amounted to well below the long-term average. In 2023, write-downs on fixed-income securities, in particular, were much lower than they had been in the preceding year. In addition, German credit institutions started to see reversals of impairment losses on securities which had been written down in the previous year due to the higher interest rate level.

Measured by the return on assets and the cost/income ratio, the profitability as well as the cost efficiency of German banks improved considerably. At 0.46%, the return on assets reached a 25-year high in the year under review. The sharp rise in operating income resulted in the lowest cost/income ratio in 25 years, at 59.2%, even though administrative spending increased (+2.4%).

However, factors that act as a drag on earnings are likely to gain in significance for German banks in the current year. In the face of geopolitical risks and persistent uncertainty about macroeconomic developments, the underlying economic conditions remain challenging. With new lending still subdued and sight deposits being shifted into better-remunerated time deposits, it is to be expected that the effects on net interest income will tend to be negative overall. In addition, further increases in counterparty credit risk render higher write-downs for non-performing loans more likely.

The year 2023 found German institutions operating in a difficult macroeconomic environment. The German economy was predominantly weighed down by the economic repercussions of Russia’s war against Ukraine, especially the sharp rise in energy costs, and anaemic global trade. Increased financing costs stemming from the Eurosystem’s continued monetary policy tightening acted as an additional drag on economic activity. In addition, March 2023 saw a number of US regional banks and one Swiss big bank experience turbulence, though this did not ultimately exert any lasting impact on German banks. 1 All in all, the German financial system proved stable in the macro-financial environment of 2023. 2

Price and calendar-adjusted gross domestic product fell slightly by 0.1% on the year in 2023. Although large order backlogs in industry and construction and easing supply bottlenecks had a bolstering effect, weak domestic and foreign demand and the after-effects of the sharp rise in energy costs weighed on industry. Averaging 6% in 2023, inflation as measured by the Harmonised Index of Consumer Prices was lower than it had been in the previous year (2022: 8.7%). Nevertheless, it continued to hold back private consumption, despite higher wages and a robust labour market. 3 As pandemic-related expenditure tapered off, government consumption also declined. In addition, increased financing costs dampened private investment, especially in housing construction.

In response to high inflation rates, the Eurosystem continued tightening monetary policy in 2023. Key interest rates were raised six times in a row in the year under review, with the interest rate steps being reduced from 50 basis points to 25 basis points as the year progressed. Taken together, these increases constituted the biggest hike in key interest rates in the history of the Eurosystem. In September 2023, the interest rate on the deposit facility, which is of relevance for monetary policy, reached its peak at 4%. Furthermore, reinvestments of principal payments from maturing securities purchased under the asset purchase programme (APP) were initially scaled back and were then discontinued altogether in June 2023. 4

A number of US regional banks and one Swiss big bank were beset by trouble in the year under review, though the turmoil did not leave lasting adverse effects on international financial markets. It began with Silicon Valley Bank’s collapse in March 2023, after interest rate risk and liquidity risk materialised due to severe deficits in management. The turmoil quickly spilled over to other US regional banks with similar business models and Swiss big bank Credit Suisse. 5 Despite a temporary bout of tension, these events did not have any lasting effect on the performance of international financial markets. 6 The stock markets also withstood the flagging economic activity and the geopolitical risks in the year under review and, amid fluctuations, posted gains overall. The bond markets saw mixed developments as a whole. 7 Yields on medium to long-term government and corporate bonds, especially, fell because market participants were anticipating a global disinflation process and policy rate cuts. 

The consolidation process in the German banking sector continued in 2023. As in the previous years, both the number of credit institutions and the number of branches contracted further. 8 Credit cooperatives accounted for more than half of the reduction in the number of credit institutions. Around one-third of the decline in the number of branches was attributable to savings banks and roughly one-third to credit cooperatives. However, big banks also significantly scaled back their number of branches once again. 9

German credit institutions’ aggregate total assets for the year grew at a considerably slower pace than in the years from 2019 to 2022. According to the monthly balance sheet statistics, annual average total assets grew by 0.9% in 2023. Growth rates ranged between 2.9% and 7.9% in the period from 2019 to 2021. The sharp increase in 2022 (+12.0%), meanwhile, was largely attributable to a one-off effect in the balance sheet statistics concerning how derivatives are recorded.

