European banks warn of outlook

For European lenders, one success after another.

Banks in Germany, Italy and the Netherlands warned on Wednesday that making money and improving their operations were becoming more difficult as already low interest rates were expected to fall.

A low interest rate environment that lasted longer than expected has already weighed on the profitability of banks in the region. They are also grappling with a slowing economy, the impact of trade tensions between the US and China and the possibility of the UK leaving the European Union without a deal.

“Banks will have to find ways to make money in a tougher environment,” said Vincenzo Longo, Milan-based strategist at IG Group..

He also said banks clearly needed to go further with restructuring and would likely be hit by the slowdown in manufacturing, especially in Germany.

“As customer tariffs are close to zero, it will be increasingly difficult to compensate for the decline,” said ABN AMRO chief executive Kees van Dijkhuizen.


koen van weel/European Press Photo Agency

Falling US yields also weighed on US bank stocks. The KBW Nasdaq Bank index fell 3.1% on Wednesday, bringing its decline over the past week to nearly 9.5% in another sign of unease about the health of the US economy.

Even though major lenders have generally reported steady consumer activity, some analysts fear the latest tariffs will hit consumers and hurt banks going forward. JPMorgan Chase was down 3.26% on Wednesday morning, Bank of America fell 3.37% and Citigroup,

Inc. fell 2.91%.

Yet the banking index is up 7.5% this year as Europe’s banking sector has struggled for years, first due to the continent’s sovereign debt crisis which led to an increase degraded loans on their books. More recently, ultra-low interest rates imposed to help boost the continent’s economies have made their day-to-day business of earning money through loans less profitable.

By contrast, US banks have been quick to rid their portfolios of toxic loans and have generally faced a more favorable environment in the US, where the economy is stronger and interest rates higher.

European lenders have gone through restructuring to stay afloat, often after receiving government bailouts. But that was not enough to make them healthy. The European Central Bank, which oversees the biggest banks in the eurozone, has complained in particular about their slowness to cut costs and tackle piles of non-performing loans on their books.

Credit Suisse CEO Tidjane Thiam said last week that the bank was considering charging for deposits from some wealthy customers.


Arnd Wiegmann/Reuters

Italian banks were among those that suffered the most. Years of lax lending standards crammed them with shoddy loans that deteriorated when an economic crisis sent bankruptcies skyrocketing.

On Wednesday, UniCredit, Italy’s largest bank by assets, cut its revenue target for the year, blaming the low interest rate environment.

It also posted lower results on most revenue lines. Adding to lower revenue, the bank increased its loan loss provisions in the second quarter by 41% from a year earlier to 707 million euros ($793 million). Shares of the bank fell 5.6% towards the end of the trading session.

Frankfurt-based Commerzbank AG, which failed to reach an agreement on a merger with arch-rival Deutsche Bank HER

earlier this year, said Wednesday it still expects a slight increase in profit this year. But he added that “this objective has become significantly more ambitious, given the evolution of earnings in the first half of the year, the significant deterioration in the macroeconomic situation and the increasingly uncertain geopolitical situation”.

Commerzbank’s net profit fell slightly to 271 million euros from 272 million euros, as it more than doubled its provisions for loan losses. Commerzbank shares were trading down 5.7%.

Dutch lender ABN AMRO also warned on Wednesday of a gloomier outlook triggered by low interest rates, which the ECB said would fall further if the euro zone economy does not recover quickly.

“As client rates are close to zero, it will be increasingly difficult to offset the decline and over time the pressure on margins will increase further,” said ABN AMRO chief executive Kees van Dijkhuizen.

Several European banks already charge corporate customers for deposits at the bank, but have resisted doing so for retail customers.

Credit Suisse Group HER

Chief Executive Tidjane Thiam said last week when the company reported results that it was considering charging for deposits from some wealthy customers.

ING Groep CEO Ralph Hamers said last week that the Dutch digital bank was exploring options to offset low rates, including raising service charges.



“In Switzerland, we are considering measures on deposits to ease the pressures of negative interest rates,” he said. “They will be targeted and they will go to people who have very large cash balances.”

ING Groep chief executive Ralph Hamers said last week that the Dutch digital bank was considering various options to offset low rates, including raising service charges.

Low credit spreads aren’t the only reason low rates hurt banks. Moody’s Investors Service estimates that eurozone banks held around €1.8 trillion in excess liquidity at the ECB at the end of 2018, generating more than €7 billion in interest charges during the year at the rate of negative interest of -0.40%. German and French banks are particularly affected by negative rates.

The ECB is considering easing the pain by implementing what is called a tiering system that would only expose bank deposits above a certain threshold to fees.

ING’s Mr Hamers said prioritization would be helpful but not sufficient. He also questioned the effectiveness of lower rates and further monetary easing, adding that geopolitical uncertainties, Brexit and trade talks were to blame for weak economic growth in Europe, rather than a lack of cash.

“I don’t see any credit demand in Europe going unanswered, so there’s no need to inject more liquidity into the market,” Hamers said. “Even further, I actually see that the low rate environment is making consumers so uncertain about their financial future that they are starting to save more rather than less.”

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