International credit rating agency Moody's said Friday that the outlook for Germany's banking system remains negative owing to intense competition, low interest rates and a weaker environment.
"The outlook for Germany's banking system remains negative," Moody's said in a new Banking System Outlook.
"Intense competition and low interest rates are causing margin pressure that will likely further erode the banks' already-weak revenues and profits over the 12-18 month outlook period," it argued.
Banks were re-focusing on their domestic operations to reduce risk exposures but that would "exacerbate structural pressure on earnings in the context of additional costs, weakening economies of scale and low loan-growth prospects," the report said.
Operating conditions for the sector would be "challenging" in the next 12-18 months, even if indicators for the German economy remained sound so far.
Moody's said in was penciling in growth of 1.0-2.0 percent for Europe's top economy next year.
"However, significant downside risks from the ongoing euro area crisis will persist in view of the German economy's high dependence on other EU countries for its exports and the resulting economic interdependence with other European nations," it said.
German banks could be "vulnerable to a worsening of the sovereign debt crisis in Europe and to macroeconomic stress," Moody's said.
"High balance-sheet leverage and low pre-provision profits will make it difficult for many German banks to cope with major (unforeseen) losses," it added.