Looking at the various categories of banks, regional and other commercial banks (+3.8%) and big banks (+1.6%) were foremost in posting positive growth rates compared to 2022. By contrast, savings banks (-1.1%) and credit cooperatives (-0.5%) recorded negative growth rates.

On the assets side of the aggregated bank balance sheet, German banks’ deposits with the central bank declined in particular; growth in loans halved. According to data from the monthly balance sheet statistics, deposits held at the central bank fell by an annual average of 8.4% compared with 2022. In particular, German credit institutions repaid a large part of the outstanding volumes under the third series of targeted longer-term refinancing operations (TLTRO III). 10 Furthermore, growth in loans to domestic non-banks in 2023 was only around half the previous year’s figure, at 3.4%. Regional and other commercial banks (+5.5%) and credit cooperatives (+4.1%) were the main categories to see above-average growth. Unlike in the previous year, the loan portfolios of savings banks exhibited below-average growth (+3.0%).

Lending to non-financial corporations, in particular, proved weak. Longer-term loans continued to climb, but short-term loans were redeemed on balance. 11 The lacklustre growth was rooted in both credit supply and credit demand. The significantly increased lending rates and the uncertain economic outlook were the main factors dampening demand for loans. In terms of supply, German banks tightened their credit standards and their credit terms and conditions for corporate lending on balance, mainly because of heightened credit risk in the light of the gloomier economic situation and subdued economic outlook. 12

In addition, there was also considerably less growth in loans for house purchase to non-financial corporations and households. Having been one of the main drivers of credit growth over the past years, loans for house purchase did not even increase half as strongly as they had done in the years 2020 to 2022, posting growth of +2.9% in 2023. Savings banks and credit cooperatives, in particular, recorded heavily weakened growth. At +2.7%, growth in savings banks’ loans for house purchase in the reporting year was roughly two-thirds below the previous year’s rate. Unlike in 2022, it was also slightly below average, compared with the figure aggregated across all categories of banks. By contrast, credit cooperatives again posted above-average growth in loans for house purchase in 2023. That said, the growth rate of +4.3% was still only around half the figure seen in the previous year.

Lending for house purchase was likewise throttled by both supply-side and demand-side effects. Demand for loans for house purchase mainly slackened due to high construction prices and strongly increased financing costs. 13 But the supply side also exerted a dampening force. German banks tightened their credit standards and terms and conditions due to gloomier housing market prospects and heightened default risk. 14

On the liabilities side of the aggregated bank balance sheet, growth in deposits was significantly weaker in the year under review than was the case in previous years. At +2.3%, the rate of growth in deposits held by domestic non-banks at German credit institutions averaged across 2023 was more than 1 percentage point lower than the previous year’s value and only equated to around half of the growth seen in 2021 and 2020. In particular, 2023 saw a 4.5% decline in sight deposits; in the period since the 2008‑09 global financial crisis up to 2022, sight deposits had, at times, recorded growth rates in double figures. The decline in savings deposits also picked up pace in 2023, reaching 12.7%. In absolute terms, however, this did not have so much of an impact. By contrast, time deposits registered exceptionally strong growth at +29.0%.

Overall, German banks’ deposit business in the reporting year was characterised by the reallocation of funds in an environment of rising interest rates. Inflows into short-term time deposits, in particular, largely corresponded with net outflows from overnight deposits and short-term savings deposits. The behaviour of non-financial corporations and households was a response to further widening in yield spreads between short-term time deposits remunerated at close-to-market rates and other short-term bank deposits. 15

On an average for 2023, German credit institutions’ balance sheet equity grew much more slowly than in the previous year. At 2.8%, the growth rate was only just over half of what it had been in the year before. Credit cooperatives (+5.0%) and big banks (+4.1%) saw the most pronounced above-average increases. But growth in the balance sheet equity of savings banks (+3.2%) and regional and other commercial banks (+2.9%) was also slightly higher than the aggregate figure for all German banks. By contrast, the balance sheet equity of mortgage banks and building and loan associations contracted by 5.6% and 2.6%, respectively.

