Frankfurt am Main — On Thursday, ratings agency Moody’s on Thursday slashed its outlook for German banks from “stable” to “negative”, warning their profitability and creditworthiness will “decline” in the coming months.

“Banks’ weak profitability will decline further as net interest income falls” amid low or negative interest rates set by the European Central Bank (ECB), Moody’s vice-president Bernhard Held said in a statement.

While banks must, for now, set aside little cash to cover the risk of borrowers falling behind on payments, such charges are “unsustainably low”, he said. 

Especially, smaller banks that rely on customers’ deposits for their funding are seeing profits sapped by low rates, which have prompted many bosses to blast the ECB for the policy.

Also on Thursday, the Bundesbank vice-president Claudia Buch warned German lenders’ that “vulnerability has gradually grown” to credit risks, as she presented the institution’s annual financial stability report.

Banks could have underestimated future lending risks and overvalued assets such as property, presenting dangers in case of an economic downturn, she said.

In 2018, loans to the private sector increased more than 5% — the fastest pace in 15 years — at a time when “the economic outlook was better than at present,” the Bundesbank noted.

“Major systemic banks” were the biggest contributors, as weakened titans such as Deutsche Bank and Commerzbank looked to win market share from smaller savings banks and co-operatives that dominate the domestic environment.

Moody’s noted that German banks “have had very limited success in improving their high cost-to-income ratios”, spending about 80 euro cents for each euro of revenue in 2018.

Meanwhile, risk-averse depositors prefer to heap up cash in savings accounts rather than opt for riskier investments such as stocks — building deposits up to 40% of the sector’s assets. As banks cannot always find ways — such as lending — to put that cash to work in the real economy, they deposit large amounts with the ECB, which presently inflicts an interest rate of -0.5 %.

Banks have even been attempting to fend off new clients from opening accounts, passing on the negative rates to savers.

One Bavarian co-operative bank recently became the first to charge a negative rate from the first euro deposited in a savings account.