Rising interest rates a ‘bright spot’ for European banks

By Tom Sims, Jesús Aguado and Lawrence White

FRANKFURT/MADRID/LONDON (Reuters) – European banks are hoping higher interest rates for their businesses will be sustainable as they grapple with the economic fallout from war, soaring inflation and a looming energy crisis.

German lender Commerzbank on Wednesday reported stronger-than-expected second-quarter net profit which it said was particularly helped by rising interest rates.

In a trend seen across Europe, Commerzbank’s net interest income jumped 26% year-on-year as long-term interest rates rose in Germany and Poland’s central bank , where it has a strong presence, has increased official borrowing costs.

Manfred Knof, the bank’s chief executive, described “considerable” risks on the horizon, but singled out interest rates as a “bright spot”.

For years, bank executives across the continent have bemoaned the European Central Bank’s ultra-weak monetary policy and the imposition of fees to park their money as a drag on their bottom line.

But now central bank efforts to halt runaway inflation rates across Europe are proving to be a change of fortune. From Spain to Britain, banks are just beginning to profit from the widening gap between what they charge borrowers and what they pay savers.

“Higher interest rates will strongly benefit the net interest margins and overall profitability of all European banks, but the effect will be gradual and will vary from country to country,” Moody’s said in a statement. recent report.

Moody’s has singled out banks in Spain, Italy and Portugal as among those that will notably benefit from higher rates as more bank loans there are variable rate, giving lenders a “more pronounced increase in banking income”.

Rising revenues bolster executives’ confidence in earnings, even as European officials cut their growth forecasts amid soaring inflation and activity contracts.

In Spain, Bankinter raised its net interest income forecast from low single digit growth to mid to high single digit growth for 2022, and Banco Sabadell made a similar upgrade.

Britain’s big lenders, including HSBC, Lloyds Banking Group and NatWest, raised their 2022 forecasts when releasing first-half results last week, citing rising interest rates that are pushing up lending margins.

Rising rates pushed the profits of the two main Italian banks Intesa Sanpaolo and UniCredit above market expectations in the second quarter.

According to a recent study by PricewaterhouseCoopers, even German banks, where fierce competition has dented profits in the sector for years, are expected to benefit from an 11 billion euro increase in income in 2023 thanks to higher interest rates. ‘interest.

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

Commerzbank and rates: https://graphics.reuters.com/EUROPE-BANKS/myvmnennjpr/chart.png

Commerzbank expects to earn at least 300 million euros in additional interest income this year compared to 2021, rising to 800 million more in 2024. This compares with analysts’ expectations of total income of 9 billion for this year.

But the ultimate benefit is still unclear.

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

In Commerzbank’s case, as with other banks, the tailwind will only partially offset the impacts of potential writedowns on corporate loans that turn sour if power sources dry up.

The bank plans provisions and impairments of 700 million euros this year, against 570 million last year.

(Additional reporting by Marta Orosz in Frankfurt and Valentina Za in Milan; Editing by Elaine Hardcastle)

Copyright 2022 Thomson Reuters.