The performance, profitability and cost efficiency of German credit institutions improved significantly in the year under review. Aggregate profit for the financial year before tax and the return on assets both grew steeply compared with 2022, reaching 25-year highs. 16 At the same time, German banks’ cost/income ratio fell to its lowest level in 25 years. Furthermore, these developments were founded on a broad-based improvement in annual results across all of the categories of banks included in the statistics on banks’ profit and loss accounts 17 (see the supplementary information under “Methodological notes”). This was mainly driven by the institutions’ net interest income, which saw strong positive developments primarily due to the Eurosystem having increased key interest rates.

Aggregate profit for the financial year before tax 18 rose by almost 80% in 2023 on the year. At €48.7 billion, pre-tax profit for 2023 was not only two-and-a-half times the long-term average, but was also the highest figure seen in the last 25 years. 19 In addition, all of the categories of banks considered 20 as well as around 88% of all individual institutions contained in the data recorded higher profits for the year in 2023 than they had done in 2022.

In absolute terms, savings banks and credit cooperatives were responsible for more than half (58%) of the total increase. At +122.3% and +104.1%, respectively, growth in profits for the year before tax recorded by savings banks and credit cooperatives in 2023 was well above the average. Both categories of banks predominantly conduct conventional lending and deposit business, meaning that they benefited from the rising key interest rates in the Eurosystem. Their net interest income rose steeply. But much lower net valuation charges than in 2022 also played a key role in the increased profit for the year seen by savings banks and credit cooperatives.

Besides this, regional and other commercial banks, which are also highly active in the lending and deposit business, recorded significantly higher profits for the year before tax than they had done in 2022. The growth of 82.6% recorded by these institutions was roughly on a par with the aggregate across all German credit institutions. In absolute terms, regional and other commercial banks accounted for just under one-fifth (around 18%) of the total increase in pre-tax profit for the year. Similarly to the case of savings banks and credit cooperatives, a strong rise in net interest income and lower net valuation charges were instrumental in driving the improvement in profit for the year at regional and other commercial banks.

Meanwhile, at +38.4%, growth in profits for the year at big banks fell short of the average. Big banks’ absolute contribution to the increase in aggregate profit for the year was comparatively slim as well, amounting to around 11%. Unlike savings banks, credit cooperatives and regional and other commercial banks, big banks did not benefit from higher net interest income in 2023, with that metric remaining virtually the same as it had been in 2022. Instead, the trading result and other operating result proved to be the main forces driving the improvement in big banks’ profit for the financial year. In contrast to developments at the aggregate level, big banks saw their profit for the financial year compressed by higher net valuation charges and steeply increased net charges in the other and extraordinary account.

In 2023, operating income 21 increased once again significantly more strongly than in the previous year, growing by €23.2 billion (+16.5%). 22 As in 2022, the increase was broad-based, with all categories of banks under consideration 23 and around 85% of all individual institutions contained in the data reporting higher operating income in 2023 than in the preceding year.

Overall, roughly two-thirds of the total increase in operating income in the reporting year was attributable to the sharp rise in net interest income. However, its share in operating income remained virtually the same as in 2022. In 2023, net interest income remained the most important source of revenue for German credit institutions. In addition, the trading result and other operating result also improved considerably, with their combined contribution to the overall increase in operating income being about half that of net interest income. Nevertheless, the trading result and other operating result remained of minor importance overall as a source of income for German banks. By contrast, net commission income in 2023 did not contribute to the increase in operating income at the aggregate level. However, in absolute terms, net commission income remained the second most important source of revenue for German credit institutions.

In 2023, German credit institutions’ net interest income once again recorded considerably stronger growth than in the previous year 24 and was ultimately the main driver of growth in profit for the financial year before tax. Rising by €15.3 billion (+16.7%), net interest income amounted to €106.9 billion in the reporting year, which is the highest value in 25 years. Much the same as in the previous year, the increase in the reporting year was also almost entirely attributable to net interest income in the narrower sense, i.e. the contribution to earnings made by interest-related business. Current income from shares and other variable-yield securities, as well as from participating interests, which are likewise included in net interest income, also increased on balance. However, in 2023 this once again made only a small contribution to growth.

