FRANKFURT: German banks are not profitable enough compared to their European counterparts and should reconsider their business models, a top member of the German central bank or Bundesbank said on Tuesday.

“Banks have to be profitable... And in this regard, German banks need to catch up,” Bundesbank executive board member Andreas Dombret told a banking congress.

“Their return on assets and their return on equity are ... relatively low compared to other euro area countries.” The main factor behind this was that German banks were relatively dependent on interest income, Dombret said.

“Such a business model poses a major challenge in the current environment of low interest rates.” As a result, in the first six months of this year, the operating results of the large German banks were about 8 per cent below their 2013 levels, he argued.

“The banks should therefore reconsider their business models and gear them towards sustainable profitability.

“An obvious strategy for the German banks would be to diversify their sources of income away from interest income,” he said.

On the cost side, German banks “fare rather well compared to other countries,” the Bundesbank board member said.

“But there are still options to reduce costs. In this regard, mergers may well be a potential strategy. The German banking market still offers scope for further consolidation,” he said.

In the European Central Bank’s recent financial health check of eurozone banks, German banks fared well, with just one out of 25 banks falling through the net.

But there was no room for complacency, Dombret said.

Published in Dawn, November 19th , 2014