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German banks pose a threat that politicians want to hide, economist says

  • Shipping loans and too many bank branches are the biggest issues
  • Other concerns surround lack of digitalization and low interest rates
Thomas Lohnes | Getty Images | Getty Images News

With the Italian banking system in the spotlight, analysts have highlighted that Germany's lenders are still not out of the woods, saying shipping loans and too many bank branches are some of the very real problems they are currently facing.

German officials repeatedly tell EU members from the south of Europe to restructure their banking systems but industry experts believe they have a problem of their own as federal elections approach.

"Germany is overbanked, too many banks, very little consolidation has taken place," Carsten Brzeski, chief economist at ING Germany, told CNBC via email on Wednesday.

There are approximately 2,400 separate banks with more than 45,000 branches throughout the country and over 700,000 employees, according to Commercial Banks Guide, an industry website.This increases the cost income ratio for banks, Brzeski explained. Meanwhile, the International Monetary Fund (IMF) warned last May that cost-to-income and leverage remain high in Germany.

"Low profitability reflects structural inefficiencies, persistent crisis legacy issues, provisions for compliance violations, and the need to adjust to the new regulatory environment," the IMF said in the report last May.

Another problem seems to be the reliance on the shipping industry for many banks.

"I would point towards some specific issues with asset quality: Shipping is one of the priorities of the single supervisor, the ECB (European Central Bank), for next year," Gildas Surry, senior analyst at Axiom Alternative Investments, told CNBC on Wednesday when citing the biggest problem for the German banking sector.

Loaning to the shipping industry before the financial crisis was a stable investment, however, the industry has become shaky and the long-term loans became a problem for many institutions dependent on this sector.

HSH Nordbank, for instance, once the biggest shipping lender in the world, had to be rescued by two German states in 2009. The bank has agreed to sell its loan portfolio worth 1.64 billion euros ($1.86 billion) to clean up its balance sheet and it has to be sold before the end of February 2018.

"Many banks, as the entire economy, have missed the train of digitalization and need to invest big time now," Brzeski added.

"With the need for investments and the pressure from low interest rates, the pressure on many banks has increased. Do you hear politicians talking about it? No, not a topic which will win elections," Brzeski said.

German officials have nonetheless focused on the European Central Bank and its loose monetary policy as being the major drag on the German banking system.

Wolfgang Schaeuble, the German Finance minister, has said on a few occasions that the ECB needs to tighten its policy, which is also leading to an increase in Germany's export surplus.

"Lower and flatter yield curves are compounding these issues by gradually eroding margins, especially in smaller retail banks," the IMF recognized last May.

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