Overall, German credit institutions benefited considerably from the Euroystem’s key interest rate hikes. 25 While both interest income and interest expenditure increased substantially, in absolute terms interest income (+€164.4 billion) increased much more strongly than interest expenditure (+€149.1 billion) in 2023. The supplementary information on the composition of interest income and interest expenditure of German credit institutions in 2023 provides an overview of the importance of individual financial instruments in German banks’ interest income and interest expenditure.

As in the preceding year, developments in net interest income in the reporting year were mainly attributable to differences in the speed and degree of interest rate increases applying to loans and deposits. 26 For example, monthly interest rate statistics show that whilst interest rates on new loans to non-financial corporations and households continued to increase sharply, interest rates on overnight deposits from the private non-financial sector in particular were raised by banks to a relatively weak extent once again. According to an estimate in the Bundesbank’s 2023 Financial Stability Review, overall interest expenditure in 2023 would have been an estimated €29 billion higher if German banks had passed through the key interest rate hikes to overnight deposits as observed in the past. 27 However, the volume of these deposits had grown to an unprecedented level by 2022, meaning that, in 2023, this type of deposit continued to be not only the most cost-efficient type of funding, but also the main source of funding for German banks. The nevertheless relatively strong growth in interest expenditure was probably due in part to the fact that interest rates on time deposits rose as anticipated and thus to a greater extent than interest rates on sight deposits. 28 Moreover, non-financial corporations and households increasingly shifted their funds from sight deposits to time deposits.

Furthermore, German credit institutions generated a total of roughly €41 billion in interest income from deposits held at the central bank in 2023. 29 This amounted to around 12% of total interest income in the reporting year, with interest income from deposits held at the central bank contributing just under one-quarter of the growth in interest income. 30 By contrast, at roughly €5 billion, interest expenditure on monetary policy refinancing operations accounted for only around 2% of German credit institutions’ overall interest expenditure in 2023 and contributed just under 5% of the rise in interest expenditure. 31

All of the categories of banks under consideration 32 posted higher net interest income for the year under review than in 2022. However, the increases varied very considerably across the different categories of banks. In particular, savings banks’ net interest income saw strong above-average growth of €6.3 billion (+27.2%), meaning that roughly 41% of the total increase in net interest income in 2023 was attributable to savings banks. By contrast, the increase recorded by credit cooperatives was slightly below average at €2.5 billion (+14.1%). The main reason for this was that the increase in interest expenditure in relation to interest income was significantly greater at credit cooperatives than at savings banks. Like savings banks, regional and other commercial banks also recorded substantial growth in their net interest income in 2023, up €3.8 billion (+23.5%). Together, savings banks, regional and other commercial banks, and credit cooperatives generated just over 80% of the total increase in net interest income in 2023. By contrast, big banks’ net interest income increased only marginally, stagnating at the level recorded in 2022. 33 Unlike the situation at regional and other commercial banks, interest income and interest expenditure at big banks increased in almost equal measure.

As savings banks and credit cooperatives predominantly conduct conventional lending and deposit business, net interest income plays a relatively important role as a source of income for both categories of banks. For example, in 2023 nearly three-quarters of operating income at savings banks and credit cooperatives was attributable to net interest income. By contrast, regional and other commercial banks generated only around half of their operating income through net interest income, with the equivalent figure for big banks being just short of 60%.

The interest margin 34 increased again in the reporting year for the first time since 2018. It was up 0.14 percentage point compared with 2022, but, standing at 1.00%, still fell short of the long-term average (1.09%). The improvement resulted entirely from the increase in net interest income, as aggregate average total assets for the year hardly grew at all in 2023.

In a comparison of the various categories of banks, savings banks and credit cooperatives in particular recorded an above-average improvement in their interest margin. The interest margin of savings banks increased by 0.42 percentage point compared with 2022, while that of credit cooperatives rose by 0.22 percentage point. In 2023, savings banks and credit cooperatives were once again the categories of banks with the highest interest margins, at 1.89% and 1.75%, respectively. Nevertheless, both categories of banks were still short of their long-term average levels (2.04% and 2.13%, respectively). In addition to savings banks and credit cooperatives, regional and other commercial banks also improved their interest margin. This increase, which amounted to 0.16 percentage point, was roughly on a par with the aggregate across all German banks. However, at 1.00%, the interest margin of regional and other commercial banks likewise fell short of the long-term average level for the category (1.63%). The interest margin of big banks, by contrast, remained at the previous year’s level, standing at 0.66%, and was still significantly below the long-term average (0.85%).

