European banks hope to sustainably benefit from rising interest rates

German lender Commerzbank announced stronger-than-expected net profit for the second quarter on Wednesday, thanks in part to higher interest rates.

In a pattern seen across Europe, Commerzbank’s interest margin jumped 26% in this period from the previous year, due to the rise in term interest rates in Germany and the rise in official borrowing costs from part of the Polish central bank, where it has a strong presence. Manfred Knof, the bank’s chief executive, described the “considerable” risks ahead, but pointed to interest rates as a “bright spot”.

For years, mainland bank executives have complained that the European Central Bank’s ultra-weak monetary policy and charging fees for parking their cash are weighing on their profits. But today, central bank efforts to end runaway inflation in Europe have turned the tables. Banks from Spain to Britain are just starting to profit from the growing gap between what they charge borrowers and what they pay savers.

“The increase in interest rates will benefit net interest margins and the overall profitability of all European banks, but the effect will be gradual and will vary from country to country,” Moody’s said in a recent report. Moody’s has identified banks in Spain, Italy and Portugal as the ones that will particularly benefit from higher rates, as the more bank loans there are at floating rates, offering lenders a “more pronounced increase in bank income”.

Rising revenue bolsters executive revenue confidence, even as European officials cut growth forecasts amid rising inflation and shrinking business activity.

In Spain, Bankinter raised its interest margin forecast from a low to a medium-high figure for 2022, and Banco Sabadell made a similar update.

Large UK lenders including HSBC, Lloyds Banking Group and NatWest raised their 2022 guidance when they released half-year results last week, citing rising interest rates that are widening loan spreads. .

The rate hike helped the top two Italian banks, Intesa Sanpaolo and UniCredit, to record profits above market expectations in the second quarter.

According to a recent study by PricewaterhouseCoopers, German banks, where fierce competition has weighed on the profits of the sector for years, should also benefit from an increase in revenues of 11 billion euros in 2023 thanks to higher interest rates.

That’s a significant figure, representing more than five times the annual profit of Deutsche Bank, the country’s largest lender, last year.

Commerzbank expects the interest margin to increase thanks to higher rates

Commerzbank expects to earn at least € 300 million more in additional interest income this year than in 2021, to reach € 800 million more in 2024. This figure is to be compared with analysts’ expectations for a total income of 9 billion for this year. But the ultimate benefit is still unclear.

We still don’t know how customers will react after many years of ultra-low rates, “Commerzbank’s chief financial officer told reporters.

In Commerzbank’s case, as in other banks, the favorable wind will only partially offset the potential losses resulting from write-downs on corporate loans that deteriorate if energy sources run out. The bank expects provisions and write-downs of € 700 million this year, compared to € 570 million last year.

Leave a Comment