Over­drafts prove a cost bur­den for Euro­peans banks

The Pak Banker - - FRONT PAGE -

Ger­man con­sumers are pay­ing the price for a pro­longed slump in lend­ing rev­enues with banks charg­ing as much as 16 per cent in­ter­est on over­drafts even as they gain from record-low rates on re­fi­nanc­ing oper­a­tions.

The rate, levied by Raif­feisen­bank Trost­berg-Traun­reut in the south­ern Ger­man state of Bavaria, is the high­est of 424 lenders who dis­close the data, ac­cord­ing to a sur­vey of 1,472 banks by re­search group Stiftung War­entest. Deutsche Bank and Com­merzbank, Ger­many's largest banks, charge as much as 10.95 per cent and 11.25 per cent, re­spec­tively, the watchdog said in a state­ment on its web­site.

Europe's big­gest banks are bat­tling a squeeze on lend­ing rev­enue as ef­forts by the Euro­pean Cen­tral Bank to re­vive eco­nomic growth low­ered bond yields and re­duced the amount they can charge on loans. With do­mes­tic de­mand driv­ing an in­creas­ing share of Ger­many's growth, lenders are us­ing its cit­i­zens' pref­er­ence for over­drafts over credit cards to prop up mar­gins in an in­dus­try still dogged by cri­sis. The Bun­des­bank said con­sumer spend­ing will sup­port eco­nomic ex­pan­sion in the sec­ond half of the year.

"Banks are re­ally un­der pres­sure in all ar­eas in this low in­ter­est-rate en­vi­ron­ment," Michael Seufert, an an­a­lyst at Nord­deutsche Lan­des­bank, said from Hanover. "Con­sumer pro­tec­tion groups might not like it, but the re­al­ity is that they re­ally can't af­ford to lower the charges on over­drafts and do with­out those earn­ings."

Over­drafts are in­tended to only be a short­term source of fund­ing, and banks of­fer their clients ad­vice about other forms of bor­row­ing, Deutsche Kred­itwirtschaft, the as­so­ci­a­tion which rep­re­sents Ger­many's banks, said in a state­ment on its web­site.

Ger­many isn't alone

in charg­ing cus- tomers high rates on over­drafts. Dutch banks de­mand as much as 15 per cent in­ter­est, while Ital­ians face rates of as much as 18 per cent and Bri­tish banks take as much as 19.9 per cent as well as flat fees if clients ex­ceed their free fa­cil­i­ties, price com­par­i­son web­sites in the three coun­tries show. Rates aren't per­mit­ted to ex­ceed 20.04 per cent in France, ac­cord­ing to the coun­try's cen­tral bank.

Ger­many's big­gest banks have failed to keep pace with a re­cov­ery in lend­ing in­come at their com­peti­tors.

In 2014, Europe's 25 big­gest pub­liclytraded banks saw their com­bined net in­ter­est in­come, the dif­fer­ence be­tween what they earn from as­sets and pay for li­a­bil­i­ties, climb 5 per cent to 261.5 bil­lion eu­ros (Dh1.09 tril­lion; $289 bil­lion) from a year ear­lier, data com­piled by Bloomberg show. That fol­lowed two years of declines.

Deutsche Bank's net in­ter­est in­come fell for a third year while the de­cline at Com­merzbank con­tin­ued into a fifth year, the data show. "Given banks of­fer savers al­most no in­ter­est and can bor­row at very low rates, a fair rate should be sig­nif­i­cantly be­low 10 per cent," Stiftung War­entest said. A cus­tomer de­fault rate of 1 per cent doesn't jus­tify the charges, it said.

Ger­mans rely more on their over­drafts than con­sumers in coun­tries like the US who use credit cards for pur­chases that out­strip their means, while bank pay­ments on Ger­man credit cards are gen­er­ally booked at the end of the month, said Seufert.

Some 43 per cent of Ger­mans over­draw their ac­counts "a few times" a year, while 17 per cent do so fre­quently, ac­cord­ing to a sur­vey con­ducted by polling com­pany Ip­sos for the Ger­man unit of ING Groep in Oc­to­ber and Novem­ber. Ger­man banks had 36.4 bil­lion eu­ros of out­stand­ing over­draft loans in June, the high­est level since March, ac­cord­ing to the Bun­des­bank's monthly re­port.

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