Net commission income stagnated at the previous year’s level and once again played no part in improving the profit for the financial year in 2023. Unlike in the previous year, both commissions received and commissions paid declined. In absolute terms, however, the declines in 2023 of €1.9 billion and €1.6 billion, respectively, were nearly the same size, meaning that net commission income, totalling €37.6 billion, remained at the previous year’s level. Furthermore, as aggregate total assets of German banks remained largely unchanged on the year, the commission margin 35 in 2023 also stagnated at the previous year’s  level. In addition, at 0.35%, it was also in line with the long-term average.

Overall, the Eurosystem’s key interest rate hikes were a drag on German banks’ net non-interest income. 36 However, commissions business in the individual business areas was mixed across the various categories of banks. German credit institutions derived most benefit from payments business and portfolio management. By contrast, declines were seen above all in lending business, securities business and brokerage business.

In a comparison of the categories of banks under consideration, the absolute changes in net commission income were low across the board, but there were sizeable differences when looking at percentage changes. The changes in the commission margins recorded by the respective categories of banks were also correspondingly low. For example, net commission income of regional and other commercial banks declined by €0.9 billion (-10.8%) compared with 2022. The commission margin of this category of banks thus fell by 0.06 percentage point to 0.38%. By contrast, savings banks and big banks increased their net commission income in 2023 by €0.4 billion (+3.8%) and €0.3 billion (+2.9%), respectively. As a result of this, the commission margin of savings banks rose marginally to 0.65%. The commission margin of big banks remained unchanged at 0.38%, despite slightly higher net commission income in 2023. Credit cooperatives’ net commission income and thus also their commission margin remained unchanged in the year under review compared with the previous year.

The net result from the trading portfolio increased by €1.8 billion (+18.4%) to €11.6 billion in 2023. The trading result continued to be a significant source of income only for big banks, regional and other commercial banks, and Landesbanken. In the reporting year, big banks (+59.1%) and regional and other commercial banks (+28.7%), in particular, improved their trading results. This was primarily driven by gains from hedging transactions attributable to increased customer demand in the changed interest rate environment. By contrast, Landesbanken recorded a decline of 38.6% compared with 2022. In their case, the higher interest rate level primarily led to valuation losses on derivatives.

The other operating result 37 recorded a very strong improvement compared with 2022 (+€6.4 billion/+359.7%). This increase was almost exclusively driven by big banks. Their other operating result for 2023 was €5.6 billion higher than in the previous year. In comparison with 2022, big banks saw a significant decline in their other operating expenses, in particular. The Eurosystem’s key interest rate hikes and the resulting higher interest rate level led, above all, to a reduction in transfers to provisions for pensions.

German credit institutions’ net valuation charges 38 declined by just over one-third compared with the previous year. After the sharp increase in 2022, net valuation charges declined in the reporting year by €6.0 billion to €10.3 billion, thus falling under the long-term average of €13.5 billion. This decline was chiefly attributable to the lower depreciation of and value adjustments to loans and advances, and provisions for contingent liabilities and for commitments. At €11.9 billion in the reporting year, they were €6.5 billion lower than the previous year’s figure and thus also below the long-term average of €17.2 billion. Compared with the previous year, a considerable decline could be seen in particular for write-downs on securities in the liquidity reserve, following a sharp increase in 2022 against the backdrop of the higher interest rate level. In addition, there were reversals of impairment losses on securities which had been written down in 2022 (for more information see the supplementary information on earnings effects since the interest rate reversal on securities held in German credit institutions’ banking books). Nevertheless, a comparison of the categories of banks under consideration shows considerable differences.

