'Banks' weak profitability will decline further as net interest income falls' amid low or negative interest rates set by the European Central Bank, Moody's vice-president Bernhard Held said in a statement.
Rating agency Moody's on Thursday slashed its outlook for German banks from "stable" to "negative", warning their profitability and creditworthiness would "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, 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 judged.
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.
Moody's noted that German banks "have had very limited success in improving their high cost-to-income ratios", spending around 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 like stocks -- building deposits up to 40 percent 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 a negative interest rate of -0.5 per cent.
Banks have even been attempting to fend off new clients from opening accounts, passing on the negative rates to savers.
One Bavarian cooperative bank recently became the first to charge a negative rate from the first euro deposited in a savings account.