Profitability of the Financial Sector and Sub-sectors

Abstract

The profitability of German banks, measured by the rate of return on equity or on assets, has been low by international comparison since the early 1980. Pre-tax profitability tended to fall from the early 1980s until the recent crisis, although after-tax profitability did not. The pre-tax profitability of the cooperative banking sector has been higher than that of the private banking sector, with the latter being far more volatile. It has also been higher than that of the public savings banks because of the particularly low profitability of the Landesbanken. After-tax profitability has converged and private banks have gained relatively most from government re-distribution. The profit share of the financial corporate sector has shown no pronounced trend since the early 1980s, but has fluctuated quite widely, with major declines during the crisis in the early 2000s and the recent financial and economic crisis. The profit share of the non-financial corporate sector started from a lower level in the early 1980s, but then showed a tendency to rise until the recent crisis with only minor fluctuations. Since the early 2000s, it has exceeded the profit share of the financial corporate sector. The rate of return of the financial corporate sector has shown a falling trend. Although the financial and the non-financial sectors had similar rates of return on equity in the early 1990s, in contrast to the financial sector, the rate of return tended to rise in the non-financial sector until the recent crisis.