By Thomas Borgwerth and Heinz-Roger Dohms
A considerable number of German savings banks are obviously accepting high interest rate risks in their lending business. This is the conclusion of the large savings bank study by FinanzSzene.de. As already outlined in our reporting on Tuesday (-> The question of survival arises at every tenth savings bank), we had divided the around 380 municipal institutions into ten equally large deciles for analytical purposes. One of the things that caught our eye was an unnaturally wide range of interest expenses. The 38 savings banks with the highest refinancing costs had an average interest expense of 0.84% of the balance sheet total. In other words: Despite the low interest rates, a whopping 8,400 euros in interest expenses were incurred for each EUR 1 million in interest-bearing liabilities. In contrast, the decile with the lowest refi costs managed at just 1,600 euros.
How can that be? In view of the fact that the savings banks hardly pay interest or even charge negative interest for savings deposits, the interest expenses of 0.16% shown at the lower end seemed more plausible to us at first glance than the 8,400 euros from the upper end. Or put the other way around: The interest costs shown at the top end had to be influenced by other factors.
Our assumption was as follows: In addition to the actual interest costs, there are also costs for interest rate hedging at the savings banks in question – to a considerable extent. From this, however, a suspicion was derived which, conversely, affected the savings banks at the lower end of the scale: Could it be that these savings banks are diligently engaged in maturity transformation (i.e. converting short-term deposits into medium- and long-term loans) – but the risks that arise here keep in the books instead of hedging them with interest rate hedge transactions?
Some savings banks have interest rate swaps worth billions. Others none at all
In order to get to the bottom of the matter, we asked the German Savings Banks Association what proportion of the interest expenses is attributable to interest rate hedging transactions. While the DSGV remained cautious about other critical points during our study research, there was open information here: About a third * of the interest expenses (which incidentally amounted to 5.5 billion euros for the 379 German savings banks in the 2019 financial year) on the interest rate hedge, according to the association. In other words: This money does not flow in the form of interest to the customers of the Sparkasse, but in the form of swap fees to the swap partners who take on the interest rate risk.
We wanted to know more about it. And formed a sample of 50 randomly selected larger savings banks in order to examine the extent of the swap business in detail. Here, differences emerged that were sometimes striking. The Kreissparkasse Ludwigsburg, for example? Came on an interest rate swap portion based on customer receivables of 148%. At the Sparkasse Krefeld? It was 122%. At the Kreissparkasse Heilbronn? 115%. And so forth. At the other end of the scale, however? There were no fewer than seven savings banks (i.e. seven out of 50, at least 14%) who did not provide any information about their interest rate swap transactions for the 2019 financial year – and for which one should therefore assume that they do not operate any interest rate hedging at all. * Specifically, these were the Kreissparkassen Ravensburg, Augsburg and Syke as well as the savings banks Dachau, Neuwied, Oberland and Bochum.
In the red area – the large savings bank study from FinanzSzene.de
- The most in-depth study to date on the savings banks
- Which institutes are already struggling to survive
- Six key findings – from swap transactions to CIR alarms
- Based on the evaluation of 1,956 (!) Degrees
Why Bavarian savings banks have a lower risk exposure
A savings bank that has low refinancing costs (and therefore hardly or no hedging transactions) is not automatically a high-risk savings bank. Thus, among the institutes with the lowest interest expenses, there were various South German institutes such as the Kreissparkasse Ravensburg (0.11% based on the balance sheet total) or the Sparkasse Bad Kissingen (0.15%). However, the analyzes by FinanzSzene.de also show: In Bavaria (2.10%) and Baden-Württemberg (2.22%), conversely, the interest rates on the loans granted were also comparatively low. According to our study, this is due to the fact that the proportion of mortgage loans in southern Germany is higher than in northern or eastern Germany, for example. In other words: Since the loans are secured, they generate less interest income – but they also involve lower risks and therefore lead to a lower risk exposure for the bank.
We discovered the opposite phenomenon, so to speak, at a number of North and West German institutes. Here, the average interest rates on the loans granted were comparatively high (the Schleswig-Holstein savings banks turned out to be the regional front-runners with 2.69%) – however, the interest costs also tended to be higher than the national average. The most glaring was the Sparkasse KölnBonn. With an average interest rate of 3.46%, it comes with the highest relative interest income in Germany. On the other hand, the Rheinische Großsparkasse also reported by far the highest relative interest expenses (1.54%). Here one can assume that there are enormous risks on the assets side, which, however, are apparently hedged accordingly on the liabilities side.
High interest income, low interest costs. How do the Eastern Savings Banks do it?
The thing is, however: According to our study, there are also a number of institutes which, on the one hand, charge impressive interest rates – but, on the other hand, have extremely low interest expenses and are therefore unlikely to engage in any hedging transactions. This phenomenon can be observed particularly in the East German municipal institutes.
Among the 38 institutes with the lowest relative interest costs, 18 (!) Are located either in the area of the East German Savings Banks Association or in Thuringia. At the same time, however, the Eastern Institutes as a group come to an average interest rate on loans granted of 2.42% – which is above (!) The national average. In other words: the loan books of the East German savings banks should by no means only contain mortgage-backed and otherwise low-risk receivables (such as municipal bonds). Rather: In the portfolio of the Eastern Savings Banks, there should be a significant amount of risky and corresponding higher-interest loans – such as loans to companies. *
Now, of course, it is not possible to judge from the outside in individual cases whether a Sparkasse is theirs Risks appropriately hedges. The impression, however, is that there are savings banks with a high risk appetite, especially in eastern Germany.
The question of survival arises for every tenth savings bank
* In the original study, we inadvertently stated the proportion as two thirds. The fault was ours, not the DSGV. Please excuse the mistake.
* According to § 285 No. 19 HGB, credit institutions must provide information on their derivative transactions in the appendix. We have concluded from this that the institutes for which we cannot find the relevant information in the appendix have not entered into any interest rate swap transactions.
* Incidentally, our findings have nothing to do with the “Depot-A business” (ie the own investments). Another result of the study is that East German savings banks invest a considerable amount in securities. The interest income achieved in this way is – as it does not belong to the interest business in the narrower sense – not included in the 2.42%.