In contrast to overall developments, net valuation charges at big banks were more than three times the previous year’s figure (+248.2%). At big banks, there was an increase in the depreciation of and value adjustments to loans and advances, and provisions for contingent liabilities and for commitments of 54.3% on the year. This increase was driven predominantly by large write-downs at one institution belonging to the big banks category.

A sharp decline in net valuation charges was recorded above all by savings banks and credit cooperatives (savings banks: −35.3%, credit cooperatives: −70.2%). 39 Both savings banks and credit cooperatives reduced depreciation of and value adjustments to loans and advances, and provisions for contingent liabilities and for commitments (savings banks: −30.5%, credit cooperatives: −58.6%). At the same time, income from value readjustments to loans and advances, and provisions for contingent liabilities and for commitments increased on the year (savings banks: +28.5%, credit cooperatives: +150.7%). Savings banks and credit cooperatives primarily realised reversals of impairment losses on securities which had been written down in 2022.

Net valuation charges also more than halved at regional and other commercial banks (-53.8%). They reported depreciation of and value adjustments to loans and advances, and provisions for contingent liabilities and for commitments that amounted to less than half of the previous year’s figure (-52.9%).

Taken together, regional and other commercial banks, savings banks and credit cooperatives were responsible for virtually the entire decline in net valuation charges on aggregate for all German credit institutions. In total, just under 67% of the institutions under review reported lower net valuation charges. Going forward, however, net valuation charges could rise again in the coming years owing to current developments in lending business. For example, a significant increase in net transfers to the fund for general banking risks was already observed in the year under review (+11.3 billion or +391%). This indicates that institutions used the good earnings situation in 2023 to prepare themselves for rising net valuation charges (for more information on this, see the supplementary information on the development of non-performing loans in the German banking sector).

General administrative spending 40 rose by 2.4% in the reporting year and therefore less strongly than in the preceding year. 41 Growth also remained far below the rise in the general price level. Unlike in the previous year, the overall increase in 2023 was primarily attributable to other administrative spending, which grew by 4.6%. By contrast, staff costs remained at their 2022 level. However, this had no notable impact on the respective shares of total administrative spending. Staff costs and other administrative spending each continued to account for half of total spending.

In the case of staff costs, various countervailing effects came together and virtually cancelled each other out on aggregate. The increase in wages and salaries of €1.6 billion (+4.4%), for instance, was offset overall by an almost equal decrease in social security costs and costs relating to pensions of €1.5 billion (-12.3%). On the one hand, wages and salaries rose against the backdrop of high inflation, whilst on the other hand, some German credit institutions cut staff and made lower pension provisions than in previous years due to the changed interest rate environment.

Other administrative spending grew on aggregate due to two main reasons: first, it reflected the general rise in prices caused by inflation. Second, German banks stepped up their investment in digitalisation and information security.

Differing developments were observed when comparing categories of banks, however. General administrative spending decreased slightly, by 0.6% at big banks and by 0.9% at regional banks and other commercial banks. Viewed in absolute terms, staff costs declined more strongly than other administrative spending rose in both categories of banks. By contrast, general administrative spending at savings banks and credit cooperatives recorded significant growth of 6.9% and 6.0%, respectively. Unlike big banks, regional banks and other commercial banks, savings banks and credit cooperatives recorded increases in both staff costs and in other administrative spending.

The balance in the other and extraordinary account 42 deteriorated significantly in 2023. Net charges in the other and extraordinary account rose by €5.5 billion, which almost completely offset the decline in net valuation charges. Overall, net charges in the other and extraordinary account increased in the reporting year to more than triple the figure from 2022 and, at €7.9 billion, stood at the level of the long-term average.

This deterioration was primarily driven by big banks. In the previous year, a one-off effect 43 at an institution in the category of big banks had significantly reduced net charges in the other and extraordinary account. A comparable one-off effect did not occur in 2023, causing big banks’ net charges to go up by €4.5 billion. Furthermore, regional banks and other commercial banks reported a rise in net charges of €2.3 billion in the other and extraordinary account in the year under review. This increase resulted primarily from higher extraordinary charges at one institution in the category of banks. This institution recorded profits transferred under profit pooling, a profit transfer agreement or a partial profit transfer agreement that were €1.7 billion higher than in the previous year. By contrast, savings banks reported a considerable improvement in their other and extraordinary account balance. Net charges here went down by €1.5 billion because depreciation of and value adjustments to participating interests, shares in affiliated enterprises and securities treated as fixed assets declined on the year.

