German banks fared better than expected in euro zone health checks, with none needing to raise new capital, but the sector still needs to restore profitability and reform, officials said yesterday.

Germany, often criticised for its fragmented and weak banks, saw only one small lender fail the exercise, while its banks on average slightly outperformed the euro zone average, data published by the European Central Bank showed.

"German banks demonstrated that they are robust enough to withstand even severe stress but have to increase their profitability in order to cross the finish line at the front," Andres Dombret, Bundesbank board member in charge of regulation, told reporters.

In the hardest part of the test, German banks posted an average capital ratio of 9.1 percent compared to a euro zone average of 8.4 percent.

Mortgage bank Münchener Hyp was the only lender to fall short as of the end of 2013 but has since raised €415 million ($507 million) to close its capital gap.

Even HSH Nordbank, which openly worried about failing the test, cleared the 5.5 per cent minimum capital threshold in the hardest part of the test with a score of 6.1 per cent, thanks largely to state guarantees.

“The results confirm my impression that German banks have prepared well,” said German finance minister Wolfgang Schäuble.

But while German banks overwhelmingly passed, many of them were borderline.

German lenders accounted for seven of the 17 banks with a capital threshold 1.5 percentage points or less in excess of the 5.5 per cent pass mark in the stress tests. – (Reuters)