Measured by the return on assets and the cost/income ratio, the profitability as well as cost efficiency of German banks improved considerably. In the reporting year, the highest figures seen over the last 25 years were achieved for both metrics.

Compared with the previous year, the return on assets 44 of German credit institutions virtually doubled to 0.46% in 2023. 45 A similarly high figure (0.44%) was last recorded in 2005. With annual average total assets having only increased slightly, this improvement was almost exclusively down to growth in profit for the financial year before tax. Furthermore, it was not just the return on assets for German banks as an aggregate that rose; the return on assets went up for all of the categories of banks under consideration. 46

Savings banks and credit cooperatives registered the most considerable improvement in their return on assets in the year under review. Compared with the previous year, both categories of banks were able to more than double their return on assets, with increases of 0.51 and 0.41 percentage point, respectively. As a result, savings banks’ return on assets amounted to 0.92% in 2023 and that of credit cooperatives came to 0.80% – these were the highest figures amongst all the categories of banks under consideration.

Regional banks and other commercial banks were also able to improve their profitability substantially in the reporting year. After rising by 0.19 percentage point to 0.43%, their return on assets in 2023 stood at roughly the same level as the aggregate of all German banks.

By contrast, big banks’ return on assets grew by only 0.08 percentage point. The return on assets of 0.31% that they therefore achieved for 2023 was also far below the average across all German credit institutions.

In the reporting year, the cost/income ratio in its broad definition 47 improved by just over 8 percentage points to 59.2% and thus stood far below the long-term average of 67.8%. As in the previous year, this improvement was primarily caused by the rise in operating income, which was approximately ten times as strong as the rise in general administrative spending in 2023.

All of the categories of banks under consideration improved their cost/income ratio compared with the previous year. Nevertheless, there were clear differences between the categories of banks. As in 2022, big banks recorded the sharpest decline in the cost/income ratio (-20.8 percentage points) out of all the categories of banks considered in the reporting year. This was almost exclusively down to the above-average growth in operating income. All the same, big banks’ cost/income ratio of 69.0% remained the weakest of all the categories of banks. By comparison, the cost/income ratio of savings banks fell by just 5.9 percentage points, but, at 56.1%, was slightly better than the cost efficiency of the aggregate of all German banks. The decline in the cost/income ratio of credit cooperatives totalling 2.2 percentage points proved to be the lowest amongst all the categories of banks under consideration. With a cost/income ratio of 60.3%, the cost efficiency of credit cooperatives was on par with the aggregate in the year under review. The comparatively sharp rise in general administrative spending at savings banks and credit cooperatives slowed down the improvement in their cost efficiency significantly, even though the operating income of both categories of banks increased considerably in the reporting year.

German credit institutions’ business environment is likely to remain challenging in 2024. Although inflation rates declined significantly compared with 2023, and, in June 2024, the Eurosystem lowered key interest rates again slightly for the first time after they had remained unchanged since the last interest rate hike in September 2023, major uncertainties regarding future macroeconomic and geopolitical developments persist. All in all, German economic output saw hardly any growth in the first and second quarters of 2024. 48

Factors that drag on earnings are likely to gain in importance for German credit institutions. With new lending still muted and sight deposits being shifted into better-remunerated time deposits, it is probable that the effects on net interest income will tend to be negative overall in 2024. Furthermore, counterparty credit risk is expected to continue to rise, which renders higher write-downs for non-performing loans at German banks more likely. Moreover, additional challenges remain due to digitalisation, climate action and cyber risks. Taken by itself, the growing need for investment resulting from this will initially have a negative impact on the performance of German credit institutions. However, the earnings from 2023 stand the institutions in good stead for the investment and risk provisioning that are needed.

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Deutsche Bundesbank (2024e), Forecast for Germany: German economy slowly regaining its footing – outlook up to 2026, Monthly Report, June 2024, Chapter 1.3.

Deutsche Bundesbank (2024f), Overview, Monthly Report, August 2024, Chapter 3.1.

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